THE POWERS OF CORPORATIONS CREATED BY ACT OF CONGRESS THE HE Supreme Court of the United States has decided that the Federal Reserve Board may give national banks permission to engage in the business of acting as trustees and as executors and administrators and as registrars of stocks and bonds.1 This suggests the question whether there has been any modification of the doctrine of M'Culloch v. Maryland 2 and Osborn v. Bank of the United States, and what are the scope and extent of the powers that may be exercised by corporations created by act of Congress. The creation and control of corporations by federal statute has been suggested as a remedy for the evils arising out of the diversity and feebleness of state control over companies engaged in transportation or commercial business of nation-wide concern, and it has even been urged that existing state corporations should be required to accept incorporation under federal laws as a condition of being allowed to engage in commerce with foreign nations and among the states. With the growth of national consciousness little need is felt of drawing very technically the lines between the spheres of state and federal legislation, and the present tendency is to ignore these distinctions and to consider rather the question of practical efficiency. It is important, therefore, that we should keep in mind the limitations which the Constitution has put upon the purposes for which Congress may create corporations and the powers with which corporations so created may be endowed. A corporation is something more than the personification of an association of individuals; its personality, its properties and powers are derived from the laws of the sovereignty by which it was authorized, or at least recognized, to be a legal person. It is not enough that an association of individuals has filed a certificate in a public office declaring itself to be a corporation and stating the objects and 1 First National Bank v. Union Trust Co., 244 U. S. 416 (1917), reversing the judgment of the supreme court of Michigan in 192 Mich. 640, 159 N. W. 335 (1916), and overruling the decision of the Supreme Court of Illinois in People v. Brady, 271 Ill. 100, 110 N. E. 864 (1915). 2 4 Wheat. (U. S.) 316 (1819). 3 9 Wheat. (U. S.) 738 (1824). purposes for which it was organized. The legal existence of the corporation and its powers depend upon the jurisdiction of the state which created it or the recognition of the state wherein it operates. The principles governing the power of Congress to create corporations and the extent of the power conferred are stated by Chief Justice Marshall in the cases of the first and second banks of the United States. The power to create corporations is not one of the substantive powers conferred upon Congress by the Constitution. "Among the enumerated powers," says Chief Justice Marshall in M'Culloch v. Maryland "we do not find that of establishing a bank or creating a corporation." He was discussing the question whether this power, admitted to be a power appertaining to sovereignty, was one which appertained to the sovereignty of the state or to that of the United States, and he said: "The power of creating a corporation, though appertaining to sovereignty, is not, like the power of making war, or levying taxes, or of regulating commerce, a great substantive and independent power, which cannot be implied as incidental to other powers or used as a means of executing them. It is never the end for which other powers are exercised, but a means by which other objects are accomplished." 5 It was decided in that case that the creation of a bank with the power to transact private banking business was an appropriate means for carrying into execution the powers expressly given to the government of the United States, and the creation of such a corporation was held to be justified by the authority given to make "all laws necessary and proper for carrying into execution the enumerated powers and all other powers vested by the Constitution in the government of the United States." Again, in Osborn v. Bank of the United States, the Chief Justice said: "Why is it that Congress can incorporate a bank? This question was answered in M'Culloch v. The State of Maryland. It is an instrument which is 'necessary and proper' for carrying on the fiscal operations of government. Can this instrument, on any rational calculation, effect its object, unless it be endowed with that faculty of lending and dealing in money which is conferred by its charter? If it can, if it be as competent 5 Ibid., 411. 4 4 Wheat. (U. S.) 316, 406 (1819). to the purposes of government without, as with this faculty, there will be much difficulty in sustaining that essential part of the charter. If it cannot, then this faculty is necessary to the legitimate operations of government and was constitutionally and rightfully engrafted on the institution. It is, in that view of the subject, the vital part of the corporation: it is its soul; and the right to preserve it originates in the same principle with the right to the skeleton or body which it animates." These decisions declare the principles upon which rests the power of Congress under the Constitution to create corporations and indicate the extent of the powers that may be conferred upon them. In view of these principles Congress created the national banks under the act of June 3, 1864. Of this act the Supreme Court said in 1875, 8 "The constitutionality of the act of 1864 is not questioned. It rests on the same principle as the act creating the second bank of the United States. The reasoning of Secretary Hamilton and of this court in M'Culloch v. Maryland (4 Wheat. 316) and in Osborn v. Bank of the United States, (9 id., 708) therefore, applies. The national banks organized under the act are instruments designed to be used to aid the government in the administration of an important branch of the public service. They are a means appropriate to that end. Of the degree of necessity which existed for creating them Congress is the sole judge." Victor Morawetz, in an article in the HARVARD LAW REVIEW for June, 1913, suggested that although the court was right in sustaining the constitutionality of the national bank act, it seemed little more than a pretense to assert that an unlimited number of banks, some of them small and intended only to give local banking facilities, were incorporated to serve the fiscal operations of the government and that a sounder and better ground was the power to regulate commerce among the states; but it is to be noted that the consolidation of some of these banks under the National Reserve Bank Act has now proved their usefulness for serving the fiscal operations of the government and the transportation of armies in time of war. When Congress in 19139 conferred on the Federal Reserve Board power to license such national banks as should apply for it, 7 13 STAT. AT L. 99. 8 Farmers' & Mechanics' National Bank v. Dearing, 91 U. S. 29–33 (1875). power to act as trustees and executors and administrators and registrars of stocks and bonds, it was insisted that these functions bore no real relation to the purpose of serving the fiscal operations of the government or regulating commerce among the states, nor to any of the federal purposes for which Congress had power to authorize corporations to be created; that the functions were not even the proper functions of a private banking business, but were governed by different rules of law peculiarly within the province of the state and that the duties of executors and administrators were derived and regulated wholly through state laws. The question came before the Supreme Court of Michigan in Grant Fellows, Attorney General v. First National Bank of Bay City 10 and before the Supreme Court of Illinois in People ex rel. First National Bank of Joliet v. Brady, Auditor."1 In both cases the decision was that the permission given by Congress through the Federal Reserve Board to the national banks did not avail to authorize them to carry on the business of trust companies and registrars of stocks and bonds, nor to act as executors and administrators within the states. The decision of the Supreme Court of Michigan was taken to the Supreme Court of the United States and the judgment was reversed.12 The effect was to overrule also the opinion of the Supreme Court of Illinois in the Joliet bank case. The opinion of the Supreme Court of the United States was delivered by the Chief Justice. He said the court below, while recognizing that it had been settled beyond dispute that Congress had power to organize banks and endow them with functions both of a public and private character, had, "instead of testing the existence of the implied power to grant the particular functions in question by considering the bank as created by Congress as an entity, with all the functions and attributes conferred upon it, rested the determination as to such power upon a separation of the particular functions from other attributes and functions of the bank, and ascertained the existence of the implied authority to confer them by considering them as segregated, that is, by disregarding their relation to the bank as component parts of its operation." 10 Mich. 640, 159 N. W. 335 (1916). 11 192 271 Ill. 100, 110 N. E. 864 (1915). An article of my own on the Illinois case, with an outline of the arguments of counsel and court, appeared in 16 COL. L. REV. 386. 12 244 U. S. 416, 424 (1917). The Chief Justice said that while fully recognizing the right of Congress to exercise its legislative judgment as to the necessity of creating the bank including the scope and character of the public and private powers which should be given to it, the court disregarded this discretion in Congress to determine whether it was relevant or appropriate to give the bank the particular functions in question, and in so doing the court below took a mistaken view of the actual conditions and failed to observe that the state banks exercised these same functions and by reason of this were rivals in the same field of business so that it was plain that it was necessary to confer these functions upon the national banks in order to promote their efficiency and the success of their business. As to the point that the functions of executors and administrators and trustees were peculiarly within the domain of state regulation, the court said that it was established in M'Culloch v. Maryland and Osborn v. Bank of the United States that "although a business was of a private nature and subject to state regulation, if it was of such character as to cause it to be incidental to the successful discharge by a bank chartered by Congress of its public functions, it was competent for Congress to give the bank the power to exercise such private business in coöperation with or as part of its public authority." The Supreme Court took no notice of the suggestion of counsel that Congress had not, in fact, declared its opinion that the new privileges conferred were necessary to the efficiency of the national banks. They only declared that they might be conferred by the Federal Reserve Board on such national banks as applied for them. It is, perhaps, sufficient that Congress should determine that these privileges were necessary to the efficiency of any national bank that should, in view of the rivalry of state banks, find it was desirable that it should take up these new lines of business. It will be observed that in this case of the national banks the court found as an essential fact that the new functions now conferred upon them were functions which had now become familiar functions. of state banks, their rivals in the banking business, so that it was a reasonable exercise of discretion for Congress to consider them a relevant and appropriate means of preserving the efficiency of the banks as instrumentalities in carrying into execution the purposes of the government for which they were created. |