In re Youths' Temple of Honor

COLLINS, J. The defendant Temple of Honor was. an endowment association organized in 1889, under the provisions of Laws 1885, c. 184, and amendatory acts (G. S. 1894, §§ 3296-3316.) To use the words of the court below, its “general scheme was impracticable, impossible of accomplishment, and must inevitably have resulted in failure”; but the general plan and avowed purpose of this association need not be enlarged upon. January 19, 1897, it made an assignment for the benefit of its [323] creditors. Its general creditors were few, and its indebtedness to these persons was but a small fraction of its assets. When this assignment was made its members — holders of its certificates — were in three classes: First, those whose certificates had matured in accordance with the by-laws of the association, the number aggregating 16, and the face value of such certificates being $10,-425.25; second, members who had given notice of cancellation and withdrawal pursuant to the articles of association, the number of such certificates being 34, and the face value aggregating $6,-659.92, which, under the by-laws, had a cash surrender value; and third, members whose certificates had not matured, nor had they given notice of cancellation or withdrawal. Of these there were 782 in number, and they had paid into the treasury of the association over $95,000. When the assignment was made the assets of the association did not exceed $15,000 in value, and of these assets all but about $100 in value belonged to and constituted what was designated in the articles as the “Endowment Fund.” This fund had been created by setting apart 75 per cent, of the premiums, lapsation from nonpayment of premiums, compound interest, and lapsation by death, and as it accumulated it had been placed in the hands of a trustee, to be held and used solely for the purpose of payment of matured certificates. Holders of certificates in each of these three classes filed claims for allowance with the assignee, precisely as if they were general creditors, and they have been so treated in all of the steps which have been taken. The assignee allowed the claims thus filed, and the controversy is now between the three classes of claimants as to their respective rights in the distribution of the assets. The holders of matured certificates claim that they should be paid in full out of the endowment fund, in preference to the claims of any other certificate holders, on the ground that, at the time of the assignment, their certificates had matured and were existing debts against the corporation and that the endowment fund is a trust, fund set apart expressly and exclusively for the payment of their claims as they matured. The certificate holders who had served notice of cancellation and withdrawal of their certificates claim [324] that they should come in on an equal footing with the holders of matured certificates. It is claimed by the holders of matured certificates, and also by withdrawing certificate holders, that the claims of the unmatured certificate holders which were allowed as claims against the estate by the assignee are not debts against the estate, and that such claims should not be allowed by the assignee, and cannot be paid in a proceeding of this character. There were cross appeals to the district court taken by the holders of matured certificates, and by the holders of certificates which had not matured, and on appeal the court ordered that the assignee distribute the money on hand pro rata among all of the claimants, without regard to the classification before mentioned. Within the usual and ordinary meaning of the word, the association was not “insolvent” when it made the assignment, for its assets greatly exceeded in value its indebtedness to its general creditors. It could not accomplish its purpose and pay'its certificates in full, and in this sense and to this extent it was “insolvent.” And, when speaking of this condition of affairs in associations of this same general character, the courts have almost invariably used the word “insolvent,” meaning nothing more thereby than a financial inability to carry out the agreement with members. Therefore the statutory assignment should not have been made, but proceedings should have been instituted to wind up the affairs of the association, and to terminate its existence, either under G-. S. 1894, §§ 3430-3435, or in accordance with well-known equitable principles, and on the ground that the purposes for which it organized could not be accomplished and had wholly failed. The deficiency in assets here, the outstanding indebtedness being insignificant in amount, did not constitute “insolvency,” in any proper sense of the word, but at most was a loss of corporate assets or capital, and a consequent depreciation in the value of the certificates held by its members. Knutson v. Northwestern L. & B. Assn., 67 Minn. 201, 69 N. W. 889. But, as before stated, the proceeding has been treated as regular, and the certificate holders have been considered as creditors of an insolvent concern, and we shall dispose of the appeals on the same theory. It has been held, almost universally, that as between themselves, and as between themselves and an association of this sort, members [325] are not to be treated or considered as creditors. An eminent textbook writer, when speaking of the rights of the members of building associations, states the law thus : “Wherever, therefore, a member appears as a claimant upon the estate of an insolvent building association, upon the ground of his stock interest, he is to be treated as a member, and not as a. creditor.” Endlich, Bldg. Assns. (2d Ed.) § 515. And it was held (Appeal of Criswell, 100 Pa. St. 488) that— “Upon the insolvency of a building association, and an assignment for the benefit of creditors, the holders of matured stock are not creditors, and can only share pro rata with the holders of unmatured stock after the payment of the creditors of the corporation.” See also on the same subject, Heinbokel v. National S. L. & B. Assn., 58 Minn. 340, 59 N. W. 1050; Towle v. American B. & L. Assn., 75 Fed. 938; Gibson v. Safety, 69 Ill. App. 485. In an action brought to wind up an association of this kind, insolvent in the sense that it could not mature and pay its outstanding certificates, it was held: The rule of distribution in winding up a company of this sort is necessarily different from the order of payments made by it while a going concern. The dividend to each holder of a certificate will be in proportion to the amount paid in by him to the fund. Fogg v. Supreme Lodge, 159 Mass. 9, 33 N. E. 692. And it was said in a subsequent case, in reference to a contention that the endowment fund was a trust fund for the payment of matured certificates, that it was equally a trust fund for the benefit of all certificate holders. Williams v. United Assoc., 166 Mass. 450, 44 N. E. 342. Every member of such an association has an interest in the endowment fund and has contributed to it. To paraphrase from the opinion in People v. Security, 78 N. Y. 128, one who has paid his money to carry an endowment certificate to maturity has no better right and no greater equity to an endowment fund than has another, who has paid his money to carry a like certificate towards maturity. We adopt the following rule where, an endowment association, organized under the provisions of G. S. 1894, §§ 3296-3316, has failed to accomplish the purposes of its organization, and for this [326] reason proceedings are had to wind up its affairs and distribute its assets among its members: The expenses incident to the proceeding are first to be paid, and then the general creditors, if any, in full; and, finally, the residue of the trust fund must be distributed pro rata among those whose claims are based upon certificates in the association, without regard to whether they have matured or not, for all classes of such certificates are equally meritorious. The claims of each are alike based upon their relation to the association as members thereof, and no one class is entitled to priority over the other. Appeal of Christian, 102 Pa. St. 184,189. “It would certainly be inequitable in a fraternal beneficial society, where mutuality is the basis of the contract, that a member whose certificate matured the day before the assignment should receive the maximum amount named therein, and that the member whose certificate would have matured the day after the assignment should receive comparatively nothing. In this distribution of an insolvent society of this character, the equitable maxim applies, ‘Equality is equity.’ ” In re Tonti, 173 Pa. St. 464, 483, 34 Atl. 441. The rule applied here is that adopted in Knutson v. Northwestern L. & B. Assn., supra, and what was there said as to the applicability of the principle of rescission is in point here. Counsel for such of the appellants as held matured certificates rely upon the case of In re Educational End. Assn., 56 Minn. 171, 57 N. W. 463, as fully supporting their contention that they have priority of right to payment. It is true that language was therein used which tends to justify counsel’s claim, but the point now presented was not then before the court. The association was there treated and considered as a concern able to meet all of its obligations, and to pay all of its liabilities. It was regarded as a solvent institution as to all of its members, and with respect to all classes of certificate holders. For this reason, what was said in reference to certificates which matured prior to the institution of the statutory proceedings to wind up its affairs and to dissolve the corporation is not in point here. The order appealed from is affirmed.