Untitled Texas Attorney General Opinion

Auaauu. ‘F-b 787811 ~wwomIB (3. MAmrm --v’

Maroh 9, 1967

Honorable J. M. Falkner Opinion No. M-39 Commissioner of Banking John H. Reagan Building Austin, Texas Re:’ In the involuntary dlssolu- ‘tlon of a Credit Union under ktlcle 2483, V.C..S., what difference, if any, would there be In the classification and treatment of claims based on moneys paid ln for shares on the one hand, and based on deposits made, on the~other Dear Mr. Falkner: hand, and related questlone. In you& request for an oplnlon on the questions ‘set out above, you ptate that a credit union ia facing invpluntary llquiaationunaer the provisions of.Section 4 of Article 2&83, Vernon’s Civil Statutes, and that the claims agalnst it which you are concerned with grow out of loans from other credit unions, evidenced by installment promissory notes, as well as money received fsom Its depositors and stockholders. You ask: “(1) What difference, ‘if any would there be in the; classification and treatment of claims based on moriies pald in for shares, on the one hand, and based on deposits made, on the other hand? (It has been suggested that the Legislature intended that they should be treated equally in all respects by virtue.of the first sentence of Section 1, Article 2462, V.T.C.S. : I A credit tinion may receive the savings of its members in payment for shares or as depbslts.‘) “(2) What dlfferenc,e, if any, would there be In the claeslfication and treatment of claims based on the, money borrowed from other credit unions, on the one hand, and those claims based on shares and deposits, on the other hand;”

- 184 T Honorable J. M. Falkner, page 2 (M- 39)

We do not conclude that deposits with the credit union and shares in the ownershlp ln the union “should be treated equally in all respects”, as suggested in your query. This would be a departure from well established legal concepts, which will be discussed below, and It ia Incompatible with the protislona of the statute Itself. Section 1 of Article 2483 makes It clear that In the case of voluntary diaaolu- tion of an association, the ahareholdera may not receive any of the proceeds of liquldation until “after debts of the asso- clatlon have been pald”. This provision of the statute merely follows the well established principle, stated in Humble 011 g Reflnlng~Comnany v. Blankenburg, 149 Tex. 498, 235 S.W.2d 891, 893 (1951), aa followa: “When &..corporation Is dissolved, Its property becomes the property of Its stockholders In pro- portion to thelr respective shares, subject, however, to the rights of the creditors of the corporation whose debts must be satisfied out of the corporation property. ” The question then arises: .Are the rights of the stock- holder in cases of involuntary dlsaolutlon different from those prescribed by statute in cases of voluntary liquidation of the credit union? Section 4, paragraphs (4) and (5) of Article 2483 plainly authorize the llq~ldatlng agent to take possession of the books, records and assets of the credit union, to llqul- date the assets, to pass uptn all claims, including claims of members owning shares, and to make distribution and payment to creditors! and members aa their Interest .may appear phasla added.) Xt further authorizes th 11 quldator t; k% notices to creditors and members concern&g their rights to present their claims, and then authorizes him to, from time to time make a ratable dlvidend’on all such claims and, after the assets of such credit union ha;e’been liquidated, make further dividends on,;all claims previously proved or adjusted, . . . Section 4, paragraph 6 of the Article provides that upon completion of the llquldat.l.on, whether voluntary or.involuntary, the Corhmissioner shall cancel the charter of the credit union; but that the corporate existence of the credit union shall con- tinue for three years,-durlng.whlch time the Commissioner may, act’on behalf of the credit union to pay the debts and to dls- tribute the assets.

- 185 -Honorable J. M. Falkner, page 3 (M- 39)

The language of Section & presents a serious question. It is susceptible of being construed to mean that stockholders are to ahare ln the assets on a parity with the aredltors. For the reasons set out below we construe the phrase “as their interests may appear” to mean “as their reapectlve interest may appear”, so that each category of claim may be paid at the time and in- the manner provided by law. It has been held that the word “ratable” means pro rata, as distinguished from equality or equal dlvlalone, and that it Implies an unequal division between different persons. Chenoweth v. Nordan and Moms 171 S.W.2d 386, (Tex. Civ. 3ipp. 1947, error ref. w.~T~Y~T’ If the language contained in Section 4 were to be construed to mean that upon the InvoluntaFy liquidation of a credit union a stockholder may assert a’clalm In the assets of a corporation on a parity with depositors and other creditors, it would mean that in the case of an involuntary liquidation the stockholders could assert the same rights as a creditor; whereaa, In a voluntary liquidation under Section 1, the stock- holders get nothing until the creditors are paid. Furthermore, such a construction of Section 4 would be a complete departure from the basic legal concept of the relationship of StOckhOlderS to the corporation. The ultimate control (and ownership) of the corporation is in the stookholdera, and to permit them to effect a change in their relationship with the corporation so as to assert their ownershlp interest as a claim against the corporation in fhe form of a debt would make possible the use, by majority of the stockholders, of their control of the corporation, to divert or misapply its assets and then assert their full~claim to the assets of the corporation on an equal footlng with the creditors upon involuntary dissolution. A problem aimllar to that involved in your question was involved in the case of In Re Phoenix Hotel Company of Lexln - 83 F.2d 724,(C.C.A. bth 1936, certlorarl denied 299 U 8 A Kentucky statute authorized corporations to permit’& con&ion of stocks Into bonds and bonds into stocks. In a bankruptcy’proceedlng, a dispute arose over the prloritlea of the claims asserted by holders of corporate bonds. This Involved an interpretation of the statute. As the Court construed the statute, a conversion of sharea,into bonds would not amount to a transformation of a stockholder to the position of ‘a credttor. The Court said:

- 186 -Honorable 3. M. Falkner, page 4 (M-39)

"It 1s a fundamental ruse of corporation law that one cannot be at the same time both a stock- holder and a creditor of a corporation in respect to the same funds hazarded in the corporate enter- prise. The two relations are antlpodal. This prln- clple is not only rooted in sound public policy, but grows out of the very nature of corporations. The assets represented by corporate stock are the baals of Its credit, and provide a fund for the payment of Its debts. 30 part of them may be wlthdrann for the purpose of retiring shares until debts are paid. Hamlin v. Toledo Railroad Co ., 78 F. 664, 36 L.R.A. 826 (C.c.A.6). It ‘may be granted that the state may authorize the creation of securities which though denomlnated preferred shares are debts of the corpo- ration and to glve such debts priority over other debts, since nomenclature Is not conclusive as to the essential character of an Instrument.. Matheivs v. Bradford, 70 F. (2d) 77, 78 (C.C.A.6). But to do thls,ls to work a revolutlgnary change In long ac- celjted prlnclplea Vanden.Bcach v. Mlchlgan Trust Co., 35 F. (2d) 643 (C.i- .A.6) 7, and those who are to be asked to give credit mus? revise familiar standards of credit. If the LeRlslature Intends such complete uPsettIng of known standards It may easily use ex- press. words to indicate such Intent. Th princlnle of universal application. \JZmp~~s’,~Edded.) ‘I ?he 1910 act gives no indication of such revo- lutionary legislative intent. It Is the source of new corporate bower. It authorizes the conversion of pre- ferred stock into bonds and bonds into stock, but ne%ther expressly nor by necessary lmpllcati?n does It give to such bonds priority over debts accruing prior to conversion . . . . I,. Without express or more clearly implied purpose ie’cannot impute to the Legislature an intent to overturn a doctrine In respect to corporate capital so long and so universally recognized, to Permit corporate debts parading as stock to escepe the burden of its revenue acts, or the condemnation of ita usury laws, or to Impair if not wholly destroy corporate credit. All of these aonsequences must follow If we accept the construction urged upon us. If corporate capital in trust for creditors may at will be translated

- 187 -.

Honorable J. M. Falkner, page' 5 (M-39)

to corporate liability whenever clouds appear In the financial heavens, then the asserted purpose of the statute la defeated rather than effectuated, as soon as Ita lmpllcatlons are understood.". In Vaden Bosch v. Michigan Trust Comoany, 35 F. (2d) 643, 645 (C C A 6 1929) ( 'it d In the foregoing quotation) the court h;ld <h&t a sta&eeauthorlelng corporations to make the redemption of preferred stock obllgatory did not create a debtor-creditor relationship. The court declared that such a conatructlon of the statute would work a revolutionary change In long-accepted principles and that If the Legislature ln- tended such a complete.upsett%ng of known atandards, It could easily have used express words. See also Mathews v. Bradford, 70 F. (2d) 77 (C.C.A.6, 1934); and Galloway v. Michigan Savings and Loan Aa&&&&n, 206 F, 241, 246 (C C A 6 1913) where the court declared that the claimant "could noi, at tLe same time and for the same money, become a general creditor and a certificate holder, so that he would be entitled to pursue and enforce both positions." Apply&g these considerations to your question, it appears certain that the Legislature did not Intend to create totally different rights for the stockholders of a corporation under- going Involuntary liquidation from the rights of stockholders In a corporation undergoing voluntary liquidation. Moreover, It IS altogether unlikely that the Legislature would have ln- tended to permit the stockholders to undergo a change in their relationships with the corporation some time during its transi- tion from solvency to Insolvency, In other words, there is no basis to assume that the Legislature Intended the stockholders to be transformed Into creditors of the corporation by virtue of Its financial deterioration.., Inotir oplqlon, the provisions of Section 4 authorizing the liquidator to make distribution and payment to creditors and to membera as their interest may appear' must be construed, to'mean that the members receive the assets of the corporation at such time and In such amounts as their legal rights may justify, after the debts of the corporation are paid. The remaining question Is whether there is any difference, from the standpoint of priorities, between the claims of the depositors and the claims of the other creditors. We hold that In the absence of valid contractual provisions to the contrary such claims are on a parity and that the depositor 1s a credito: of the credit union In the same way that the depositor of a ban'

- 188 -Honorable 3. M. Falkner, page 6 (M-39)

or savings and loan association becomes Its creditor, and as such la not entitled to any preference over other creditors. Re nolds y. W&&~Q,& 149 S.W.2d 780, 782 (KY. App. 1941); 9 C.S.S. --by- gaAt;; Banking, Sec. 530; Galloway v. Mlchluan Savings and ., supra; 12 C.J.S. 538, &llding and Loan Associations, sec. 116. SUMMARY In an Involuntary llquldatlon of a credit union, general creditors and depositors would be on a parity and would receive their clalma in full prior to any distribution to stockholders.

Prepared by Ralph R. Rash and J. T. Walker Assistant Attorneys General APPROVED: OPINION COMMITTEE Hawthorne~ Phillips, Chairman W. V. Geppert, Co-Chairman Ray McGregor Fielding Early Malcolm Quick W. 0. Shultz STAFF ~GATI ASSISTANT A. J. Carubbl, Jr.

- 189.-