Woodlawn Federal Savings & Loan Ass'n v. Williams

This litigation is in equity, and relates to the rights of the parties in respect to certain shares of stock in a building and loan association incorporated under the laws of Alabama, and later reincorporated or converted into a federal savings and loan association under Act of Congress and the statutes of Alabama. Act of July 8, 1935, page 222. Under section 7109, Code, shares of stock were required to have a definite withdrawal value prescribed in the by-laws. After its conversion, the charter provided for a repurchase at the instance of stockholders as follows: "Shareholders shall have the right to file with the association their written application to repurchase their shares in part or in full, at any time and upon the filing of such written application, to repurchase, the association shall number and file the same in order received and shall, after thirty days after the receipt of such application to repurchase either pay the holder the value thereof, in part or in full as requested, or apply at least one-third of the receipts of the association from its shareholders and borrowers to the purchase of such shares in numerical order." On January 1, 1927, one Richards became a stockholder, and his rights as such became vested in the converted enterprise without special action for that purpose. He purchased one hundred shares of the aggregate value of $5,000. The agreed facts state that Richards "endorsed and delivered over to said association as payment for said shares of stock certain notes specifically described as follows: "it then describes the notes aggregating $6,001.44, less discount of $1,001.44, leaving a balance of $5,000. They include notes of Richards personally of $750.72. But they have all been paid. Payments have been made on the others, leaving a balance unpaid of $3,559.68. The association issued to him a certificate of stock, on the back of the stub there is a notation showing "balance due on notes principal amount" on the first of January of each year, up to January 1, 1937, when it was said sum of $3,559.68. In 1929, Richards became indebted to the bank and we infer from the agreed facts assigned the stock to the bank as collateral security. See Richards v. Montgomery, 230 Ala. 307,160 So. 706. In 1926, the association had sold and issued its certificates for seventy shares all paid for in full, for $3,500. They were likewise assigned to the bank as collateral security. We will call that the Hershey stock. On July 6, 1929, the bank went into liquidation under state laws, and the assets taken over by the superintendent of banks of Alabama, and a liquidating agent. On October 24, 1932, the superintendent of banks foreclosed and sold both issues of said stock and became the purchaser, and on November 8, 1932, a new certificate was issued for the seventy shares representing the Hershey stock, but no new certificate was issued for the Richards stock. It was after this that the association was converted into a federal corporation. The superintendent of banks has given notice of his election to have all of the stock so held repurchased by the association in accordance with the charter power which we have quoted. This suit is in equity by the superintendent of banks to force the association to comply with such charter duty. The association contests this right on the ground that it has a lien under section 7000, Code, for the debt due it by Richards, either as a part of the purchase price or on his indorsement of the notes assigned to it as a payment of the price. And in the alternative, both as to the Richards stock and also as to the Hershey stock, that under section 7000, Code, the superintendent of banks was a stock holder of the association first by pledge to it of the stock and then by the foreclosure of that pledge by the superintendent of banks (see Ensley Mortgage Co. v. Chadwick, 223 Ala. 468, 136 So. 821, 80 A.L.R. 1334), and further in the alternative, that the association has a right to set off against its *Page 450 liability to the bank by virtue of its charter duty to repurchase the stock, the amount of the balance unpaid of its deposit with said bank existing since prior to the time when the bank went into liquidation. In that connection the facts are that when it did go into liquidation the association was a depositor and had a balance in that account of $12,840.25. On account of it, dividends have been paid the association pending liquidation aggregating $2,054.36, leaving still unpaid an amount in excess of its obligation to the bank on repurchase of the stock. The cause was submitted for final decree on the agreed facts. The court held that the association had no lien on the Richards stock for the unpaid purchase price, because the agreed facts show that it accepted notes in payment and had no claim by virtue of the indorsement of those notes by Richards, because it was inferred from the circumstances that he did not intend to bind himself by his indorsement; and that the bank was not the owner of stock in the association when the bank went into liquidation, and that the association had no lien on any of the stock under section 7000, Code. The court did not allow any claim of right to set off. We proceed now to consider the claim of a lien by the association on the Richards stock under section 7000, Code. As we have said, that is predicated upon three aspects. One is that the notes assigned to the corporation did not pay the obligation of Richards; the second is that, if so, his indorsement is sufficient to create such a debt under section 7000, Code; and, third, that the bank was a stockholder and owed the amount of the deposit. The first point is expressly covered by the agreed facts. It states specifically that the notes were given in payment of the debt. The second theory is based upon the indorsements. The description of the notes so indorsed is that they are such as to be negotiable. Section 9029, Code. The indorsement creates a contract in writing whose obligations are defined by statute, section 9090, Code, and not subject to be varied by parol evidence nor extraneous circumstances. Pointer v. Farmers' Fertilizer Co., 230 Ala. 87, 160 So. 252; Dean v. Lyde, 223 Ala. 394, 136 So. 857; 9 Alabama Digest, Evidence, 403, 423(6). But the indorsement is a conditional obligation. Any suit which undertakes to enforce it must show a compliance with those conditions. O'Neal v. Clark, 229 Ala. 127, 155 So. 562, 94 A.L.R. 589; O'Neal v. Mason, 229 Ala. 142, 155 So. 567; Falkner v. Protective Life Ins. Co., 228 Ala. 57, 152 So. 34; Section 9114, Code. The lien created by section 7000, Code, is to secure the collection of a debt presently payable. There is no such debt created by an indorsement unless the condition precedent to such liability has occurred. Notice of dishonor is one such condition, and knowledge otherwise acquired is not sufficient. O'Neal v. Clark, supra. The nearest approach to a compliance with this requirement is a statement in the agreed facts that the association had no notice of the claim of the bank until 1930, when its secretary, "being unable to collect the notes heretofore referred to, called on W. M. Richards for payment." That was intended merely to fix a collateral date. The cross-bill makes no allegation of notice of dishonor and no relief is sought in it on that account. It was properly denied. As to the third contention, we agree with the trial court that when the bank went into liquidation it was not a stockholder of the association, but only a pledgee of stock. The subsequent foreclosure of the pledge does not relate back to the date of liquidation so as to change the status of the bank as a pledgee, and not owner of the stock at that time. The only other question argued is whether the association may set off against its obligation to the bank under its repurchase clause the amount the bank owes it as depositor. We will treat this obligation as one to pay money by virtue of its charter. The association was organized under Article 17 of Chapter 274, Code, as amended by the Act of August 26, 1927, page 431. Under its provisions the corporation had the right to make and alter all needed by-laws, rules and regulations and the right to amend its charter existing under section 238, Constitution. Under the Act of 1927 (page 432), it is provided that repayment to the shareholder shall be made when accumulated to full par value. And section 7109, Code, provides as follows: "All shares of stock in said association, upon which all dues and charges for one year or more have been paid, shall have a definite withdrawal value, *Page 451 which shall be set out in the by-laws of said association or in a duly adopted resolution of the stockholders." The charter provision under the federal act, which we have heretofore quoted, is but the exercise of a contingent right which has existed since the corporation was organized and became a part of the contract with the stockholder, with the same effect on this transaction as though it had existed when the stock was first purchased. We pause here to observe, in response to a suggestion in argument, that the Uniform Stock Transfer Act of July 22, 1931, page 565, has no bearing on the right of set off. If the right of set off exists, it is by virtue of the relations between the association and the bank, and not by virtue of a status existing before the assignment of the stock was made to the bank. Its claim as a holder in due course if available under the act otherwise is not therefore available here. Industrial Sav. Bank v. Greenwald, 229 Ala. 529, 158 So. 734. The question is therefore directly presented of whether the association may set off its deposit in the bank which was in existence when liquidation began against its liability to the bank to repurchase the stock which is owned by the bank. Section 10172, Code, makes mutual demands subject to set off unless there is something in the status of insolvency and liquidation of the affairs of the bank which prevent an application of the statute. The subject has been involved in several of our cases, and the right to set off was recognized. Green v. McCord, 204 Ala. 364,85 So. 752; Pickens County v. Williams, 229 Ala. 250,156 So. 548; see First National Bank v. Dupuy-Burke Realty Co.,229 Ala. 696, 159 So. 231; Oates v. Smith, 176 Ala. 39,57 So. 438, 440. We quote as follows from the Oates case, supra: "It is universally conceded that the changed status wrought by insolvency, or by the appointment of the receiver, does not impair then existing rights of set-off in favor of debtors. See note to St. Paul Trust Co. v. Leck (Minn.) 47 Am.St.Rep. 585; Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148,36 L.Ed. 1059; 34 Cyc. 194." There seems to be a unanimity of authority elsewhere to the same effect. Many of the cases have their basis upon Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 151, 36 L.Ed. 1059. The National Banking Act, 12 U.S.C.A. § 21 et seq., requires the assets of a bank in liquidation to be distributed ratably among the creditors. It was contended that a preference would be created to allow such a set off. In answer to that the court in the Scott case, supra, observed: "And it is insisted that the assets of the bank existing at the time of the act of insolvency include all its property, without regard to any existing liens thereon or set-offs thereto. "We do not regard this position as tenable. Undoubtedly any disposition by a national bank, being insolvent or in contemplation of insolvency, of its choses in action, securities, or other assets, made to prevent their application to the payment of its circulating notes, or to prefer one creditor to another, is forbidden; but liens, equities or rights arising by express agreement, or implied from the nature of the dealings between the parties, or by operation of law, prior to insolvency and not in contemplation thereof, are not invalidated. The provisions of the act are not directed against all liens, securities, pledges, or equities, whereby one creditor may obtain a greater payment than another, but against those given or arising after or in contemplation of insolvency. Where a set-off is otherwise valid, it is not perceived how its allowance can be considered a preference, and it is clear that it is only the balance, if any, after the set-off is deducted, which can justly be held to form part of the assets of the insolvent. The requirement as to ratable dividends is to make them from what belongs to the bank, and that which at the time of the insolvency belongs of right to the debtor does not belong to the bank." This has also been emphasized in the recent case of Willing v. Binenstock, 302 U.S. 272, 58 S.Ct. 175, 82 L.Ed. 248. The textwriters have fallen in line and cite it and many other supporting cases. 3 Michie on Banks and Banking 334; 9 Corpus Juris 867, 868-9 to 871; 7 Corpus Juris 746, section 537; 7 Am.Jur. 339, section 473, 529, section 735; 97 A.L.R. 588, Prudential Realty Co. v. Allen, Com'r of Int. Rev.,241 Mass. 277, 135 N.E. 221, 25 A.L.R. 938, 954. The fact that the indebtedness to the bank was not mature at the time of insolvency *Page 452 should not interfere with the depositors' right to a set off. That was the status in Scott v. Armstrong, supra, and authorities are cited in 25 A.L.R. 946, and asserted in 7 Am.Jur. 342, section 475. Some authorities to the contrary are noted in 25 A.L.R. 947. The general rule undoubtedly is that the right to set off a deposit against a debt due a bank which has become insolvent is fixed at the time the bank closes its doors. 7 Am.Jur. 341, section 474. At that time and by that circumstance the deposit became due. And at that time the bank in the instant case held a contract of the depositor conditionally obligating itself to pay the bank money upon its election to receive it and notice of such election. The contract fixing that status was inchoately in existence the moment of insolvency, though the election had not been made so as to fasten on the depositor the duty presently to pay money. But the right to an election under such circumstance should be treated as encumbered with a corresponding right on the part of the depositor to off set his own duty then outstanding with the duty of the bank to pay him his deposit. We think there were then mutual subsisting demands within the spirit, perhaps the letter, of section 10172, Code, though the time of their effect is here fixed at the beginning of liquidation and by the statute it is at the commencement of the suit. If the bank had given notice of its election before it closed its doors or exercised similar charter powers then existing, both claims would have been current at the commencement of the liquidation to the extent the law and by-laws then created such obligation. In equity the justice of the situation should prevail. Hall v. Clark, 227 Ala. 571,151 So. 445; Fischer v. Pope, 233 Ala. 301, 171 So. 752. The importance and justice of fixing that as the date when the right to set off must exist is not to protect the bank and its liquidating agent in respect to a claim held by the bank which is then a contingent liability, but not mature because the right to do so had not been exercised. We think that the principle is such that if either acquires a claim against the other after liquidation begins, not by virtue of a prior subsisting contract, it is acquired with its status as to the right of set off which existed before the assignment. Such assignment cannot have the effect of improving in that respect the rights which then applied. This is discussed in Oates v. Smith, supra, as follows: "But it is held with equal unanimity that such debtors are not entitled to have set off against their debts claims which they have acquired subsequent to such insolvency, of which they have notice, or subsequent to the appointment of the receiver. * * * The reason in each case is elementary: (1) The receiver succeeds to the assets as they are, and subject to every specific right and equity which existed against the insolvent; and, where a set-off exists, the debtor equitably owes only the balance over and above the amount of his counterclaim, and this is the debt that passes to the receiver; and (2) the impartial distribution of the assets, which constitute a trust fund in equity, without any preference of one creditor at the expense of others, would be palpably defeated. After insolvency is established, a creditor's claim, so far as the assets are concerned, gives him no more than the right to file his claim seasonably and to share ratably in their distribution. And when he assigns his claim to another, after such insolvency is established, the assignee acquires no other nor higher right than had his assignor." But it should not prejudice the standing of a claim which the bank held when its doors were closed, that it was subject to the election of the bank. The election merely served to mature a contingent liability then existing as subsequently amended. In its quality as contingent there was then an inchoate right of set off, which matured with the maturity of the claim. In this case, the agreed facts show that the deposit of the association is more than its liability to the bank on account of its obligation to repurchase from it the stock in question. The result is that the superintendent of banks is not entitled to the relief which the trial court granted. That decree is therefore reversed, and one is here rendered to the effect that the balance of the deposit account of the association, which now remains unpaid, of $10,785.89, is reduced by the sum of $8,500, and on the balance of which only shall the association have further ratable distribution, to-wit, $2,285.89. It was however necessary for the superintendent of banks to file this suit to establish its right to have the amount of the deposit thus reduced. This right was *Page 453 denied in the answer and cross-bill, but admitted in the agreed facts. Considering that status, we think that all the costs which accrued in both courts should be equally divided between the parties, so that its payment to that extent by the superintendent of banks is a proper credit in his accounts. Reversed and rendered. GARDNER, THOMAS, and BOULDIN, JJ., concur. On Rehearing. The majority, namely, ANDERSON, C. GARDNER, THOMAS, BOULDIN, and BROWN, JJ., disapprove the holding of the foregoing opinion touching the question of set-off therein treated, and adopt the opinions of Justices BOULDIN and THOMAS as the opinion of the Court. The application for rehearing is therefore granted: the judgment of reversal is set aside and the cause affirmed. FOSTER and KNIGHT, JJ., dissent.