Trust estates as business companies

Front matter

KF

m

Sf3

Preface To The Second Edition

Increasing interest in the subject, many new decisions an^ the generous welcome and widespread use of the first edition, now out of print, has inspired the author to revise and enlarge this work.

Experience manifests growing appreciation of the usefulness and adaptability of trust administration to business affairs. In an article in the Harvard Law Review for March, 1920 (33 , Harvard Law Review, pages 688 to 705), Austin W. Scott says:

" 'Of all the; exploits of Equity, the largest and the most important is the invention and development of the trust.' So- Professor Maitland was accustomed to tell his students ; and soindeed it is. The law of trusts, being comparatively modern,, has developed more systematically, more symmetrically, tharn the older branches of the law. Its general principles are for the most part now well settled ; and most of the numerous current decisions relating to trusts involve mere questions of fact, of construction of written instruments. But there have been a considerable number of recent cases involving important questions of principle. The law of trusts has not ceased to grow- And as long as the institution of private property and the power of testamentary disposition continue to exist, it is safe to predict that the trust, the most effective instrument in effecting the disposition of private property, will hold its place in Anglo-American Law. * * * The Massachusetts device of creating a trust for the carrying on of a business is rapidly growing in popularity."

Figures showing the numbers of new business trusts are not available, except those compiled in Massachusetts and referred to by the Tax Commissioner in his 1912 report, where-

VI PREFACE

in he speaks of 103 real estate trusts having filed their declarations in the Department of the Commissioner of Corporations, and that such "trusts of the city of Boston own, it is estimated, property valued at $250,000,000." In addition to the "Mackay Companies" (Postal Telegraph), the "Great Northern Iron Ore Properties," and the "Texas Pacific Land Trust" (formed in 1888 and owning vast land holdings in Texas taken over from the Texas & Pacific Railway Company), listed on the New York Exchange, examination of Moody's Manual of .Securities discloses that the Amoskeag Manufacturing Company (Manchester, N. H., large manufacturers of ginghams, shares listed on Boston Stock Exchange), the Ludlow Manufacturing Associates, manufacturers of jute, hemp, etc., the' Massachusetts Gas Companies (listed on the Boston Stock Exchange), the Chicago City & Connecting Railways Collateral Trust (shares listed on Chicago Stock Exchange, and bonds on the Chicago and the New York Stock Exchanges), the Chicago Elevated Railways Collateral Trust, the North American Pulp & Paper Company (listed on the Montreal Stock Exchange and on the New York curb), the Yukon-Alaska Trust (organized in New York), and the Associated Simmons Hardware Companies, engaged through corporate subsidiaries in the wholesale hardware business in all parts of the world, with headquarters in St. Louis, are prominent examples either of "voluntary associations" or "voluntary trusts."

Other trusts listed as of public interest are the Pepperell Manufacturing Company, the North Boston Lighting Properties, the Boston Suburban Electric Companies, the Boston Electric Associates, the Massachusetts Lighting Companies, the New England Company, the New England Securities Company, the New England Investment & Security Co., the New Hampshire Electric Railways, and the Old Colony Light & Power Associates. Most of the real estate trusts described in the security manuals, such as the Andrews Real Estate Trust, Back Bay Realty Associates, Boston Ground Rent Trust, Busi-

PREFACE Vll

ness Real Estate Trust, Congress Street Associates", Real Estate Associates, Haverhill Building Trust, Lowell Warehouse Trust, Myrick Building Trust, New Scollay Building Trust, Somerset Hotel Trust, Terminal Hotel Trust, Springfield Warehouse Trust, etc., own and operate properties in Massachusetts, but the Western Real Estate Trustees is organized "for the purpose of holding and improving real estate in downtown parts of cities of the United States," and the Masonic Temple Trust and the Rialto Trust own and operate large office buildings in Chicago. Discrimination in the use of both trusts and corporations is shown by Montgomery Ward & Co., Incorporated, which controls Montgomery Ward Warehouse Associates, a trust owning property in Kansas City, Missouri, and the Montgomery Ward Warehouse Corporation, an Oregon corporation owning property in~Portland. Reports of decided cases disclose adoption of the trust method in a number of states, but no doubt this sheds but little light on the extent to which the trust is being employed, since a great many such organizations are never assailed by litigation.

Increase in use of trust estates does not mean, however, that incorporation has thus been measurably displaced. In fact investigation will show that the prominent trust estates above referred to control or have large investments in corporations, and that the two systems of corporations and trust estates generally supplement each other. Statistics prove that corporations in trade continue greatly to increase in number and in size. Experience in England and in Massachusetts, where both methods have long been in use, indicate that they do not conflict; corporations being most frequently availed of and trust estates being found exceptionally appropriate under special circumstances and for particular purposes. Where corporation laws are less liberal and those of a foreign state are not available, the choice is often made in favor of the trust; but the matter of selection should always rest on sound judgment under guid-

V1U PREFACE

ance of counsel skilled in the laws and decisions pertaining alike to corporations and to trust estates.

It may be helpful to those who have read the first edition to briefly point out the more important changes in this revision. Additions have been made to sections 36, 61, 101, 105, 121, 128, 133, 140, 158, and 181. Sections 1, 39, 91, 93, 94, 95, 96, 98, 125, 129, 130, 149, 168, 169, 173, 174, 175, 176, 177, 178, 182, 185, 186, 202, and 204 are entirely new. Sixteen complete precedents, miscellaneous provisions from various trust instruments, and statutes of Massachusetts and of Oklahoma have been added to the appendix. The most significant development since the first edition is increased recognition of the importance of emphasizing the trust relation created by the declaration or trust agreement, avoiding all semblance of partnership and its consequent liabilities. For a hurried examination, it is recommended that Chapter I and the concluding section or "summary" of subsequent chapters be consulted. The collection of references under the names of states in the index will assist in locating authorities in a particular jurisdiction.

I acknowledge with gratitude the many helpful suggestions of attorneys from all parts of the United States, particularly those of Judge Needham C. Collier, of the St. Louis bar, who assisted me throughout the preparation of the first as well as the revised edition of this work.

John H. Sears. 3T Wall street, New York, N. Y., April, 1921.

Preface To First Edition

This work owes its appearance to the wide interest manifested in a booklet by the undersigned entitled "Effective Substitutes for Incorporation." This persuaded me that bona-fide business had become greatly discontented with corporations as supposed exclusive agencies for the employment of the aggregated capital of numerous investors. One of the; most conservative states of our Union upon investigation was ascertained to be applying another idea to the problem, and satisfaction therewith was growing with experience. I thought that, if this idea had passed beyond the experimental stage in Massachusetts and was there being developed into larger usefulness, very probably it could be applied elsewhere. My investigation showed, as cases hereinafter prove, that the principal features had been used in other states and our mother country even before their employment in Massachusetts.

The book endeavors to plant itself upon those principles of jurisprudence, which have governed Courts of Equity in their enlightened conscience. Therefore there will be found herein no innovation in doctrine, but a mere adaptation of old principles to modern needs. The author considers that, if he may be thought to have presented those principles clearly and marshalled them in logical order, his efforts will achieve their greatest success. Upon this view the work is submitted to the kindly, but discriminating, judgment of the profession.

Gratefully I acknowledge many helpful suggestions by my brethren in various parts of our country. Particularly do I acknowledge my indebtedness to Judge Needham C. Collier of the St. Louis bar for his assistance throughout the entire preparation of the work.

John H. Sears.

St. IiOuib, September, 1912.

Chapter I Explanatory

(References are to sections)

Section Definitions and the General Nature of Trust Estates as Business

Companies 1

The Purpose of this Book 2

Not Advocated as a Method of Escaping Legitimate Responsibilities 3

Difficulties of Corporations as to Changing Statutes 4

Distinction as to Trust Estates in Business 5

Personal Responsibility in Corporate and Trust Management. . . 6

Permanency of Management 7

Proper and Improper Selection of the Trust as a Business Unit. . 8

Plan of Treatment 9

Chapter II Various Methods Of Establishing A Trust Estate In Business

Trust Estate Embarked in Business Created by Wills 10

Trust Estate Created by a Single Settlor with Himself and Others as Cestuis Que Trust 11

Trust Estate Created by Debtor with Himself and Creditors as Beneficiaries 12

Trust Estate Created by Debtor with Himself and Creditors as Beneficiaries (Continued) 13

Trust Estate Created by Debtor with Himself and Creditors as Beneficiaries (Continued) 14

Several Persons Originating Trust Estate for Their Proportionate Benefit 15

Trust Estate — In Pursuance to Articles of Association for Unincorporated Company 16

Smith v. Anderson Continued — Ruling on Appeal 17

Trust Estate — In Pursuance to Articles of Association for Unincorporated Company — Continued — American Cases 18

Seabs Teust Est. (xi)

Xll TABLE OF CONTENTS

Chapter III The Natuee Of A Trust Estate

Status of Trust Estate Exemplified by Decisions 20

Rule Where Settlor Creates Trust for His Own Benefit 21

Rule Where Settlor Creates Trust for His Own Benefit (Continued) 22

Dry or Passive Trust Distinguished from Active Trust 23

Chapter IV Joint Settlors Creating Trust For Their Entire Benefit

Single Settlor Creating Trust for Benefit of Himself and Another 25

Several Settlors Creating a Dry Trust for Their Own Benefit 26

Several Settlors Creating a Dry Trust for Their Own Benefit

(Continued) 27

Settlors Creating Active Trust for Their Exclusive Benefit 28

Settlors Creating Active Trust for Their Exclusive Benefit (Continued) 29

Settlors Creating Active Trust for Their Exclusive Benefit (Continued) 30

Chapter V Liability Of Trustee Of An Active Trust

Independent Status of a Trustee 32

Independent Status of a Trustee (Continued) 33

Rule of Trustees' Personal Liability Stringent 34

Stipulation Effective Against Personal Liability 35

Stipulation Effective Against Personal Liability (Continued) .... 36

Stipulation Effective Against Personal Liability (Continued) .... 37

Discussion of Above Ruling 38

Informal Execution of Stipulation against Personal Liability 39

Liability of Trustee for Torts Committed in Management of a

Trust Estate 40

Liability of Trustee for Negligence in Management of a Trust

Estate (Continued) 41

Liability of Trustee for Negligence in Management of a Trust

Estate (Continued) 42

TABLE OF CONTENTS xill

Section Liability of Trustee for Negligence in Management of a Trust

Estate (Continued) 43

CHAPTER VI TRUSTEE'S RIGHT OF INDEMNITY Preliminary Observations 45

Trustee's Right of Indemnity 46

Trustee's Right of Indemnity (Continued) 47

Trustee's Right of Indemnity, Where the Indebtedness is in Tort 48 Liability of Trust Estate Through Indemnity, as Shown by American Cases , 49

Liability of Trust Estate Through Indemnity, as Shown by

American Cases (Continued) 50

Liability of Trust Estate Through Indemnity, as Shown by Other

American Cases 51

CHAPTER VII Directions Creating Pbimaby Liability

Liability of Trust Estate Where Creating Instrument so Provides 53 Liability of Trust Estate Where Creating Instrument so Provides

(Continued) 54

Embarking Trust in Trade as Pledging it for Debt 55

Special Contract Relieving Trustee from Personal Liability 56

CHAPTER VIII BENEFICIARIES OF A TRADING TRUST English Decisions

Unincorporated Associations 58

English Decisions as to Associations with Transferable Shares. . 59 English Decisions as to Associations with Transferable Shares

(Continued) 60

Summary of Above Cases 61

Transferable Shares in a Trading Trust 62

Scope of Opinions in Smith v. Anderson on Appeal 63

Smith v. Anderson (Continued) 64

XIV TABLE OF CONTENTS

Smith v. Anderson (Continued) 6o

Summary of the Lords Justices' Opinions 66

Construing These Opinions Through Reference to Former Decisions 67

Chapter IX Beneficiaries Of A Trading Trust— Continued American Decisions

Shareholders as Cestuis Que Trust 69

Other Contributors as Cestuis Que Trust 70

Creditors as Cestuis Que Trust 71

Devisees as Cestuis Que Trust 72

Chapter X Nonliability Of Beneficiaries Of A Trading Trust

Liability of Trustee to Creditors 75

Nonliability of Devisees, Cestuis Que Trust of a Trading Trust. . 77

Making Creditors Cestuis Que Trust by Deed of Assignment.... 78

Review of the English Case Above Alluded to 79

Contributors Other Than Shareholders 80

Nonliability of Cestui for the Contracts of Trustee 81

Nonliability of Cestui on Contracts of Trustee (Continued) 82

Nonliability of Cestui Que Trust on Contracts of Trustee (Continued) 83

Nonliability of Cestui Que Trust on Contracts of Trustee (Continued) 84

Chapter XI Nonliability Of Beneficiaries Of A Trading Trust— Continued

The Beneficiaries, or Shareholders in a Trading Trust 85

Shareholders in a Trading Trust (Continued) 86

Liability in General Aspect of Shareholders in Unincorporated

Associations 87

Summary 8S

TABLE OF CONTENTS XV

Chapter XII Relation Of Beneficiaries To Trustee

Are Beneficiaries Partners Inter Sese? 90

Partnership Relation between Shareholders in Unincorporated

Association 91

Massachusetts View (Continued) 93

View of Subordinate Federal Courts 94

The Massachusetts View in Other States— New Jersey, Rhode

Island, Maine, and Michigan 95

The Massachusetts View in Other States — Continued — Kansas,

Arkansas, Oklahoma and Texas 96

Rights of Beneficiaries Against a Trustee — Removal of Trustee. . 97 Receiver of Insolvent Trust Suing Trustee for Wrongful Diversion of the Trust Funds. . .■ 98

Cestuis Que Trust Represented by Certificates of Shares 99

Theory of Trustee's Responsibility to the Association 100

Chapter XIII Perpetuities And Restraints Upon Alienation

Trusts by Settlors for Their Sole Benefit 102

The Nature of Perpetuities 103

Suspension of the Right of Alienation 104

Suspension of Power of Alienation Must be Absolute — Special

Rules in New York 105

No Suspension Where Settlors are Sole Cestuis 106

Power of Sale with Directions to Reinvest 107

Directions for Accumulation 108

Lawful Period of Suspension of Alienation 109

Provisions for Continuance Beyond Stated Trust Term 110

Rule Where Restraint is Upon Partition Ill

Chapter XIV Actions By And Against The Trustees

Trustee of an Active Trust a Principal and Not an Agent 113

Necessary Parties Defendant in Actions Against Trustees 114

XVI TABLE OF CONTENTS

Section Trustee Sued Alone Where Instrument Gives Trustee Full Control 115

Trustees as Plaintiffs 116

Trustees Suing in Foreign Jurisdiction 117

Constitutional" Right of a Foreign Trustee to Sue in Another

State 118

Trustee of Express Trust Distinguished from Statutory Trustee 119

Action Where Trustee Merely Binds Trust Estate 120

Actions by Cestuis Que Trust 121

CHAPTER XV Excise Taxes— Exemption of Trusts from Federal Corporation

Tax 124

Exemption from Federal Income Tax 125

Trust Taxable to Trustee or Beneficiary and Not to Both 126

Taxing Resident Beneficiaries of Foreign Trusts 127

Massachusetts Legislation 128

Taxation under State Income Tax Laws 129

Succession or Inheritance Taxes on the Interests of Beneficiaries 130 Summary 131

Chapter XVI Trustees As Managers

Unity of Action by Trustees . : 132

Provisions for Action by Less Than Full Number — Division of

Duties 133

Appointment and Tenure of Trustees 134

Occasion for Appointment of Trustees 135

Fixing Terms for Trustees and Election of Successors 136

Joint and Several Responsibility of Trustees. — Confidence Reposed 137

Acts and Defaults of Cotrustee 138

Trustee Seeking Direction of Courts 139

Special Importance of Advisory Power as to Trading Trusts 140

Question Must be Substantial and Involve Actual Doubt 141

Effect on Trust Estate of Making Application for Direction 142

Limitation of Corporate Capacity to its Domicile 143

Trust Estate Distinguished from Corporation 144

TABLE OF CONTENTS XV11

Constitutional Protection — Trust Estates may Do Business in Foreign States and Countries on a Basis of Common Right. . . 145

Distribution of Earnings of a Trust Estate in Business 146

Trustee's Compensation 147

Trust Instrument Fixing Amount of Compensation 148

Suggestions to Trustees with Kespect to their Duties 149

CHAPTER XVII PROTECTION OF BENEFICIARIES' INTERESTS Status of Stockholders 151

Examination of Books and Papers by Stockholder 152

Relation Between Stockholders of a Corporation and Its Managers 154

Cases in Which Directors were Held Liable to Stockholders 155

Trustees Selling or Purchasing From or Dealing with the Trust

Estate — Interposition of Third Parties or "Dummies" 157

May a Beneficiary also Act as Trustee? 158

Reports Required by Trust Instrument — Restraints on Right to

Information— Questioning Motive of Inquiry 160

Using Shares as Collateral Security 161

Meetings, of Certificate Holders — Receipts, Acquittances and Waivers 162

Chapter XVIII Inviolability Of Trust Fund

Corporate Assets as a Trust Fund 165

Assignments and Preferences by Corporations 166

Trust Estates Not Subject to Bankruptcy 167

Unincorporated Company under Amended Bankruptcy Statute.. 168

Appointment of Receiver 169

Unpaid Subscriptions to Shares in a Trust Estate 170

Subscription to Corporate Stock Distinguished 171

Seabs Tbust Kst. — b

XV111 TABLE OF CONTENTS

Chapter XIX Public Policy With Respect To Trust Estates Embarked In Trade

THE POLICE i'OWER— APPLICATION OF CORPORATION LAW TO XBUST ESTATES

Section Authority to Form Corporations and Joint-Stock Companies... 173

Contrary View by Attorney General of Ohio 174

Application of the Police Power to Trust Estates 175

Bringing Trust under Corporate Regulation Because of Similitude to Corporation 176

Illustration in Regulatory Statutes Applying to Foreign Corporations Only 177

Chapter XX Stipulations In Instruments Establishing Trust Estates In Business

Practical Experience— General Directions — Purposes— Name- Insurance— Temporary Investments

Practical Experience with Trust Estates as Business Companies 179

Summary of Situation as Shown by Experience 180

Essential Elements and General Directions in Declarations and

Agreements of Trust 181

Care to Distinguish Trust from Partnership 182

Unnecessary Detail in Trust Instruments 183

Purposes of Trust Estates in Business 184

Trust Created for Unlawful Purpose 185

Confining Operations of a Trust to its Authorized Purposes 186

Adoption of Name for a Business Trust 187

Stipulations in Trust Instrument as to Trustee's Contracts.... 188

Insurance — Making Trustee Secure Against Personal Loss lsd

Appointment of Officers — Directions as to Acts by Subordinate

Agents 190

Meetings of Trustees 192

TABLE OP CONTENTS XIX

Chapter XXI

STIPULATIONS IN INSTRUMENTS ESTABLISHING TRUST ESTATES IN BUSINESS— CONTINUED

Section Corporate Capitalization 193

Capitalization of Trusts in Business 194

The Capital of a Trust Estate in Business 195

Interests or Shares in a Trust Estate 196

Preferred Shares in a Trust Estate , 197

Publicity of Affairs of a Trust Estate — Reports — Accountings . . . 198

Mortgages by Trustees 199

Amending Trust Agreements — Increase of Authorized Shares. . 200

Voluntary Termination of Trust Estate 201

Place of Execution — Laws of What State Govern Construction of

a Trust — Stipulations with Respect to Same 202

Recording — Actual and Constructive Notice 203

Filing Certificates of Fictitious Name 204

Appendix

(References are to pages)

STATUTES RELATING TO TRUST ESTATES AS BUSINESS COMPANIES

Page

Massachusetts 409-411

Oklahoma 411-416

EXHIBITS

Explanation of Exhibits 416-417

The Wachusett Realty Trust 433-439

International Church Film Service (A New York Trust Estate) 440-459

Trusts for Diversifying Investments in Securities 460-468

Plan of the Merchants' Bank (by Alexander Hamilton) 468-476

XX TABLE OF CONTENTS

Page

Trusts as Investment and Holding Companies 491

Chicago City and Connecting Railways Collateral Trust. ....491-553

Real Estate Trusts — Homans Real Estate Trust Deed — The

Boston Real Estate Trust — Warren Chambers Trust 618-635

Agreement Covering Reorganization from Incorporation to

Trusteeship 648-653

Form of Trust Taking Over Corporation 654-667

General Exemption of Trustees from Liability Except for

Willful Default 668-669

Miscellaneous Provisions from Various Declarations and

Trust Agreements 669-684

Form of Rubber Stamp Used on Contracts 685

Certificate Without Par Value 685-686

Form of Indenture Securing the Payment of Notes or Debenture Bonds oi A Business Trust Estate 686-709

Form of Cestuis' Meeting 710-711

Certificate of Conducting Business Under an Assumed Name in New York 711-712

Table of Cases Cited (Page 713)

Index (Page 727)

t

TRUST ESTATES AS BUSINESS COMPANIES

Chapter I Explanatory

§ 1. Definitions and the General Nature of Trust Estates as Business Companies '

"A trust is a right of property, real or personal, held by one party for the benefit of another." It implies two interests, one legal and the other equitable ; the trustee holding the legal title or interest and the cestui que trust or beneficiary holding the equitable title or interest.

Trusts cover a wide range and for convenience are divided into many classifications. The kind of trusts treated in this work are variously known as "Massachusetts Trusts," "Common Law Companies," "Business Trusts," and "Voluntary Associations." The term "Trust Estates as Business Companies" 1 was applied by the author in an effort towards bc)th an accurate description and one which would not mislead those to whom the single term "trust" is the synonym of monopoly. It was thought that addition of the word "estate" would emphasize the distinction.

The general nature of these trusts may be readily understood if the reader will assume that "trustees" take the place of "directors" in corporations, that "cestui que trust" or "beneficiaries" occupy the nearly relative position of "stockholders," and that the "declaration" or "agreement of trust" supplants the certificate of incorporation or charter. Although this comparison is not in every sense correct, as discussion hereinafter shows, nevertheless familiarity with

i This term is recognized in Eawle's Third Revision of Bouvier's Law Dictionary and in some of the more recent court decisions. Sears Trust Est 1

EXPLANATORY

(Ch.l corporate terms makes it available for general purposes. Continuing this method, the following parallel of corporate features and the method of equaling or approaching them in the trusts discussed in this book is presented merely for introductory purposes, and without the refinements and distinctions incident, to the true technical understanding sought in subsequent pages :

GENERAL FEATURES OF INCORPORATION.

1. Continued Existence (Perpetual or a certain Dumber of years).

2. Limited Individual Liability of Stockholdeks.

CORRESPONDING PROVISION

IN TRUST DECLARATION

OR AGREEMENT.

1. Indefinite or else measured by the lives of named persons in accordance with laws against perpetuities and restraints upon alienation. Laws of some states permit existence for at least 20 years after death of last survivor of persons named. (For discussion see Chapter XIII infra.)

2. Beneficiaries of a trust are not personally liable with respect to the management or operations of a trust. (Chapter X and XI.) Such nonliability is emphasized by provisions in the trust instrument. (See Exhibits in Appendix.) The trustees are liable except as they contract for nonliability with third persons (Chapter V), but the trustees have the right to indemnity from the trust funds (Chapter VI), and stipulations that trust funds shall alone be looked to by contracting parties are effective (Chapter V, sections 35, 38; Chapter VII, section 5G) ; tort liability insurance may be provided for (Chapter XX, section 189).

§ 2)

THE PURPOSE OP THIS BOOK

3. The Convenience of Transferable Shakes of Stock, fob Purpose of Sale, Collateral Security, etc.

4. The Safety and Convenience of Management by a Board of Directors.

5. The Convenience of Bringing and Defending Litigation in the Corporate Name as Representative of a Legal Entity.

3. The trustees Issue certificates to beneficiaries of par or non-par value, with or without preferences, as the trust may provide. (Chapter XIII and IX.) These certificates are transferable on the books of the trustees and may be used as collateral. (Chapter XVII, section 161.)

4. Trustees manage the business in accordance with regulations stated in the trust instrument. They may act with orwithout meetings and may appoint officers and other agents. (Chapter XVI.)

5. The trustees represent the trust as parties plaintiff or defendant. (Chapter XIV.)

§ 2. The Purpose of this Book

There is attempted in this book to discuss the attitude, that a trustee under a declaration or agreement of trust for the carrying on of a business as above described may sustain to his contracts and acts in the management of such business, the liability generally and specially of the trust estate itself and the liability vel non, outside of their interest in the trust estate, of the creators or settlors of the trust and others for whose benefit it is established. Incidentally there will be noticed the principles, or such of them as seem germane or illustrative, in trusts for the continuing of businesses previously carried on by testators and where settlors may otherwise have established trusts embarked in trade, where the equitable interests are in third persons. It is, of course, to be conceded, as a general proposition, that if one is the proprietor of a business, his personal liability is behind its acts and contracts, and if two or more are the proprietors there is a joint and several liability, no matter what may be their arrangements with each other. Such business is ordinarily carried on by an agent, if not personally conducted, and the acts of the agent are those of the principal, when within the scope or apparent scope of the agency. Also, it is too well settled 'to need discussion that, at law, this personal liability cannot be avoided, where the ultimate owners of a business establish it and provide for its being conducted, unless the title thereto be vested in a corporation, with no statute specifically affixing liability over to the ownership of paid-up stock.

It is thought to be well settled that a corporation is such a distinct legal entity apart from its shareholders ; that it is necessary for any law authorizing its creation to declare expressly that its shareholders are liable personally for its acts and contracts, or they will not be so held. This principle was clearly and adequately expressed by Judge Finch of the New York Court of Appeals,2 as follows : "It is the essential and inherent characteristic of a corporation that it alone is liable for its debts, because it alone contracts them, except as that natural and necessary consequence is modified by some explicit command of the statute, which either imposes an express liability upon the corporators in the nature of a penalty, or affirmatively retains and preserves what would have been the common-law liability of the members from the destruction involved in the corporate creation. In other words, the individual • liability of the members, as it would have existed at common law, is lost by their creation into a corporation, and exists thereafter only by force of the statute * * * so far preventing, by

2 People ex rel. Winchester v. Coleman (1892) 133 N. T. 279, loc. cit 284, 31 N. E. 96, 16 L. R. A. 183.

§ 2) THE PURPOSE OF THIS BOOK 5

the intervention of an express command, the total destruction of individual liabilities which would flow from the inherent effect of the corporate creation."

All of this is to the effect that, though in shareholders exists the right to create directors and limit their term of service and elect others, in their stead, in the way and manner and at the times prescribed, yet those directors are not the agents of those who appoint them, but of a distinct person, when acting within the scope of their agency.

Thus far, and especially in connection with the further fact that this artificial person is endowed, if not with immortality, at least with a certainty of continued existence in the full vigor of its primal creation, it might be thought, if there is no such "explicit command of the statute," as has been mentioned, it would be an academic discussion to pursue such a course as this volume purposes.

Nevertheless, as the corporation is the creature of statute, those who employ it as an agency accept the burdens along with the benefits that are expected. It has only such rights as its creator confers and these may be hedged about in their exercise by such regulations as that creator sees fit to impose." It is sufficient to say, without elaboration, that these rights differ in many respects from those which belong to natural persons, and especially in their being less absolute and more relative.

The growing complexity arising out of conditions, both

s City of New York v. Bryan (1909) 130 App. Div. 658, 115 N. Y. Supp. 551: "The right to be a corporation and to exercise corporate powers, is derived solely from the state. The power which creates has the right to destroy. The state has the right to limit the period of existence of its creature, the corporation; to provide conditions precedent or subsequent by laws existing at the time of its creation, or by laws subsequently passed to destroy its existence, for such reasons as may seem to the Legislature sufficient."

intrastate and interstate, in the United States, has produced and seems likely to continue to produce a vast amount of legislation particularly regarding corporations. The privilege of corporate organization apparently has come to be considered, either so valuable as to stand the impact of all kinds of regulation, or so defenseless against statutory purpose as to make indulgence in their regulation the sport of legislatures. Therefore, it- may not be the cause of wonder that business and enterprise, demanding such aggregation of means as is afforded by the ownership of shares of stock in corporations, is seeking other agencies than corporations for their uses.

If, as is said by the Supreme Judicial Court of Massachusetts,4 those interested in a business enterprise may obtain "most of the advantages belonging to corporations, without the authority of any legislative act, and with freedom from the restrictions and regulations imposed by law upon corporations," and, if this is true, there at least is presented a choice between organization for such a purpose and corporations.

This volume, it is hoped, may supply useful suggestion, based upon decided cases, for an intelligent solution of the problem in the choice of a corporate entity, or of a method arising out of a purely contractual relation, for the conduct of business by the use of aggregated capital not belonging to a partnership.

§ 3) NOT TO ESCAPE RESPONSIBILITIES 7

§ 3. Not Advocated as a Method of Escaping Legitimate Responsibilities

The fact that advantages seem to be offered over other methods of business organization should not be taken, however, as evidence that the plan set forth in this book is not consistent with the public interest in matters of business control and regulation. Indeed, it is thought that the trust relation thus established is the ideal toward which much corporate legislation has striven, and will continue to strive, in vain.