Story Case

Gordon Jones, John K. Lynch, and Claude Perrin organized an association called the Mutual Indemnity Exchange. This organization was created in accordance with the state law providing that the merchants of any town might co-operate through one company for their mutual protection against delinquent debtors. After organization was perfected, members were solicited and received. The law did not state whether such organizations should be considered corporations, or mere non-profit associations, or partnerships, but it provided for some of the characteristics of a corporation. A charter was granted; the rights of the members were evidenced by certificates which were transferable by indorsement, and the organization was empowered to have directors and officers. The law was silent upon the rights of the organization to sue and be sued, and upon the liability of the members for its obligations.

The Mutual Indemnity Exchange became heavily indebted to Charles Peabody for office and hall rent. When payment was ultimately refused, Peabody brought an action against the three original organizers, alleging that they were" individually liable. The defendants contended that they were acting for a corporation and were not individually liable. Is this correct?

Ruling Court Case. Wehrmann Vs. Merchants' National Bank, Volume 202 United States Reports, Page 295

A partnership was formed to develop certain real estate. The shares in the firm were represented by 40 transferrable certificates, and under the partnership agreement, any holder of a certificate was to become and be recognized as a member of the firm. The Merchants' National Bank took nine of these certificates as a security for a debt, and, afterwards, in satisfaction of the debt, became the owner of them. In this suit it was sought to hold the bank as a partner for a debt contracted by the partnership. The bank contended that it should not be held as a partner, because it had no power to assume that relation.

The Court said, in an opinion delivered by Mr. Justice Holmes: "The general proposition is that a national bank may take, by way of security, property in which it is not, as a general rule, authorized to invest, and may become owner of it by foreclosure or in satisfaction of a debt. There are decisions that it may acquire stock in a corporation in this way, and so subject itself to the liability imposed by statutes upon the stockholder for the corporate debts, but it does not follow, that because the interest in a partnership is represented by a paper certificate, which in form more or less resembles a certificate of stock in a corporation, a national bank has power to own the partnership certificate to the same extent that it could take the stock. In a certain sense, the certificate of a share in one represents property much like a share in the other, but from the point of view of the law there is a very important difference. The corporation is legally distinct from its members, and its debts are not their debts. Therefore, when a paid-up share in a corporation is taken, no liability is assumed, but simply a right equal in value to a corresponding share in the assets of the concern after its debts are paid. Before the dissolution, a stockholder's rights are wholly limited to the right to receive dividends as declared by the directors, to vote for the directors, and to require on their part a conscientious administration of the affairs of the corporation. But to take a share in a partnership, means to become a part of the concern, with a voice in its management and an unlimited personal liability. This, a national bank has no authority to do. The bank had no power to become a partner and is not liable for the partnership debts."

Judgment was given for the defendant, the bank.

Ruling Law. Story Case Answer

It is not always an easy matter to distinguish clearly between a corporation and a partnership. But there are certain fundamental differences which may be noted, and which, in most cases, will determine the nature of an organization. (1) A corporation is created by a legislative body. Its existence depends wholly upon legislative authority. On the other hand, a partnership is a common law organization, which may be voluntarily entered into, like any other contract, without the aid of legislative authority. (2) In the second place, a corporation has perpetual succession, which means, as we have seen, the right to exist during the life of its charter, regardless of the continued existence or membership of the original members. On the other hand, a partnership has no such perpetual existence. The death of a partner immediately brings the relation to an end, or, as is said, dissolves it. If a partner transfers his interests in a firm, the transfer operates as a termination of the relation. (3) The corporation, as an artificial person, is distinct from its members. It holds title to all the real estate corporate property; it may sue or be sued as a separate person. But a partnership has no such separate existence. Suits must be brought by the partners as individuals. Suits against them are maintained in the same manner. Title to real estate is held by the individual members and not by the partnership as a separate person or entity. (4) A stockholder of a corporation may freely transfer his interest in the corporation and the transfer has no effect upon the continued existence of the corporation. A partner may transfer his interest in his firm. But, as stated above, the transfer operates as a dissolution or termination of the partnership relation. (5) Finally, a stockholder is not liable for the debts of the corporation. He is only compelled to pay into the corporate treasury the amount due upon the shares of stock which he owns. On the other hand, a partner is individually liable for all the debts of his firm, regardless of the amount he has contributed or promised to contribute.

Because the Mutual Indemnity Exchange acted under a charter, and because it acted primarily by virtue of state authority and not from contract between individuals, it is believed the Court will imply the other corporate characteristics and decide in favor of the defendants.