Before examining the details of trust law doctrine, it is first useful to understand how the trust initially emerged and how it worked in the organization of a business. Since the tax only applied to land that a man owned in his own name at death, the tax did not apply if the land legally belonged to a trustee, rather than to the deceased. The trust thus became a fixture of late-medieval England. Turner, The Equity of Redemption: Its Nature, History and Connection with Equitable Estates Generally 43–46 (1931). This claim is based on extensive digital searching of the English reports. By the early nineteenth century, the evidence that unincorporated companies could lock in their capital becomes more direct. but in fact the doctrine behind it served an important practical purpose: It locked in a company’s capital.
Parts I and II of this Essay begin by showing how the trust worked in business and by demonstrating that the trust remained persistently popular in business even after the passage of general incorporation statutes. It turns to previously unexamined primary legal sources such as case reports and legal treatises to show that for much of modern history, the trust offered each of the key legal features that we now associate with the modern corporate form, including entity shielding and capital lock-in, limited liability, legal personhood in litigation, and a sensible scheme of fiduciary powers. The trust helped a landowner avoid the feudal incidents by allowing him to manipulate the way the law applied. The reason the phenomenon is somewhat difficult to see in early joint-stock companies is that very few unincorporated joint-stock companies appeared in the Court of Chancery during the eighteenth century, presumably because of the incompleteness of Chancery reporting. They find that the vast majority of trust-based companies declared in their deeds of settlement that they would exist indefinitely. Little & James Brown 1841) [hereinafter Story, Commentaries on the Law of Partnership] (“[A] partnership may expire by the mere efflux of the time, which limits and bounds its duration under the terms of the original contract, by which it is created.”). See 3 James Kent, Commentaries on American Law 26 (N.
This Essay challenges a central narrative in the history of Anglo-American business by questioning the importance of the corporate form. As Professors Henry Hansmann and Ugo Mattei have shown, this was an extraordinary innovation because it limited the rights of a trustee’s creditors even if the creditors had not personally agreed to the limitations. Today, an unsecured creditor can seize any property—real or personal—of a debtor as long as the property is not already committed to a security interest. Since no one could take real property from a trustee unless the trustee specifically pledged it, there was no point in cutting off the claims of creditors who had no pledge. The historiographical value of is nevertheless enormous because it appears to be the first reported case ever to have involved a business company organized as a trust, and the judges who resolved the case were forced to address a number of key issues about the basic features of the company. The trust, of course, existed in a larger context of laws beyond judicial doctrine that included statutes and legislative acts. Thus, while the trustees faced personal liability, the shareholders lost nothing, allowing them the de facto equivalent of limited liability.
The Essay shows that the corporate form was not, as we have long believed, the exclusive historical source of powers such as limited liability, entity shielding, tradable shares, and legal personhood in litigation. It was enough simply to have a rule that protected property from the secured creditors who had received the pledges. The reports of the case tell us about a company that came into being when the City of London agreed to lease a supply of water to an entrepreneur named Thomas Houghton. Rottschaefer, Massachusetts Trust Under Federal Tax Law, 25 Colum. Sometimes these statutes—such as the Bubble Act and the Registration Act of 1844 in England—intervened to make the trust less appealing than it otherwise might have been. Eventually, however, the trust would lose this feature before partially regaining it again in the early twentieth century.
No historian has yet shown that in fact the trust was almost as strong as the corporation as a matter of judicial doctrine. The most famous example is the set of death taxes and military obligations that modern historians call the “feudal incidents.” The feudal incidents essentially taxed the land a man owned when he died, and they provided the primary source of revenue for the English crown during the later stages of feudalism. The evidence for this is somewhat hard to see at first, but it grows increasingly clear over time, becoming unambiguous by the early nineteenth century. Additional evidence comes from Professors Freeman, Pearson, and Taylor’s recent survey of eighteenth- and early-nineteenth-century joint-stock companies. Lescure 1847) (“Where, as is frequently the case, a precise time is fixed for the duration of the partnership, it is dissolved by the expiration or effluxion of that time, if it do[es] not meet with an earlier legal termination.”); Joseph Story, Commentaries on the Law of Partnership 403 (Bos., Charles C. This doctrinal shift probably first appeared around the 1820s, since this was the time when courts in England and the United States first began treating contractual arrangements as partnerships even when the partners did not want to do so.
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See generally Ribstein, supra note 25 (surveying the history of business forms with little discussion of the trust). The basic principle behind the trust’s popularity was that by giving property to a trustee, a landowner could avoid a set of obligations that applied to himself. For many centuries, the central function of bankruptcy law was to undo the effect of these fraudulent-transfer statutes in certain circumstances by making private compositions binding even on the creditors who did not agree to them. — When the trust first appeared in joint-stock companies in the late 1600s, it brought its asset-partitioning features along with it. suggests that even from the very dawn of trust-based joint-stock companies, something like entity shielding was widely expected. Indeed, the whole point of treating a business as a partnership was usually to make the partners personally liable for the partnership’s debts.
Because it was so effective as a substitute for the corporate form, the trust was widely used in England and the United States to hold the property of unincorporated partnerships and associations both long before and long after the corporate form became freely available through statutes of general incorporation in the mid-nineteenth century. Queen Elizabeth, King James I, and King Charles I all granted corporate charters to a variety of overseas trading businesses and domestic businesses that aimed to earn a profit. While limited liability protects the owners of a business from liabilities that might flow up from the business, entity shielding works in the opposite direction, protecting the business from the liabilities of the creditors and owners that might flow down. 162 (prohibiting transfer of an interest in trust)). This string of statutes thus had the effect of weakening the system of entity shielding that previously protected trust property in the law of trusts.
Indeed, at the time general incorporation statutes first appeared, many large businesses actually preferred the trust. Harris, Industrializing English Law, supra note 16, at 41; see also 2 William Robert Scott, The Constitution and Finance of English, Scottish, and Irish Joint-Stock Companies to 1720, at 3 (1910) [hereinafter Scott, Constitution and Finance] (cataloging trading expeditions to Africa). Brown, Common Law Trusts as Business Enterprises, 3 Ind. That is, the creditors of a modern corporation enjoy both (a) priority of payment over the owners and their creditors and (b) the right to prevent the owners and their creditors from forcing the business to sell off its assets to pay their debts. 244, 245 (prohibiting transfer of an interest in trust); Ogle v. But some commentators have argued that equitable interests were assignable, including St. See, e.g., Francis Bacon, The Reading upon the Statute of Uses of Francis Bacon 16 (London, William Henry Rowe ed., W. German, Doctor and Student 185 (London, Henry Lintot 15th ed. The main evidence of the trust’s effectiveness in avoiding beneficiaries’ creditors appears in the long string of statutes that Parliament passed in the late Middle Ages to try to limit the trust’s effectiveness and prevent it from destroying the credit system. 172, 174 (holding that even a run-of-the-mill interest in an inheritance trust was reachable by creditors); Maitland, supra note 22, at 377–78 (describing the characteristics of “ownership in equity”); Turner, supra note 38, at 161 (explaining that a judgment creditor has an equitable interest in the debtor’s estate under the Statute of Frauds but not a legal interest). But even the resulting weakened system turned out to be extremely strong—and was actually almost exactly analogous to the entity-shielding regime that now exists in the modern corporation.
In the earliest kind of trust—which was originally called a “use” For simplicity, I generally avoid archaic terms in favor of their modern counterparts. The trustee would then hold the property on the original owner’s behalf, with the understanding that at some future date, the trustee would convey the property back to the original owner or his wife, children, or others as the original owner instructed. at 136; Geoffrey Gilbert, The Law of Uses and Trusts 72–73 (London, E. Titling property in the name of a trustee raised the prospect that the trustee and his creditors might take the property for themselves. The Chancellor’s innovations consisted of three key doctrines that helped to control misconduct by trustees. Together, these innovations enabled a trustee to play the same basic role as a corporation. 299 (1931); Comment, The Doctrine of Merger as Applied to Commercial Trusts, 29 Yale L. 97 (1919); Comment, Massachusetts Trusts, supra note 146; Comment, Massachusetts Trusts and the Income Tax, 28 Yale L. 690 (1919); Comment, The Nature of Massachusetts Business Trusts, 27 Yale L. 677 (1918); Note, Taxation of Business Trusts, 42 Yale L. Dunn, Trusts for Business Purposes (1922); Robert Gardner Mc Clung, Representative Massachusetts Trusts (1912); Wilber A. Thompson, Business Trusts as Substitutes for Business Corporations (1920) [hereinafter Thompson, Business Trusts]; Edward H. In the first half of the nineteenth century, partnership treatise writers uniformly agreed that although the default rules of partnership allowed a partner to withdraw his capital and dissolve the partnership at any time, this rule could easily be changed by agreement. or felony, to qualify the causes of its dissolution. continue beyond the legal period of dissolution, in the hands of his children or representatives.” Niel Gow took a similar position in his treatise, arguing that even “[i]n the absence of an express [contract], there may be an implied, contract, as to the time for which a partnership shall endure . Joseph Story, Commentaries on Equity Pleadings § 132 (Bos., Charles C. 1840) [hereinafter Story, Equity Pleadings] (describing partnership dissolution as an exception to the general principle that partners did not all have to be joined where they were too numerous). It thus appeared, for all intents and purposes, that unincorporated companies were able to lock in their capital as effectively as incorporated companies. The form of limited liability the trust offered varied throughout history and was not always exactly like the limited liability we now know in modern corporations.
Before the trust appeared in large, corporation-like business companies, it had a long and varied career as a device for conveying real property. Later on, the term “cestui que use” would come to refer to beneficiaries. For descriptions of the trust as a device for avoiding the feudal incidents, see id. Giving land to a trustee was not without risks, however. With the Chancellor’s enforcement, the arrangements between landowners and their trustees ceased to be mere contracts and became instead the formalized, property-like arrangements that we now know as trusts. Rommel, Tax Liability of Business Trusts: See, e.g., William C. The only cases involving a company organized as a trust between 17 were Lynch v. The clearest evidence comes from the earliest treatises on partnership. ; and where that is the case, the partnership cannot be destroyed by the act of the party until the contemplated period arrives.” Andrew Bisset, A Practical Treatise on the Law of Partnership 55 (Harrisburg, Pa., I. As we will see below, the requirement that every shareholder be joined was unique to dissolution proceedings—in most other proceedings the joinder of every one of a business trust’s stockholders was not required. was thus to recognize dissolution as a unique problem and to make capital difficult to withdraw.