The Church as a Corporation: Part II

April 2, 2004 | 18 comments
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What follows is a continuation of my earlier thoughts on church legal histroy (see Part I). Despite the absence of comments, I hope someone is reading this stuff. If not who cares. I have access to the Moveable Type software, therefore I get to post what I want to.

In Nauvoo the absence of a corporate form once again plagued Church efforts. Nauvoo was a tremendously expensive affair. It required the purchase of huge amounts of land for the Saints to settle on. Since there was no Church corporation to purchase these lands, here is how the financing worked. Joseph personally went to a group of rich speculators in Connecticut. These guys put up a whole lot of money as a personal loan to Joseph, secured by a mortgage on the land that he personally purchased in Illinois and Iowa. The idea was that Joseph would then sell the land to incoming Latter-day Saints and take the proceeds to pay off the bankers, who would then give up their mortgage on the land, which would be held free and clear by the new settler. It was understood that the loan was to “the Church,” even though strictly speaking there was no such legal entity. This was important, because the investors looked to tithing revenue to repay the loan if Joseph couldn’t sell the land fast enough. In theory this scheme should have worked, but there were two problems. First, Joseph couldn’t sell the land fast enough or at high enough prices to pay off the loans. In large part this was because he wanted to avoid the accusation that he was profiting at the expense of the Saints through land speculations. Worse still, it turns out that about half of the land that he purchased was worthless. This was because the person from whom he bought the real estate in Iowa did not really own the land. In fact, the title to the land in Iowa was so hopelessly confused that eventually Congress had to step in to sort out the mess, but that was not until long after the Saints left the region. In the mean time, it meant that about half of the security on the massive loan that floated the city of Nauvoo was essentially worthless because if the Connecticut “venture capital” money tried to foreclose on its mortgage, it would face years of litigation with rival claimants to the land.

At the same time, Joseph was extending his “personal” guarantee to a variety of economic schemes in Nauvoo in an effort to spur development. Again, because the Church did not exist as a separate legal entity, creditors assumed that they were extending credit guaranteed by “the Church” by which they meant tithing revenue. Eventually this whole house of cards came falling down around Joseph’s head. The accumulated weight of litigation over the United Order, the Kirtland Safety Society, the loans financing Nauvoo real estate, and various debts contracted to spur economic enterprises, became too much, and Joseph had to file for personal bankruptcy. (The bankruptcy was not actually concluded until after his death.)

In an attempt to solve some of these problems, in 1841 the Church finally organized itself as a legal corporation. On January 30 of that year, a conference of the Saints elected Joseph as “Trustee in Trust for the Church of Jesus Christ of Latter-day Saints,” and the next day a notarized affidavit of this action was filed with the county recorder. Under an 1835, Illinois law any religious society that chose a trustee and filed an affidavit with the county recorder could become a corporate entity. As far as I know, this was the first time the Church ever existed as a formal legal person.

The problem was that the Illinois law reflected standard protestant (especially English) biases about church corporations. The great fear was that corporations, which in theory can live forever, would amass huge amounts of wealth. The boogey man were the pre-Reformation religious orders in England, which owned huge amounts of real estate. Henry VIII had gleefully dismembered these entities and distributed their property to himself and his cronies. Thereafter, “mortmain” laws became a standard feature of Anglo-American laws. These placed restrictions on the amount of wealth that could be held by a religious corporation. The Illinois law under which the Church was incorporated contained a mortmain provision limiting religious corporations to holding no more than five acres of real estate, which could only be used for houses of worship. The model was clear that of decentralized, congregational protestantism. Despite the preamble of the law, which asserted that it was passed so that “every denomination should receive equal protection and encouragement,” it was clearly not a very good corporate mechanism for a centralized and expansive organization like the Church.

The law did not contain a restriction on holding personal property, so in theory the Church could have created subsidiary corporations to hold its other real estate and then the Church corporation could have held the stock of those subsidiary corporations. This is a tactic that the Church would later adopt in Utah, but it was not available in Joseph Smith’s time for the simple reason that it was not possible at that time to easily incorporate a business company. Any such incorporation would require a special act of the legislature. The year that Joseph died ? 1844 ? saw the passage in England of the first general business incorporation act, and no state in America would pass such a law until 1866.

In short, at the death of Joseph Smith, the legal and commercial affairs of the Church were an absolute mess. Much of this was because the law of the time simply didn’t have any legal forms that could accommodate the activities of the Church. The response was a series of ad hoc arrangements centered personally on the Prophet.

Next up, trying to solve the problem in Utah…

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18 Responses to The Church as a Corporation: Part II

  1. Adam Greenwood on April 2, 2004 at 3:17 pm

    Yes, I’m reading.

  2. Aaron Brown on April 2, 2004 at 3:22 pm

    You are being read, Nate. Keep it coming…

    Aaron B

  3. brayden on April 2, 2004 at 3:22 pm

    Nate – I want to fast-forward to the future for a second. Is the Church a LLC? Who’s liable for damages? As a “shareholder” I’d like to know.

  4. Nate Oman on April 2, 2004 at 3:28 pm

    You aren’t a share holder. The Church owns itself. There are no other legal owners.

  5. brayden on April 2, 2004 at 3:31 pm

    Yeah, I was being facetious about the ownership thing. But I was serious about the liability question. How does liability work at the stake, ward, and general church levels?

  6. Kaimi on April 2, 2004 at 4:03 pm

    Sheesh, more boring corporate stuff. . . why don’t you post something about gay marriage? (It’s been at least 15 minutes, by my watch, since the last one).

    In seriousness — interesting stuff here. (Are you going to get into the Emma-Brigham fight over money and debt any?) (And is this a law review article in the making?)

  7. Kaimi on April 2, 2004 at 4:05 pm

    By the way, I may have to quote your preamble some time, it’s nice and to the point.

    “I hope someone is reading this stuff. If not who cares. I have access to the Moveable Type software, therefore I get to post what I want to.”

    Sort of a general blogger’s Declaration of [independence? rights? war?].

  8. Nate Oman on April 2, 2004 at 4:08 pm

    As it now stands, my understanding is that wards and stakes have no seperate legal existence. The issue of the Church’s liability is governed by the doctrine of respondant superior. A principal is liable for the acts of his agent but only when the agent is acting within the scope of his duties for the principal. An agent always remains liable for his own acts regardless of the liability of his principal. Thus, it seems that stake and ward officers could make the church liable in some cases but not in others. They are always exposed to personal liability for their acts.

  9. Kent W. Huff on April 2, 2004 at 5:24 pm

    Nate:

    You have delved into some interesting history here. I had to plow through some of it for my two books, “Joseph Smith’s United Order” and “Brigham Young’s United Order.” It was a near-revelation to me to discover that the “united order” before 1841 was simply the partnership-form precursor(s) to today’s corporation of the president, with all the contracting and liability problems you have noted.

    For a short period in Nauvoo, the saints had access to a sensible legal system. But from 1845 to 1869, they had no way to own property, form limited liability business organizations, or operate a criminal justice system. That legal background has been overlooked by nearly everyone, and has led to many strange conclusions about the beliefs of that time period.

    One interesting version of corporate law is the corporation sole, a Utah invention, I think. There is only one shareholder, the current president of the church.

  10. Nate Oman on April 2, 2004 at 5:51 pm

    “It was a near-revelation to me to discover that the “united order” before 1841 was simply the partnership-form precursor(s) to today’s corporation of the president, with all the contracting and liability problems you have noted.”

    Sorry Kent this is not true. The United Order was considerably more than simply an attempt to create a legal personality for the Church. Indeed, it was the fact that it was an attempt to create a communal property system that led to the litigation.

  11. Ethesis on April 2, 2004 at 11:48 pm

    Well, this follows a fair amount of my trusts class from Professor Oaks (pre Elder Oaks).

    One interesting wrinkle is that Joseph Smith ended up owning all the excess (over the mortmain limits) property he was trustee for, and Emma ended up taking possession of it about the time Brigham Young was trying to sell it to finance the perpetual immigration movement to Utah.

    That led to a number of hard feelings between the two.

  12. Gordon Smith on April 3, 2004 at 3:23 am

    Nate, As you can imagine, this is particularly interesting to me. While I know almost nothing of the Church’s use of corporations, I have done a little work on the history of corporate law in the U.S. I am not sure what you mean when you say that the “first general business incorporation act” was passed in England in 1844 and not in the U.S. until 1866. There were clearly other statutes (usually considered “general”) adopted prior to those dates. Here is some of that history from my article on the Shareholder Primacy Norm:

    “In 1795, North Carolina adopted perhaps the first incorporation statute in the United States, granting canal builders the right of eminent domain under certain conditions and the power to ‘sue and be sued, plead and be impleaded, under the denomination of the canal company.’” [This statute is often discounted as a "general" incorporation statute because it applied to such a narrow slice of economic activity. In my view, this fails to acknowledge the key attribute of a "general" statute, namely, that the promoters could form the legal entity without an act of the legislature.]

    Other states passed general incorporation statutes before 1850: Laws of the State of New York, Ch. LXVII (Mar. 22, 1811); Public Statute Laws of the State of Connecticut, Ch. LXIII (June 10, 1837); Laws Made and Passed by the General Assembly of the State of Maryland, Ch. 267 (Mar. 28, 1839); Acts of the Seventieth Legislature of the State of New Jersey, p. 16 (Feb. 14, 1846); Laws of the General Assembly of the Commonwealth of Pennsylvania, No. 368 (Apr. 7, 1849).

    A few other points, not quite so arcane.

    * Nate writes: “in theory the Church could have created subsidiary corporations to hold its other real estate and then the Church corporation could have held the stock of those subsidiary corporations.” Was this possible? One of the great innovations usually attributed to the New Jersey statute (late 1800s) was that it allowed business corporations to own stock in other business corporations. You wrote that the Church practiced institutional shareholding in Utah. Was that before this time?

    * On a related point, as far as I know, municipal corporations and ecclesiastical corporations have always been distinguished from business corporations. While I assume that some of the activities of the Church would have been conducted as a business corporation, when did ecclesiastical corporations gain the right to own stock in business corporations?

    * Kent suggests that the United Order was a “partnership-form precursor(s) to today’s corporation.” One of the preconditions of partnership today — and, as far as I know, this was no different in the early 1800s — is that it has to be a “business for profit.” Does this describe the United Order? I had always assumed it was more accurately viewed as a system of communal property ownership, as Nate suggests.

    * Finally, Nate, you discuss general business incorporation, but when were general ecclesiastical incorporation statutes adopted?

  13. Nate Oman on April 3, 2004 at 9:08 am

    Gordon: as you point out figuring out what a “general incorporation statue” is is a bit difficult. What I meant was a statute providing than any business could get a corporate form, as opposed to only a canal business, or manufacturing business, or what not. Actually, my understanding was that the 1844 act was not a true corporations statute, but rather simplified some of the problems with de fact joint stock companies operating under the legal form of partnerships. As I understand it the act essentially adopted an entity theory of partnerships.

    There seem to have been general incorporation statutes for churches much earlier. The Illinois statute used by the church was passed in 1835

  14. Dave on April 4, 2004 at 1:01 pm

    “The Church owns itself. There are no other legal owners.”

    There must be shares; are these all held by the Trustee, as a commenter mentioned?

    And you may get to this later, but even if the present ownership structure eliminates accountability to shareholders, there is still trustee accountability. The trusteeship is, I take it, in favor of members of the Church as a body, who contribute all of the “donated capital” of the Church (distinguished from the accumulated earnings from invested capital, which while substantial still derives from original grants of donated capital).

    It would seem like any member (at least US member) of the Church would have standing to bring some form of derivative suit against trustees (dependent on facts to support it, of course) who might use assets held in trust for purposes not for the benefit of the members.

    Caveat to the anti-snarks–I’m raising a procedural issue, not suggesting this scenario is warranted by the facts.

  15. Nate Oman on April 4, 2004 at 1:33 pm

    Dave: Not all corporations are joint stock corporations. For example, most municipalities are corporations but they don’t issue stock. Indeed, there were corporations long before there were joint stock corporations.

  16. Steve Cottrell on April 5, 2004 at 6:54 pm

    For those interested, The Church has been a registered Charity in England since the 1960′s
    see http://www.charity-commission.gov.uk/registeredcharities/showcharity.asp?remchar=&chyno=242451

    The ‘account documents’ link will give you scans of the original Articles of Associsation which includes the names and addresses of the First Presidency at the time.

  17. Nate Oman on April 5, 2004 at 7:18 pm

    This is also facinating because it contains reported reciepts and expenditures (within the UK):

    01 Jan 1997 31 Dec 1997 £16,813,000 £20,388,000
    01 Jan 1998 31 Dec 1998 £33,652,000 £27,250,000
    01 Jan 1999 31 Dec 1999 £29,701,000 £25,255,000
    01 Jan 2000 31 Dec 2000 £25,924,478 £26,715,702

    The sums in the first collumn are reciepts and the numbers in the second collumn are expeditures. I wonder if there is some reporting reason that accounts for the fact that receipts doubled from 1997 to 1998.

  18. John on April 9, 2004 at 10:07 am

    I’m looking forward to the ‘trying to solve the problem in Utah’ piece. I’m interested to read more.

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