Story Case

Joseph Larkin and ten other men formed an organization called The Springfield Building and Loan Association. This was created in accordance with the law of their state, which provided that five or more persons could unite to create such an organization, with power to lend and borrow money on real estate. The law expressly stipulated that each of the charter members should be individually liable for the obligations of the association, and that, if any of them sold his interest, this fact must be recorded with the county recorder, stating at the same time the name of the purchaser.

Subsequently, the state passed a law taxing the franchises of all corporations. The Springfield Building and Loan Association, among other organizations, maintained that it was not a corporation, since the law expressly provided for the individual liability of its members, and did not permit them to convey their interest freely. Is this contention correct?

Ruling Court Case. Thomas Vs. Dakin, Volume 22 Wendell's Reports, (New York Supreme Court) Page 9

This suit was brought against Dakin by A. K. Thomas, president of the Bank of Central New York, to recover a debt which Dakin owed to the bank. The bank was organized under the General Banking Law of the State of New York, which provided for the creation and stated the powers of banking associations. It provided for capital stock, and specified that any shareholder might transfer his interest to another, who would take all rights thereunder; it further provided that no shareholder should be liable personally for the debts of the association, and that the association should be sued or bring suit in the name of its president. It did not, however, state that the associations organized under it should be corporations. The case here presented the question whether the law did, in fact, create corporations.

Mr. Chief Justice Nelson delivered the opinion of the Court: Whether or not the law uses the word "corporation" in organizing an association is unimportant. The test of the corporate nature of a body is the presence of corporate powers and attributes. In the present case, the organization is created by law, it has the characteristic of perpetual succession in spite of changes in the membership, and the members are personally free from the liabilities of the body. The Court said: "The distinguishing feature, far above all others, is the capacity conferred by which a perpetual succession of different persons shall be regarded in the law as one and the same body, acting in the fulfillment of the objects of the association as a single individual."

The Court held that the legislature intended the creation of corporations under this law, since (1) there is the power of succession; (2) the members are free of individual liability for the association debts.

Judgment was given for Dakin.

Ruling Law. Story Case Answer

A corporation is an association of natural persons joined together by legislative authority, for the purpose of accomplishing some desired end, or object. It is regarded by law as an artificial person, separate and distinct from the natural persons who compose the organization. It can sue or be sued as a natural person can sue or be sued. It has perpetual succession. This means that the organization continues so long as its legislative authority continues, regardless of the fact that some or all members may die or transfer their interest therein. A further element peculiar to a corporation is the fact that a corporation is liable for its own debts; that a member cannot be compelled to satisfy these obligations if he has paid the par value for the stock which he owns in the corporation.

The contention of the organizers of the Springfield Building and Loan Association, in the Story Case, is correct. That organization does not have the characteristics of a corporation. Apparently, it has only the elements of a partnership.