Eastern Building & Loan Ass'n v. Olmsted

Mr. Justice Shepard delivered the opinion of the Court: The first contention on behalf of the appellant is, that the contract of John A. Carr, under whom appellee claims title, consists not only of the notes and trust deed, but also of the certificate of stock, and the charter and by-laws of the association as referred to therein; and, consequently, that the latter must be given their full effect in the construction of the trust deed. This may be conceded to be — 406 — correct in respect of such of the manifold provisions of the charter and by-laws as are pertinent to the special contract of loan and security, and are not repugnant to, or inconsistent with, the express stipulations of the latter. The trust deed is the main feature of the contract; subject to it, the appellee acquired his title; and its terms and conditions, where express and plain, necessarily measure the rights of the contending parties. Whether the construction of. the contract, in its entirety, shall be according to the law of New York, as contended by the appellant, under an express provision of the by-laws to that effect, or according to the law of the District of Columbia, where the trust deed was executed and wherein the land affected wholly lies, is a question that does not necessarily arise and will not therefore be determined. There is no question of usury involved in the case as presented. Having examined the decisions of the courts of New York, to which our attention has been called, we have found none construing the law of the State, or the charter and by-laws of association thereunder, in relation to such a contract as is here presented. The nearest approach thereto is found in the case of O’Malley v. Peoples’ B. Asso., 92 Hun, 572. That was an action brought by a non-borrowing subscriber to recover the sum of $100 per share on five shares of stock. He had completed his payments for the period stipulated in his certificate, and claimed under the express promise (practically the same as contained in Carr’s certificates) to pay the said $100 for each share upon the completion of the period aforesaid. The sum total of his payments upon the five shares, with interest properly calculated, amounted to $371. It was held that the absolute promise of the certificate was controlled by the terms of the charter and by-laws referred to therein, which introduced the condition that the full payment should depend upon the existence of profits sufficient to bring the shares to par upon the attainment of the period. — 407 — The decision is confined therefore to the question of the liability of the association, under its charter and by-laws, to pay to a subscriber who, having obtained no loan or advance, had retained the possession and control of his stock and had demanded performance according to the letter of his certificate. In the case at bar the continuing rights and liabilities of the subscriber, Carr, whether considered as borrower or otherwise, are not involved. The appellee does not claim to have succeeded to any right that Carr may have as an original subscriber, if there be any such remaining since the reassignment of his certificate to the association. He does not pretend to have taken any transfer of stock or right to stock. He simply purchased the land incumbered by Carr’s mortgage, and holds it subject to the obligations created by said instrument, and nothing more. Deprived of the aid of an interpretation by the courts of the creating State, and looking at the provisions of the statute, the articles of the charter, the by-laws and the special conditions contained in and indorsed on the certificate of stock, we find them difficult of apprehension and of reconcilement with each other in all respects. The ultimate end of the corporation is not at all clear. It is called a building and loan association, and it has expressly assumed the functions of a savings bank. The main purpose seems to be the collection of funds for loans, at high rates of interest, partly disguised under the term of premium. Improvement of property is not required and may, or may not be, the purpose of obtaining the loan. To whom the ultimate benefit of profits shall accrue, in the event of the anticipated, or more than anticipated, success of the scheme, is involved in uncertainty. The borrowing subscriber at once transfers his stock to the association, and his connection ends with the payments stipulated for on his part. — 408 — Upon the completion of the fixed period in the case of the non-borrowing member, he may be paid par value and his interest terminated. Under certain conditions, also, his stock may be canceled before maturity upon repayment of his advances, in the way of dues, with interest. No matter-what the profits of the association shall have been, the subscriber must content himself, according to the letter of the contract, with the receipt of the par value of the stock upon the conclusion of the stipulated period. Under these provisions it would seem that the managing officers might redeem and cancel all stock, and there would be no one left to contest with them the appropriation of surplus profits. Now, then, wherever the by-laws of such an institution are uncertain in their meaning and bearing upon contracts entered into with persons applying for membership, or there is uncertainty or ambiguity in the terms of the special contract for a loan, when considered in connection therewith, we are of the opinion that justice demands the adoption of a construction most favorable to the subscriber. There appears to be a general division of subscribers to the stock of this association into borrowers and non-borrowers, and provisions of the by-laws are directed to the regulation of these two distinct relations; and this distinction must be observed in considering their bearing upon the additional contract made with the subscriber when he becomes a borrower upon the security of stock only, or upon independent security as in this case. In this respect there seems to be no substantial difference, as disclosed by the charter and by-laws respectively, between "the scheme of this association and that considered in the recent case of Armstrong v. U. S. B. & L. Asso., 15 App. D. C. 1. The contract of the borrower in that case differed from the contract in this, in that the former did not execute negotiable notes payable monthly as herein, but instead entered into a single bond payable in monthly instalments extending through a like fixed period. In connection — 409 — therewith, the borrower made the same absolute assignment of his stock to the corporation as was executed by John A. Carr in receiving this loan. It was said in that case by Mr. Justice Morris: “In the organization there is reference to stock and shares of stock; but it is very evident that as compared to ordinary joint stock companies, these expressions are misleading. Possibly, as long as the members of these building and loan associations remain lenders and do not become borrowers, there is but little difference between them and the stockholders of joint stock companies in respect of their rights and liabilities, the principal difference perhaps being that, while the stock of these latter is anticipated to be paid up in full immediately upon the organization of the companies, or within a reasonable time thereafter, and such payment in full is always an outstanding liability on the part of the stockholders, in the building and loan associations, on the other hand, payment in full for stock is not a personal liability and is never anticipated until the time fixed for the dissolution of the organization, when the stock is supposed, as the expression is, fully to mature,' by the payment of monthly dues, interest, premiums, fines and penalties. But when the members become borrowers their interest in the association is absolutely at an end, except as to their contract as borrowers. They have no further interest than to pay their monthly instalments as stipulated in that contract. They have no right to participate in the ultimate profits of the organization, if such there should be; and that there will be such is, of course, always the anticipation; and if there should be losses they are not liable to contribute to defray such losses. It is true that, in order to qualify themselves to become borrowers, they must become members of the organization by the ownership of a number of shares of stock commensurate with the amount of money which they propose to procure to be advanced to them. But when they become borrowers their holding of stock becomes merely — 410 — nominal; it is simply a measure for the amount of the monthly payments which they are to make thereafter. In fact it is part of the contract which they make as borrowers that they at the same time assign and transfer all their stock to the association; and the stock is then said to be redeemed by the association. That stock never reverts to the borrower. When the-contract is fully performed, the benefit of the stock inures exclusively to the association, that is, to the benefit of the so-called investing or non-borrowing members. In fact, to all legal intents and purposes, when the stock becomes pledged at the time of the advancement of the money, the association becomes the absolute owner of it, and the borrower or borrowing member has no further connection whatever with it beyond the liability to make the payments of which it is the stipulated measure. There is, it is true, one contingency in which, by the by-laws of the association, the borrowing member is allowed to reinvest himself with the ownership of this stock; and that is by the practical rescission of the contract, by the repayment of the money advanced to him with interest. But this is at the option of the borrowing member; and there is no reciprocal right in the association to compel such choice on the part of the borrower. The existence, therefore, of such an option does not affect the statement which has been made that the borrowing member virtually ceases to be a member, and ceases to be a stockholder in the ordinary sense of that term, as soon as he has transferred his stock to the association, although that transfer is designated as a pledge.” 15 App. D. C. 12, 13; see cases cited therein, and Fidelity Sav. Asso. v. Shea, 55 Pac. Rep. 1022. The substantial result of the transactions between Carr and the association, beginning with the subscription to the stock and ending with the trust deed, was the prepayment and surrender of his stock, and the conclusion of a loan on independent security. — 411 — Instead of continuing the payment of monthly dues, as first contemplated, for the estimated period, and waiting to receive the promised $100 per share at its end, he applied for and obtained an advance of that sum. * In consideration of the advance of the $3,500 he assigned and surrendered the thirty-five shares and all interest therein and then gave his independent obligation to the association for the increased sum of $4,245.57. This sum was represented by seventy-eight notes payable monthly thereafter, and perfectly secured by the trust deed. He ceased to be an investor under the savings bank feature of the charter, and became a borrower, a debtor of the association. The corporation obtained the return and redemption of thirty-five shares supposed to be of great earning capacity, and a profitable investment for its surplus money, the repayment of which, in monthly instalments, began at the end of the first month. The corporation itself goes so far as to admit in its answer: “That the monthly payments mentioned and referred to in said deed of trust comprise the monthly payments of dues estimated to accrue and become payable on said thirty-five shares until the same should mature or reach their par value, said dues being at the rate of seventy-five cents per share per month, and in addition thereto the aforesaid monthly interest and premium during said period.” That the business of the association, subsequent to the settlement with Carr as aforesaid, might result in less than the anticipated profit, or even in losses, certainly can not affect the pending question between the association and the present owner of the land, whose sole liability is expressed in the conditions of the trust deed. The provisions of the trust deed conform to and evidence the view we have taken of the relations of the parties. In addition to those quoted in the preliminary statement, the stipulation for the disposition of the proceeds in case of forced sale is important. The trustees are empowered — 412 — “ from the proceeds of said sale, first, to pay all proper costs, charges and expenses and retain as compensation a commission of 2-J per cent, on the amount of said sale, and-then to pay whatever may then remain unpaid on said loan, including interest, premium and fines whether the same shall be due by the terms of said notes or not, and lastly to pay the remainder, if any, to the said John A. Carr, his heirs and assigns.” There is no provision covering the payment of any monthly dues on stock. These were, as has been admitted in the answer, provided for in the notes until the expiration of the 78 months at least; and under the association’s own view of the liability of the subscriber, the possibility of the necessity for the demand of dues thereafter was not reasonably expected and would necessarily remain'a mere matter of conjecture. In case of sale- upon default in payment of a note or notes, the trustees could only deduct expenses, commissions “and interest, premium and fines;” the remainder was required to be paid to the mortgagor or his assigns. And the same situation occurs in case he should avail himself of the privilege to pay the notes before maturity. They were not onl}T payable “on or before” the dates of certain maturity, but section 6 of the by-laws, indorsed on -the certificate, also permits the borrower, as we have seen, to pay off the incumbrance and requires the association to make him an equitable discount in such event. The “fines” above mentioned-are clearly those described in section 5 of the aforesaid by-laws which prescribed a fine of 25 cents per month per share for failure to pay interest on loans. This was an additional penalty to the interest borne by unpaid notes after maturity. There could be no fines for non-payment of stock dues under the original subscription, because these had been anticipated and embraced in the notes. The claim, then, that the-trust deed also secured the — 413 — payment of possibly accruing dues after the discharge of the last note secured by it, and would remain in force indefinitely, or that in case of sale the surplus proceeds would have to be retained for the same purpose, is utterly opposed to the plain meaning of its express terms and conditions. Mere reference to the charter and by-laws can not give the instrument this additional scope. Bowen v. Lincoln B. & L. Asso., 51 N. J. Eq. 272, 280; Fagan v. People's B. & L. Asso., 55 Minn. 437, 441. The general covenant of Carr, contained in the before recited provisions of the trust deed, “to keep and perform all promises and engagements made and entered into with the said association according to the true intent and meaning of its by-laws and articles of association,” can not be interpreted as changing the obvious intent and purpose of that instrument. Moreover, the idea of exacting security for the payment of monthly dues, when unanticipated, and fines for their non-payment, is opposed to the plain provisions of the charter and by-laws. The obligation is personal, and the remedy in case of his continued default is the forfeiture of all payments previously made and of all rights as a member. Again, section 11 of the by-laws expressly permits the prepayment of shares, or a«partial advance payment of dues under guaranty of a discount of 5 per cent, per annum. The view that we, have adopted of the true relations between Carr and the association, has been clearly apprehended by the latter, and is attempted to be met by the following paragraph of its answer: “ That under and by virtue of said laws and its articles of incorporation, by-laws, rules, and regulations this defendant is a purely mutual corporation, in which the rights and duties of all of its stockholders are mutual and reciprocal, and that no stockholder who has borrowed or obtained an advance of the full maturity value of the shares held by him and pledged upon such advance is entitled to have his deed — 414 — of trust or other obligation given as security for the repayment of said advance released, canceled, or surrendered until the dues upon said shares so advanced upon and pledged on said loan, together with the earnings to which the same are entitled, have made said shares worth their par or maturity value, to wit, $100 per share, and that any pretended or alleged contract or agreement for the repayment of the principal moneys so loaned or advanced and the releasing of the deed of trust or other obligation at a fixed period of time regardless of the actual value of the shares held by such borrower and obligee on said advance is beyond the corporate powers of this defendant, destructive of the right of mutuality between its stockholders, ultra vires of the corporation, and void; but that there is any such agreement on the advance made to John A. Carr and secured by the deed of trust referred to in the bill of complaint herein is denied.” It is not apparent that the contract, as. construed, is beyond the powers of the corporation, especially since the Court of Appeals of New York has held that the statute under which the incorporation was had does not forbid the issue of prepaid stock. People v. Preston, 140 N. Y. 549. But if conceded to be ultra vires, it is not perceived how the appellant could take any benefit therefrom. The trust deed is a part of the contract and if that is void or voidable, must fall with it. The vendee of the land covered by it, instead of questioning the validity of the loan contract or the trust deed to secure it, concedes its lien and volunteers the payment of the last of the unpaid notes. The association must take the money and release the incumbrance. The decree appealed from is correct and is affirmed, with costs. Affirmed.