How Corporations Saved the United Order (kind of)

December 23, 2004 | 9 comments
By

One of the great advantages of blogging is that you can ramble on regardless of whether or not what you are saying is of any interest to anyone else. Hence this post. I feel it is time that we had the discussion that you have all be waiting for: The one on real estate leases, corporate law, and the United Order.

Originally this post started out as a response to Russell’s missive on socialism. However, in looking at the legal details of the law of consecration, I have to confess that the geekish delight in old and now useless legal detail overtook me. Who cares about socialism, capitalism, Marxism, liberalism, or other –isms when there are lease documents to be read!

The original version of the law of consecration worked like this: A person, upon joining the Church would donate all of their property to the Presiding Bishop, who then give back to the person a “stewardship.� Thereafter the member would give their increase – essentially their profits above some reasonable level of living expenses – back to the Church.

The interesting question, of course, is how this worked legally. Initially the member would deed all of their property to the Bishop in fee simple. The major asset in these transactions was almost always land. Land can be “owned� in lots of different ways that give the owner varying degrees of control over the land. Suffice it to see that “fee simple� is the most absolute form of ownership. It means that the land belongs to you and your heirs in perpetuity, or until you alienate it to someone else. Alas, despite the fee simple language in the deed the transaction was much more complicated.

From the get go the Church faced a problem: It didn’t really want the property to be owned by Newell K. Whitney the person, it wanted the property to be owned by “The Presiding Bishop.� Hence the property was deeded to Newell K. Whitney and his successors in the office of Presiding Bishop. This is a problem. What exactly does Newell K. Whitney now own? Alternatively, is the Presiding Bishop an independent legal entity (known as a corporation sole) that owns the property?

There is another way of conceptualizing the transfer to Whitney. The deed contained specific instructions that the property was to be used to relieve the poor of the Church and otherwise further its mission. This sounds an awful lot like a trust. A trust consists of three people and a chunk of property. The settlor of the trust gives the property to the trustee who is to hold and manage it for the beneficiary. Generally speaking the name of the game in interpreting trusts is to divine the intentions of the settlor. If the deed to Whitney was a trust, then he became a trustee and the consecrating members became the settlors. Two issues arise at this point. First, who exactly is the beneficiary? This is important because a beneficiary acquires legal rights against the trustee that can be asserted in court. Can any member of the Church sue Whitney as a beneficiary under the trust? The second issue goes to the interpretation of the document. The substantive goal of the transaction was to give the Church control over the property. The problem is that the law trusts reverses the power relationship. It assumes that the it is the settlor’s wishes not the trustee’s wishes that control.

Once the property was deeded to the presiding Bishop he would give to the member a stewardship. Originally this took the form of a lease. Under the terms of the lease, the steward of the property was required to pay his increase back to the Church. Furthermore, the lease was made revocable in the event of unchristianlike conduct etc. on the part of the steward. Finally, upon the death of the member the property was to revert back to the church, subject to the ability of widows and minor children to extend the lease until death or majority. If you read this lease (see DCH 1:365-367) you will notice that it is a none too well drafted document. In particular, the conditions under which the Bishop may modify the terms of the lease are vague but purportedly cabinned by the lease language. The goal was to allow the Bishop to alter the size of stewardships in order to accommodate more poor members if necessary and to withdraw Church property from misbehaving members. Legally precise language governing such an arrangement, however, is hard to hit upon and the vague language of the lease positively invites a hostile judge to construe the instrument against the Church.

As you can imagine, this arrangement was a legal catastrophe. It created lots and lots of ways for disgruntled members – who remember would be potentially out a very large amount of property – lots of opportunities to sue. In 1837, the Church simplified things to avoid all of these nasty problems. The complicated deeding and leasing of property was abolished. Members simply deeded property to the Bishop, and he then deeded back to them a stewardship in fee simple. No more conditions and no more attempts to preserve the Bishop’s ability to modify the size of the stewardship later. About the same time, the pesky notion of “increase� – which remember was made a legal requirement under the lease arrangement – was dumped in favor of tithing, which provided a clearer standard.

It seems to me that the legal problems with the early law of consecration stemmed from two interrelated problems. The first is that the Church wanted members to retain private control and management of their property. For example, rather than structuring the arrangement as a lease, it could have been structured as an employment contract. Newell K. Whitney would own the property and everyone would work for him, and he would simply pay them. This arrangement would have sidestepped all of the trust and real estate issue raised by the lease, but it would have radically altered the relationship of the members to their property, making it less theirs if you will.

The second problem is that the Church lacked a stable legal identity. Rather than being conceptualized as a corporation it was conceptualized as a body of people. Making Whitney a trustee put him in a peculiarly vulnerable legal position by making him a fiduciary of all the members, including those who were violently opposed to the Church and wished to harass Whitney in the courts. The trust relationship also meant that the member in theory decided the legal content of the relationship of the property to the goals of the Church.

Now fast forward thirty or forty years to the United Orders of the 1870s. All of these legal problems have disappeared. What has happened? First (and no doubt most importantly) the underlying substance of the transaction has changed. People are, by and large, no longer consecrating all of their property to the Church and receiving a stewardship in return. There are, however, lots of cooperative enterprises in which people dedicate property. The old legal problems, however, have gone away. Why?

The answer is the rise of the all-purpose business corporation. One of the first acts of the legislature of the State of Deseret was to grant to the Church of Jesus Christ of Latter-day Saints a corporate charter. This gave the Church an independent legal personality. No more mucking around with deeds and trusts to Newell K. Whitney. You now gave property to a legal entity that transcended any particular member or officer. This charter, however, was still a corporation on essentially a medieval model. It was a special act of the legislature to create a semi-public entity. The charter could have been passed by an early Tudor parliament to benefit one of the monastic orders that Henry VIII would shortly dismember.

The real revolution came after the Civil War with the passage of general incorporation statutes. These laws provided that anyone could create a corporation for any lawful purpose by simply filing articles of incorporation with a government officer (generally a court or the secretary of state). The corporate form was no longer a privilege doled out here and there by special legislation. It became a legal vehicle open to everyone. (Interestingly, the drive for general incorporation statutes had been part of the Jacksonian populist agenda in the 1830s and 1840s but it never went anywhere.)

The Church immediately saw the advantage of organizing communal economics around corporations. Hence, the various United Orders filed articles of incorporation and issued stock to their members. The members would then donate property and labor. The goals and purposes of the corporation were defined in the articles of incorporation, which were to be interpreted in light of the intentions of the incorporaters not the shareholders or donators of property. Hence, the legal advantage conferred on the disgruntled donator by the law of trusts was done away with. Finally, the corporation allowed for the mixed notion of ownership that an earlier generation of Mormons had tried to achieve through unwieldy deeds, trusts, and leases. Shareholders in a sense owned the corporation. They were the ultimate claimants on its profits and the beneficiaries of its enterprises. Furthermore, their shares gave them some control over its management. At the same time, the property of the corporation was communal. If Abel “owned� some bit of real estate because his ownership of shares, Baker “owned� the same bit of real estate in exactly the same way.

In the end, of course, the United Orders didn’t fare too well. Most of them were not economically viable and folded after a couple of years. The government cracked down on others as it sought to confiscate Mormon assets under the Edmunds-Tucker Act. Finally, corporations ultimately introduced more central control than had been present in the original consecration and stewardship system and this centralized control led to disputes and bad decisions with global consequences within an organization. Finally, the cooperatives themselves sparked litigation, although I haven’t done any research on it at all.

Tags: ,

9 Responses to How Corporations Saved the United Order (kind of)

  1. Mathew on December 23, 2004 at 10:44 am

    In regards to your second paragraph–you are a sick, sick man and you should seek help. Immediately. I pray that you and your family can withstand the dark days ahead.

  2. Nate Oman on December 23, 2004 at 11:12 am

    Matt,

    You really ought to read the lease. It is reprinted in the History of the Church, volume 1 on page 365. This is heady and facinating stuff.

    NBO

  3. Clark on December 23, 2004 at 11:26 am

    Even the strategy of the corporation in Deseret didn’t necessary fare too well either, did it? After all with the anti-polygamy drives didn’t Brigham put many of the church’s assets in his name, thereby causing quite the kerfuffle when he died and his heirs thought they deserved more? Or is that a Mormon myth?

  4. Nate Oman on December 23, 2004 at 11:42 am

    Clark: The law incorporating the the Church was repealed by the Morrill Act in 1862. However thereafter there continued to be other corporate entities that held at least some Church assets. The Perpetual Emigration Fund was organized as a corporation and I believe that many stakes set up corporations that held property. I know that by the turn of the century the Church had a hideously complicated corporate structure which was subsequently much simplified.

    I honestly don’t know the details regarding Brigham. He may well have held property personally for the Church. I honestly don’t know. I do know that rather than taking a living stipend or other salary from the Church, Brigham took what amounted to interest free loans from Church funds which he would use as capital in his private business enterprises and he would then repay the money to the Church. I think that much of the litigation over the Brigham Young estate revolved around these loans, with the Church basically taking the position that Brigham died with a bunch of outstanding debts to the Church. I really don’t know, however. I think that there is a pretty lengthy appendix in Arrington’s biography that discribes the litigation over the estate

  5. Ethesis (Stephen M) on December 23, 2004 at 3:15 pm

    If you read the new dean of the BYU law school’s articles on tribes and tribal identity (and its implications for other sorts of identity, such as family corporations or churches and cooperatives), this is all fascinating reading.

    Especially in terms of capitalization, entry and exit and defining roles, all of which are critical issues for communal activities.

    But you’ve only just begun. More of these posts please, many more.

  6. Larry on December 23, 2004 at 4:38 pm

    Nate,

    Great post. If I can divert back to Russell et al’s arguments about socialism, there is a great article on the post office at http://www.dailyarticle@mises.org that I think everyone will enjoy. :)

    Merry Christmas!

  7. JWL on December 30, 2004 at 1:46 pm

    Nate —

    “Finally, corporations ultimately introduced more central control than had been present in the original consecration and stewardship system and this centralized control led to disputes and bad decisions with global consequences within an organization.”

    Many sources (such as Arrington) would agree that the demise of the 1870s United Orders was primarily due to government persecutions followed by various normal business problems. However, in my research I have never encountered anything along the lines of the sentence above. What is your basis for that? If anything, putting United Orders into corporations opened the way for professional management which was better qualified than individuals or bishops.

  8. Nate Oman on December 30, 2004 at 5:57 pm

    JWL: I had in mind attempts to create United Orders organized around certain cash crops that did not pan out. Grapes and sugar beats come to mind. Of course, these sorts of problems could just as easily be described as “various normal business problems.” My point is only that one managment becomes centralized you can no longer diversify away the risk of bad decisions that comes from decentralization. As you point out, there are advantages to centralized managment. There, between us we have laid out the basic theoretical problems of the firm: who needs Coase or Jensen & Meckling!

  9. JWL on January 3, 2005 at 2:13 pm

    Nate —

    Sorry to be a bit technical, but what the heck it looks like it’s just us lawyers here. The unfortunate agricultural ventures you’re referring to predated the formal effort to reestablish the United Order in the mid to late 1870s. Some of those agricultural missions were transferred to United Order status as were many other preexisting economic ventures at that time. I think most would agree that they failed because they were biologically inappropriate for the southern Utah environment. However, the decision to attempt them preceded and was completely unrelated to the United Order effort.

    One could say that centralized management was at fault for that decision, but it was the centralized management of Brigham Young and other high Church leaders’ impractical decision to try to make Utah’s economy entirely self-sufficient, which is quite a different thing than the fact that individual incorporated United Orders were run by corporate officers like other corporations.