Mary Szto – Limited Liability Company Morality

This is part two of a discussion of an intriguing law review article on fiduciary duties as applied in the context of limited liability companies.  The prior blog considered the theological roots cited by Ms. Szto.  This part examines other roots for fiduciary duties.

Ms. Szto starts again with a religious analysis.  Says she, “Canon lawyers provided the link between Roman legal devices and biblical views of property.  For several centuries, the study of Roman law found a home within the church.  Augustine taught that property must have a spiritual use.”

Now we are introduced to the connection between fiduciary obligations and the church – Ecclesiastical courts handled probate matters.

Says the author, “The Middle Ages saw the development of the use, the forbear of trust and agency law (agency and trust law being the forbears of partnership and corporate law).  This came about mainly through ecclesiastical courts.  It was accomplished through continued clerical adaptation of fidei commissa . . . and the ecclesiastical court’s jurisdiction over probate law.  Eventually, the Courts of Chancery enforced uses.  All these lay the groundwork for high business fiduciary duties, many centuries later.”

In this way, fiduciary relationships evolved from rules limiting inheritances in real property.  Ms.  Szto explains that, “Uses of personalty were enforced in the 1100′s by English common law courts.  However, the Franciscans are credited for the first wide-scale employment.  St. Francis of Assisi founded the Franciscan Order in 1209.  According to Maitland, although the Franciscans had taken vows of property, they employed the ‘ad opus’ to receive the benefits of property ownership, which was akin to the Roman ‘usus.’”

Which is to say, the clergy helped drive the “use,” in which beneficial possession was separated from actual legal title.  Even more, conveyance of fee ownership by will was limited, at least in England.  “Because the common law prohibited the devise of freehold land, the feoffment to uses were popular during the rein of Edward III (1327-1377).  Feoffors would convey land to feoffees, who then conveyed land to third persons – cestui que uses – named in the feoffors’ wills.  The terms use, confidence, and trust were used simultaneously.”

Still, a right without a remedy has little value.  The court must step in when misconduct occurs.   “There is evidence that ecclesiastical courts enforced uses before the Courts of Chancery did.  This is because ecclesiastical courts had jurisdiction over probate matters. . . . Interestingly, records of ecclesiastical enforcement of uses disappear in the last part of the 1400′s, apparently because of the jurisdiction of the Courts of Chancery over uses at that time.”

More next week on the limited liability companies.

Mary Szto, “Limited Liability Company Morality: Fiduciary Duties in Historical Context,” 23 Quinnipiac Law Review 61 (2004-2005).

Randy Krbechek posted at 2009-9-25 Category: Law Reviews

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