Hemphill v. Orloff/Opinion of the Court

Plaintiff in error, vice president of the payee and acting for it, sued Mrs. Orloff, in the circuit court, Wayne county, Michigan, on her promissory note, payable to the Commercial Investment Trust, or order, executed at Detroit, Mich., July 22, 1921. She defended upon the ground, among others, that the payee was a foreign corporation within the meaning of the Michigan statutes; that it had not complied therewith, and, consequently could not maintain the action. Both the trial and Supreme Court of the state sustained this defense.

Relevant provisions of the statutes follow (Compiled Laws Mich. 1915):

'Sec. 9063. It shall be unlawful for any corporation     organized under the laws of any state of the United States,      except the state of Michigan, or of any foreign country, to      carry on its business in this state, until it shall have      procured from the secretary of state of this state a      certificate of authority for that purpose. * *  * '

'Sec. 9068. No foreign corporation, subject to the provisions     of this act, shall be capable of making a valid contract in      this state until it shall have fully complied with the      requirements of this act, and at the time holds an unrevoked      certificate to that effect from the secretary of state.'

'Sec. 9071. The term 'corporations' as used in this act shall     be construed to include all associations, partnership      associations and jointstock companies having any of the      powers or privileges of corporations, not possessed by      individuals or partnerships, under whatever term or      designation they may be defined and known in the state where      organized.'

The Commercial Investment Trust-hereinafter the Trust-is of the class commonly known as 'Massachusetts trusts' or 'common-law trusts.' The following statement sufficiently indicates the general features of the lengthy 'agreement and declaration of trust' under which it was organized at Boston, Mass., March 29, 1915.

The business of the association shall be conducted under the     name specified for the trustees in their collective      capacity-the Commercial Investment Trust. They may adopt     another. Seven are designated; their successors shall be     elected for terms of two years at annual shareholders'      meetings, each share being entitled to one vote, which may be      cast by proxy.

Wide powers are granted to the trustees to buy and sell     stocks, bonds, negotiable securities, personal and real      property, to loan money, etc., and generally to manage and      conduct the trust as fully as if they were the absolute      owners of the estate; also they shall have power, but without      obligation on their part, to execute any and all instruments      and to do any and all things not inconsistent with the      provisions hereof, the execution or performance of which they      may deem expedient. They may appoint and define the duties of     officers and agents. 'But the trustees shall not have any     power or authority to borrow money on the credit or on behalf      of the shareholders or to make any contract on their behalf      for repayment of any money raised by mortgage, pledge, charge      or other incumbrances in pursuance of the provisions hereof,      or to make any contract or incur any liability whatever on      behalf of the shareholders or binding them personally.'

'Trustees shall hold the legal title to, and have the     absolute and exclusive control of, all property at any time      belonging to this trust subject only to the specific      limitations herein contained; they shall have the absolute      control, management and disposition thereof.'

'The death or resignation of the trustees, or any of them,     shall not operate to annul the trust or to revoke any      existing agency created pursuant to the terms of this      instrument.'

'Every note, bond, contract, instrument, certificate, share     or undertaking and every other act or thing whatsoever      executed or done by the trustees or any of them in connection      with the trust hereby created, shall be conclusively taken to      have been executed or done only in their or his capacity of      trustee or trustees under this agreement and such trustee or      trustees shall not be personally liable thereon.' The trustees and shareholders are exempted from personal      liability.

Shareholders' meetings shall be held annually for the purpose     of electing trustees. Interest in the estate shall be     evidenced solely by certificates for participation shares, to      be regarded as personal property. A shareholder's death shall     not operate to determine the trust nor entitle the decedent's      representative to an accounting or to take action in the      courts or elsewhere, against the trustees. Shareholders shall     have no title in the trust property or right to call for      partition, division, or accounting. The trustees shall have no power to call upon shareholders for     any sum of money or assessment whatever, except such as they      may agree to pay.

'The trustees, may, from time to time, distribute to the     shareholders such receipts or other parts of the trust estate      as they shall determine. The amount and conditions of such     payments shall be determined by the trustees.'

'For any of the purposes of the trust the number of shares     may, from time to time, be increased or reduced by the      trustees. In case the number of shares is increased, the     additional shares shall be issued and disposed of upon such      terms and in such manner as the trustees may determine.'

The trust shall continue until the death of the last survivor     of seven named individuals.

Concerning voluntary associations, chapter 182, Gen. Laws Massachusetts 1921 (volume 2, p. 2077), provides:

'Sec. 2. The trustees of an association shall file a copy of     the written instrument or declaration of trust creating it      with the commissioner and with the clerk of every town where      such association has a usual place of business. * *  * '

'Sec. 6. An association may be sued in an action at law for     debts and other obligations or liabilities contracted or      incurred by the trustees, or by the duly authorized agents of      such trustees, or by any duly authorized officer of the      association, in the performance of their respective duties      under such written instruments or declarations of trusts, and      for any damages to persons or property resulting from the      negligence of such trustees, agents or officers acting in the      performance of their respective duties, and its property      shall be subject to attachment and execution in like manner      as if it were a corporation, and service of process upon one      of the trustees shall be sufficient.' Gen. Acts Mass. 1916,     c. 184.

The Massachusetts courts give effect to agreements like the one here described, recognize the entity of associations organized thereunder, and hold both trustees and shareholders exempt from personal liability. See Hussey v. Arnold, 185 Mass. 202, 70 N. E. 87; Williams v. Milton, 215 Mass. 1, 102 N. E. 355, and cases cited; Frost v. Thompson, 219 Mass. 360, 106 N. E. 1009.

It was held by the court below that the Trust must be regarded as a corporation within intendment of the Michigan statutes which could not lawfully carry on local business within the state or make valid contracts in connection therewith without having complied with prescribed requirements. There was no attempt to comply therewith.

Plaintiff in error insists that, as construed by the Supreme Court, the statutes of Michigan deny to the trustees, collectively called 'Commercial Investment Trust,' the benefits of section 2, article 4 of the Constitution:

'The citizens of each State shall be entitled to all     Privileges and Immunities of Citizens in the several States.'

Also that they deprive the trustees of property without due process of law contrary to the Fourteenth Amendment and restrain interstate commerce.

It is settled doctrine that a corporation organized under the laws of one state may not carry on local business within another without the latter's permission, either express or implied. A corporation is not a mere collection of individuals capable of claiming all benefits assured them by section 2, article 4, of the Constitution. Bank of Augusta v. Earle, 13 Pet. 519, 584, 586, 587, 10 L. Ed. 274; Paul v. Virginia, 8 Wall. 168, 19 L. Ed. 357; Western Turf Association v. Greenberg, 204 U.S. 359, 363, 27 S.C.t. 384, 51 L. Ed. 520. See, also, Slaughter House Cases, 16 Wall. 36, 77, 21 L. Ed. 394. In the first of the causes just cited, Chief Justice Taney, for the court said:

'It is true that in the case referred to (United States Bank     v. Deveaux, 5 Cranch 61, 3 L. Ed. 38) this court decided that      in a question of jurisdiction they might look to the character of the persons composing a corporation; and if it      appeared that they were citizens of another state, and the      fact was set forth by proper averments, the corporation might      sue in its corporate name in the courts of the United States. * *  *

'But the principle has never been extended any farther than     it was carried in that case, and has never been supposed to      extend to contracts made by a corporation, especially in      another sovereignty. If it were held to embrace contracts,     and that the members of a corporation were to be regarded as      individuals, carrying on business in their corporate name,      and therefore entitled to the privileges of citizens, in      matters of contract, it is very clear that they must, at the      same time, take upon themselves the liabilities of citizens,      and be bound by their contracts in like manner. The result of     this would be to make a corporation a mere partnership in      business, in which each stockholder would be liable, to the      whole extent of his property, for the debts of the      corporation; and he might be sued for them, in any state in      which he might happen to be found.

'The clause of the Constitution referred to certainly never     intended to give to the citizens of each state the privileges      of citizens in the several states, and at the same time to      exempt them from the liabilities which the exercise of such      privileges would bring upon individuals who were citizens of      the state. This would be to give the citizens of other states     far higher and greater privileges than are enjoyed by the      citizens of the state itself. Besides, it would deprive every     state of all control over the extent of corporate franchises      proper to be granted in the state; and corporations would be      chartered in one, to carry on their operations in another. It     is impossible, upon any sound principle, to give such a      construction to the article in question.

'Whenever a corporation makes a contract, it is the contract     of the legal entity-of the artificial being created by the charter-and not the contract of the individual      members. The only rights it can claim are the rights which     are given to it in that character, and not the rights which      belong to its members as citizens of a state; and we now      proceed to inquire what rights the plaintiffs in error, a      corporation created by Georgia, could lawfully exercise in      another state, and whether the purchase of the bill of      exchange on which this suit is brought was a valid contract,      and obligatory on the parties.'

Obviously the trust here involved, is a creature of local law which demands the privilege of carrying on business in Michigan as an association-an entity-clothed with peculiar rights and privileges under a deed of settlement undertaking to exempt all of the associates from personal liability. As in the case of a corporation and for the same general reasons it cannot rely upon rights guaranteed to the individuals.

Whether a given association is called a corporation, partnership, or trust, is not the essential factor in determining the powers of a state concerning it. The real nature of the organization must be considered. If clothed with the ordinary functions and attributes of a corporation, it is subject to similar treatment. This was distinctly pointed out in Oliver v. The Liverpool & London Life & Fire Ins. Co., 100 Mass. 531, affirmed here sub nom. Liverpool Ins. Co. v. Massachusetts, 10 Wall. 566, 19 L. Ed. 1029. See, also, Flint v. Stone-Tracy Co., 220 U.S. 107, 162, 31 S.C.t. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312; Hecht v. Malley, 265 U.S. 144, 44 S.C.t. 462, 68 L. Ed. 949; Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110, 46 S.C.t. 48, 70 L. Ed. 183; Hamilton v. Young, 116 Kan. 128, 225 P. 1045, 35 A. L. R. 496; Weber Engine Co. v. Alter, 120 Kan. 557, 245 P. 143, 46 A. L. R. 158; State v. Hinkle, 126 Wash. 581, 219 P. 41; State v. Paine, 137 Wash. 566, 243 P. 2, 247 P. 476.

Upon the facts disclosed, the court below held the Trust was carrying on the business of dealing in negotiable notes within the state of Michigan, and we find no reason for rejecting that conclusion. Such business is not interstate commerce. Nathan v. Louisiana, 8 How. 73, 12 L. Ed. 992; Paul v. Virginia, 8 Wall. 168, 19 L. Ed. 357; Hatch v. Reardon, 204 U.S. 152, 162, 27 S.C.t. 188, 51 L. Ed. 415, 9 Ann. Cas. 736; Blumenstock Bros. v. Curtis Pub. Co., 252 U.S. 436, 443, 40 S.C.t. 385, 64 L. Ed. 649.

What we have already said shows plainly enough the insubstantial nature of the suggestion that the questioned statutes deprive the Trust, its trustees or members, of property without due process of law.

The judgment of the court below must be affirmed.

Affirmed.