Emoluments, Part 2: Trump Companies are Invalid Entities as Litigants

I am following up on the Quo Warranto/state AG strategy for enforcing the Emoluments Clause against Trump and his businesses.  My original blog post is here, my Law360 op-ed is here, and a story/interview by ThinkProgress’s Judd Legum is here (he kindly called it a “legal breakthrough.” I hope so!)

I have a new idea for enforcing emoluments in court, a kind of “full-court press” and even a kind of legal jujitsu flipping Trump’s litigiousness against him. The idea sparked by reading old Quo Warranto cases. In Bissell v Michigan S. & N. Ind. R.R. Cos., 22 N.Y. 258 (1860),  the highest court in New York (the Court of Appeals) heard a tort claim by a  passenger against a railroad. The defendant was actually a combination of two companies, one incorporated in Michigan, the other in Indiana. Their defense was the ultimate in legal chutzpah: the two railroads claimed that their combination into one railroad was illegal and “ultra vires” because this restructuring exceeded their corporate authority in each state. Thus, the victim’s lawsuit was against a fictional defendant that was void under the law. The Court of Appeals rightly rejected the defendant’s convenient timing in conceding illegality. (It turns out that other corporations in the nineteenth century tried to dodge debts and lawsuits by conveniently that their incorporation was void).

Judge Nelson, after discussing the quo warranto issue as  background, held that the victim’s tort suit was valid, despite the corporation’s invalidity. The problem remained: when should an “ultra vires” (unauthorized) corporation be held valid or invalid? I offer a long passage below:

“It is said that there will be no restraint upon the acts and dealings of corporate bodies, if we uphold them when in excess of rightful authority. To this I answer, that the most ample restraints will be found in the principles here advocated; while, on the other hand, if we concede to corporations immunity in all cases when they do wrong, we invite and reward the very abuse. It is also said, in order to render this doctrine less offensive to the reason and conscience, that the innocent dealer may, upon the voidness of the contract and a disaffirmance of it, recover back the value or consideration with which he has parted. This position necessarily concedes that the corporation, as a legal person, made the unauthorized contract, and received the money, or value, under and according to it; thus overthrowing the main objection to its liability to respond directly upon the contract. It also concedes the innocence of the other contracting party; thus, according to all the analogies of the law, refuting the only other objection (illegality) on which the absolute invalidity of such dealings is claimed to rest: for, surely, after conceding that the corporation actually made the contract, it will not be contended that it can set up that it ought not to have made it, against an innocent person who has given up his money or property on the faith of the same contract. But I answer, further, that while in many cases the remedy of a suit in disaffirmance of the agreement, and to recover back the consideration, will be sufficient to prevent wrong, in many others it will be entirely worthless. All collateral securities must fall to the ground with the principal contract, and all its consequences and results. The present case will afford the best illustration. The defendants, in consideration of a trifling sum received from the plaintiff for fare, agreed to perform the service of carrying him in their cars, perhaps some two hundred miles. By the negligent performance of that agreement, they inflicted on him injuries for which a jury has said the proper compensation was $2,500. This being the measure of damages for the breach of the contract, the absurdity, not less than the injustice, of confining him to the remedy of disaffirmance because the agreement was ultra vires, must be quite apparent.” (Bissell, 22 N.Y. at 277).

The basic idea is that courts should not give a corporation the advantages from an invalid/ultra vires incorporation, but it should disadvantage those invalid corporations when appropriate, explicitly with crafting a deterrent strong enough to deter the illegal actions. In this railroad case, Judge Nelson observed that the remedy of invalidating the contract was too weak, because the railroad would happily return the price of a train ticket rather than pay for a serious injury.  Invalidating a contract was not enough of a deterrent.  The New York court is clear that the remedy should be tailored to “prevent wrong” and to “restrain” illegal behavior, rather than to “invite or reward” such conduct.

How does this apply in the Emoluments context?  Whenever a Trump entity sues another party (whether contract, tort, property, debt), the court should consider whether the Trump entity is ultra vires and an invalid party because it serves to violate the U.S. Constitution. Even if there is a meritorious legal claim against a defendant, the court should consider the basic corporate doctrines of ultra vires, that incorporation is a state-created legal fiction for special rights and privileges, but comes with basic responsibilities of obeying the law in order to exist at all.  The court should also consider its duty to choose remedies to serve deterrence. Refusing to treat Trump entities as legally valid in everyday torts, property, and contracts cases would be one way to enforce the rule of law. There may be additional ways courts can consider this ultra vires problem when the Trump corporation is a defendant, case by case.

I am not sure how many cases the Trump organization is currently litigating as plaintiff, but Trump’s litigiousness can be flipped against him in a legal jujitsu move. Those lawsuits in federal or state courts could be invalidated, and the plaintiffs suing Trump entities could, in some cases, get some additional consideration as private attorneys general against Trump’s overall illegal behavior.

 

Author: Jed Shugerman

Legal historian at Fordham Law School, teaching Torts, Administrative Law, and Constitutional History. JD/PhD in History, Yale. Red Sox and Celtics fan, youth soccer coach. Author of "The People's Courts: Pursuing Judicial Independence in America" (2012) on the rise of judicial elections in America. I filed an amicus brief in the Emoluments litigation against Trump along with a great team of historians. I'm working on "The Rise of the Prosecutor Politicians," a history of prosecutors and American politics, and another project on the origins of independent agencies in America.

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