Tuesday, December 4, 2012

A Corporation and Its Shareholders are Distinct

A Corporation and Its Shareholders are Distinct
      A recent decision of the District Court for the Western District of Oklahoma has (in my view correctly) applied the principle that a business corporation and its shareholders are legally distinct, and the attributes of one will not be applied to the other.  Hobby Lobby Stores, Inc. v Sebelius, No. Civ-12-1000-HE (W.D. Okla. Nov. 19, 2012).  This suit involved a request by the Hobby Lobby stores and its controlling shareholders for an injunction against those provisions of the Affordable Care Act mandating that certain insurance plans provide coverage for contraceptive medicines, devices and related counseling.  Essentially, the owners of the Hobby Lobby stores, the Green family, alleged that theses contraceptive medicines, devices and counseling violated their religious beliefs, and for that reason those provision of the Affordable Care Act could not be enforced against the corporation.

     While the Court repeatedly acknowledge dthe sincerity of the Green family’s beliefs, it noted as well that Hobby Lobby, as well as Mardel, Inc., a similarly controlled corporation, are “secular, for-profit companies” (Slip op. at 5) and “privately held for-profit corporations.” (Slip. op at 4).  Against this, quoting the complaint, the Court observed that:
The Green family’s religious beliefs prohibit them from deliberately providing insurance coverage for prescription drugs or devices inconsistent with their faith, in particular abortion-causing drugs and devices.  Hobby Lobby’s policies have long explicitly excluded – consistent with their religious beliefs – contraceptive devices that might cause abortions and pregnancy-termination drugs like RU 486.  Slip op. at 5, quoting Complaint at ¶¶ 53-54.
The Court also observed:
Plaintiffs maintain they exercise their religion by complying with their religious beliefs which prohibit them from providing coverage, or access to coverage, for abortion-causing drugs or devices or related education and counseling.  The mandate forces them, plaintiffs argue, to violate their religious beliefs and substantially burdens their religious exercise.  Slip op. at 10.

      When viewed against this pair of statements, it is the word “them,” referring to the Green family, that ultimately decides the outcome.  In fact, it was not “them,” the Green family, that is subject to the Affordable Care Act’s mandate to provide the objected-to goods and services, but rather Hobby Lobby, that secular, for-profit corporation.  Ultimately, as corporations do not have religious beliefs the religious beliefs of those obligated to provide the benefits could not be violated.
The purpose of the free exercise clause is “to secure religious liberty in the individual by prohibiting any invasions thereof by civil authority.”  Sch. Dist. of Abington Twp. v. Schempp, 374 U.S. 203, 223 (1963) (emphasis added). Churches and other religious organizations or religious corporations have been accorded protection under the free exercise clause, see Hosanna-Tabor Evangelical Lutheran Church & Sch. v. EEOC, ___ U.S. ___, ___, 132 S.Ct. 694, 706 (2012); Lukumi, 508 U.S. at 531-32, because believers “exercise their religion through religious organizations.” Corp. of Presiding Bishop of Church of Jesus Christ of Latter-day Saints v. Amos, 483 U.S. 327, 341 (1987) (BRENNAN, J. concurring) (internal quotations omitted). However, Hobby Lobby and Mardel are not religious organizations. Plaintiffs have not cited, and the court has not found, any case concluding that secular, for-profit corporations such as Hobby Lobby and Mardel have a constitutional right to the free exercise of religion. See Anselmo v. Cnty. of Shasta, ___ F.Supp.2d ___, 2012 WL 2090437, at *12 (E.D.Cal 2012) (“Although corporations and limited partnerships have broad rights, the court has been unable to find a single RLUIPA case protecting the religious exercise rights of a non-religious organization such as Seven Hills.”). The court concludes plaintiffs Hobby Lobby and Mardel do not have constitutional free exercise rights as corporations and that they therefore cannot show a likelihood of success as to any constitutional claims they may assert. Plaintiffs’ ability to show a likelihood of success therefore depends on evaluation of the claims of the individual plaintiffs — the Greens.  Slip op. at 11-12, footnote omitted.

      Clearly the distinction between the Green family, the ultimate shareholders of Hobby Lobby, and the corporation through which they engage in profit-making activities, must be correct.  There exist fundamental boundaries between the corporation and its shareholders.  While the corporation is liable for its debts and obligations, the shareholders are not similarly liable for the corporation’s debts and obligations.  See, e.g., MBCA § 6.22; KRS § 271B.6-220.  The property of the corporation is its own, and the shareholders do not have a beneficial ownership interest in that property save and except upon the corporation’s dissolution.  See, e.g., I Thomas C. Spelling, A Treatise on the Law of Private Corporations at 9 (1892), “[The corporation’s] franchises and property are vested in it and not in the members ….”  In this way, the corporation satisfies Bierce’s definition of a corporation, namely “[a]n ingenious device for obtaining individual profit without individual responsibility.”    Ambrose Bierce, The Devil’s Dictionary 44 (The Folio Society 2003).  As observed in the course of the debate as to whether the corporate form could be utilized for law firms, it was observed:
The first and most delightful of such reasons [against the corporate form for law firms] is that a corporation has no soul, this being on the generally accepted theory that no one but God can create a soul and that the legislature is not a proper substitute.
H.H. Walker Lewis, Corporate Capacity to Practice Law, A Study in Legal Hocus-Pocus, 2 Md. L. Rev. 342, 343 (1938).
            Corporations, lacking souls, have no religion and therefore no free exercise rights.

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