People's Building & Loan Ass'n v. McPhilamy

Whitrteld, O. J., delivered the opinion of the court. These cases will be considered and determined together, as — 77 — they are one, so far as the method of accounting is concerned. This is a true building and loan association, and it is a domestic building and loan association, and hence no question of usury is involved. It had been operating for some years, and, finding that its business ceased to be profitable, it went into voluntary liquidation in September, 1898. We are inclined to think that the association is insolvent, but whether so or not is not material in considering the method of accounting. The equitable principle of accounting must be the same whether the association be solvent or insolvent. The question for consideration in these cases is, therefore, where an insolvent association goes into voluntary liquidation prematurely, what is the proper method of accounting between the borrowing and non-borrowing members, respectively, on the one hand, and the association, on the other. And the precise question here, more particularly is, should a borrowing member be credited on his debt with the amount of dues he has paid-in on his stock? A borrowing member of a building and loan association occupies a dual relation to the association. In his capacity as borrower, he is a debtor. In his capacity as shareholder, he is a member of the corporation. What he pays as interest is paid in his character as debtor on his loan. What he pays as stock dues is paid in his character as stockholder. The two are separate and distinct, and must be so dealt with. Hundermark v. Loan Ass'n (Miss.), 29 South., 528. When a building and loan association becomes insolvent, there is nothing to do but wind up its affairs. The shareholder who has been a member remains a member, liable to his just proportion of losses and expenses. He suffers a hardship in this: that, instead of having his payments on his loan distributed in small installments over many years, he is compelled by the necessity of the situation, and the nature of the building and loan association, to- pay up his loan in one lump sum, with legal interest. This often involves great injustice to him, but it is, nevertheless, one of the risks which he assumed in becoming a member of this mutual asSo — 78 — ciation. There are instances where, because of peculiarly framed, contract stipulations, a shareholder may cease to be a member upon insolvency or premature liquidation, but we speak of the ordinary membership, with the usual incidents in ' a building and loan association, such as we have before us in these cases, It is thoroughly settled by the authorities that when such insolvency ensues, or such premature liquidation occurs, the contract between the borrower and the association is abrogated; but there is diversity of opinion as to the point of time from which it is to be abrogated. Some of the earlier authorities held that, since the association cannot do for a borrower what it contracted to do, the contract is abrogated in such case db initio, and the simple relation of debtor and creditor between the borrower and the association established from the beginning, and that all payments made by the borrower, under whatever name— whether interest, premium, fines, stock dues, or what not— shall be credited upon the loan, and only the balance, with legal interest, collected from the borrower. In other words, the non-borrower would in such case sustain the whole burden of the loss incurred up to the time of such insolvency. This ignores the fact that the borrower was a member of the association up to the time of insolvency; had proceeded all along upon that basis, bearing his proportionate part of expenses and losses up to the time of such insolvency- — -bearing them as his part of losses and expenses, under that name. Close analysis makes it plain that this is not just to the non-borrower, for under this method the borrowing member would get back, entire, all his stock dues, without abatement of a single cent, whereas the non-borrower would only get back such portion of his stock dues paid in as would result from the winding up of the affairs of the association- — less than the whole in every case of insolvency. The true doctrine undoubtedly is that the contracts are to be abrogated for the future — that is to say, so far as they are executory — -but that, prior to insolvency, they shall stand. In — 79 — other words, up to insolvency the payments must stand in the' character they had when made; for example, stock dues as payments made by the member in his capacity as member; but after insolvency the borrower’s obligation to pay stock dues, etc., shall cease, because the consideration for such payments fails from that time forward. Merely because the association becomes insolvent, what he has theretofore paid as his allotted part of expenses and losses has not by some occult process changed its character, and become interest or principal paid on the debt. He remains a member after insolvency, even, charged, just as the non-borrowing member with the duties and obligations of a member, until the final settlement of the affairs of the association, which obligations consist, however, after insolvency, in simply paying his just pro rata of expenses and losses; expenses including, of course, such things as receiver’s commissions, court costs, etc. He will be entitled when such settlement is made tó have whatever his share of stock proves ultimately to be worth then credited to his loan. More than this, if there can he a reasonably certain estimate of what his shares are worth prior to the final settlement — such an estimate as will surely not exceed their value — the court may, in cases like these, credit such estimated value as payment on the debt. Whether such value of the shares shall he estimated and credited in advance of the settlement, or only at the settlement, must be determined by the chancery court in its sound disarm tion. The earlier cases to which we referred, holding that stock dues are to be credited on the debt, and that the contract is to be abrogated from the beginning, and the borrower treated as a mere debtor from the beginning, are as follows: Association v. Goodrich, 48 Ga., 445; Association v. Buck, 64 Md., 338; 1 Atl., 561; Cook v. Kent, 105 Mass., 246; Buist v. Bryan, 44 S. C., 121; 21 S. E., 537; 29 L. R. A., 127; 51 Am. St. Rep., 787; and various other authorities. See, also, 4 Am. & Ency. Law (2d ed.), 1081, and note; 7 Thomp. Corp., p. 7359, note 63. Add to this the late case of Hale v. Barker, — 80 — 129 Cal., 419; 62 Pac., 168. See, also, Carpenter v. Richardson, 101 Tenn., 176; 46 S. W., 452. We are inclined to tbink that the California case of Hale v. Barker is not in accord with later cases decided in that state, as pointed out by counsel for appellant. We refer to it, however, as the best-reasoned case on that side. We think a careful consideration of the recent and best-considered cases shows that this early doctrine is being-departed from, as the nature of building and loan contracts becomes better understood, and the practical operation of such associations, under their contracts, more fully disclosed. The true doctrine must be that set forth by Judge Thompson, in his work on Corporations (vol. 7., sec. 8796), as follows: “The effect upon the borrowing members of a premature dissolution, or what practically amounts to the same thing, requires some notice. In return for the undertakings of the borrower in the transaction of loan or advancement, as they have been pointed cut, there is an implied undertaking on the part of the association that the borrower shall have the advantage of the building-association scheme in the liquidation of the whole of his indebtedness — i. e., that it shall be by means of gradual payment, and that he shall participate, and have the opportunity of re-duping his liability by his participation, in the profits of a continuing business, to be carried on to a fixed end. Where, through bad management, financial misfortune, loss of membership, or any other cause the career of the association is brought to a premature close, the borrower is compellable forthwith to pay the balance due from him on his security, although, in terms, only given for installments. He is, therefore, deprived of some proportion of the advantages, the prospects of which induced him to assume the burden of his original obligation. There remains nothing to compensate him for his liability to make up the premium, to keep up stock payments, to pay fines, etc. The consideration of the liability failing, the liability itself must, in a proportionate degree, fail also. In other words, there remains on the one side a claim; on the other, — 81 — a liability to be measured simply by tbe amount of money actually advanced. In sueb case, therefore, all tbe borrower can be held for, on tbe theory of a rescission of at least part of bis contract, and remitting tbe parties, as to tbe rest, to tbe position of tbe ordinary lender and tbe borrower, is tbe amount received by him from tbe association, with legal interest. Upon this point nearly all tbe authorities agree. Some of them also declare tbe borrower to be entitled to a reduction from this amount of all periodical payments of dues and interest paid by him. In others it is declared that the borrower shall be required to pay back what be has actually received, with interest, and without deduction on account of any stock payments, and that be will then be entitled, after tbe debts of tbe association have been paid, to a pro rata dividend, alike with tbe non-borrowing stockholders, upon what be has paid into tbe association as dues. When it is remembered that the borrower still rests under tbe membership liability to contribute toward tbe losses and expenses of tbe association, it is clear that tbe former of these methods cannot be correct; for by it he will escape some part of bis share of tbe losses. But, on tbe other band, the hardship and increased expense of settlement which may result from requiring tbe borrower to pay back all that be has received, without any credit for tbe dues be bad paid in, remitting him to final distribution for a return of tbe excess of bis payment over what shall be found justly due from him, would seem to indicate tbe propriety of a third method, wherever practicable— viz., to ascertain what tbe receipts, profits, and losses of tbe society have been, what its liabilities are, what available assets are on band, and what, accordingly, is tbe present real value of every share, mailing allowance for tbe expenses of settlement: to credit the amount on tbe borrower’s debt in respect to each share held by him, and charging him with tbe sum actually advanced to him and interest, reduced by part- payments of. interest and premium, collect from him only tbe balance.” See, also, End. Bldg. Ass’ns, sec. 477, and an elaborate note in 5 — 82 — Am. & Eng. Dec. Eq., to Williams v. Maxwell, at p. 254, par. 2, where the same doctrine is very clearly and fully stated, with a full citation of authorities. The editor says: “Since the cessation of the business of the building association puts an end'to the contract between it and its borrowing members, and makes their loans due and payable at once, it converts the relation between them into that of mere debtor and creditor, and consequently should entitle the borrower to have the dues paid credited upon the loan, if no equities supervene. Accordingly this rule is generally acknowledged to prevail in cases of a voluntary dissolution or cessation of business (Association v. Goodrich, 48 Ga., 445; Association v. Buck, 64 Md., 338; 1 Atl., 561; Association v. Braden [Tex. Civ. App.], 32 S. W., 704), and has in a few instances been held to apply to the winding up of an insolvent association, when the contract of loan was usurious (Association v. Jaecksch, 51 Md., 198; Bank v. Whitmore, 25 App. Div., 491; 49 N. Y. Supp., 862; Strauss v. Association, 118 N. C., 556; 24 S. E., 116; Buist v. Bryan, 44 S. C., 121; 21 S. E., 537; 29 L. R. A., 127; 51 Am. St. Rep., 787). But inasmuch as this doctrine enables the borrower to evade his liability to share in the losses of the association, it can only be upheld on the theory that he is not a member thereof; and, whenever he is to be regarded as such, he can not claim credit for dues' paid, in case of the insolvency of the association, hut must pay up the whole debt, and share in the assets pro rata with the other members (Sullivan v. Stucky [C. C.], 86 Fed., 491; Curtis v. Association, 69 Conn., 6; 36 Atl., 1023; 61 Am. St. Rep., 17; Browne v. Archer, 62 Mo. App. 277; Weir v. Association, 56 N. J. Eq., 234; 38 Atl., 643; Strohen v. Association, 115 Pa., 273; 8 Atl., 843; Association v. Carroll, 15 Pa. Co. Ct. R., 522; Id., 4 Pa. Dist. R., 6; Lepore v. Association, 5 Pa. Sup. Ct., 276; affirming Association v. Lepore, 17 Pa. Co. Ct. R., 426; Rogers v. Hargo, 92 Tenn., 35; 20 S. W., 430), .... unless the actual loss and expense of winding up are capable of calculation, in — 83 — which case it is preferable practice to permit him- to pay the balance between the actual value of his stock and the loan, or, as it has been otherwise expressed, the difference between the dues paid in and the loan, plus his pro rata share of the defalcation of the association (Reddick v. Association [Ky.], 49 S. W., 1075; Williams v. Maxwell, 123 N. C., 586; 31 S. E., 821; 5 Am. & Eng. Dec. Eq., p. 224).” We select two other opinions for their marked ability in setting forth this view. They are the opinions of Sherwin, J., in Hale v. Kline, 113, Ia., 526; 85 N. W., 814, and the opinion of Brannon, J., in Young v. Association, 48 W. Va., at p. 514; 28 S. E., 670; this last being the finest opinion we have seen on the subject. In the former, Justice Sherwin says: “The only question presented for our determination in this case is whether the defendants are entitled to credit for any part of the dues paid on the twelve shares of stock issued to A. D. Kline, and assigned by him as collateral security for the loan and premium in question.. At the outset of the discussion of this question, we should say that the association was purely a mutual one, that every stockholder was a member thereof, and that every member thereof was a stockholder. Except as to the liability incurred by borrowing money of the association, every member assumed the same liabilities, and was entitled to a proportionate share of its earnings, from whatever source derived. With this mutuality of interest and liability in view, what are the rights of the defendants, and the rights of the other members and creditors, as represented by the plaintiff? There were two classes of members, which we designate as borrowers and non-borrowers. . To become a borrower, it was necessary to offer a premium of so much per share on the shares held by the applicant. The premium which these defendants contracted to pay was $600, repfesented by one-half the amount for which they gave their note. If the association had continued as a going concern until the monthly dues paid on the twelve shares of stock had matured, the stock then, by the — 84 — terms of the note itself, a surrender of the stock could have been made in full payment of the money actually received, and of the premium represented in the note; and in such case the defendants would, of course, receive indirectly the amount paid in dues. But the association became insolvent before the maturity of the stock, and it is obvious that the rights and equities of the members are thereby placed upon a different footing. This changed condition has been held by some courts to operate as a rescission of the entire contract, and to leave the members to an equitable adjustment of their rights and liabilities. It is conceded by all or most of the courts, however, that the -insolvency of such a mutual association releases the stockholders from further payment of dues on stock. It is the almost universal holding that, in the settlement of the affairs of an insolvent mutual association, a borrowing member, whose stock has not matured, shall be held for the amount of money actually received by him, with interest thereon, less the premium actually paid by him for the loan, and less the interest on the monthly payments of interest made by him. This rule applies to cases where the affairs of the association are not so far settled as to ascertain the value of the stock. When the value of the stock can be determined, the borrower would then be entitled to credit for its value in addition to the items heretofore mentioned. Wilcoxen v. Smith, 107 Ia., 555; 78 N. W., 217; 70 Am. St. Rep., 220; Hale v. Cairns, 8 N. D., 145; 77 N. W., 1010; 44 L. R. A., 261; 73 Am. St. Rep., 746; Phelps v. Association, 121 Mich., 343; 80 N. W., 120; Leahy v. Association, 100 Wis., 555; 76 N. W., 625; 69 Am. St. Rep., 945; Knutson v. Association, 67 Minn., 201; 69 N. W., 889; 64 Am. St. Rep., 410; Rogers v. Hargo, 92 Tenn., 35; 20 S. W., 430; Weir v. Association, 56 N. J. Eq., 234; 38 Atl., 643; Curtis v. Association, 69 Conn., 6; 36 Atl., 1023; 61 Am. St. Rep., 17 (and see note to this case, p. 24, 61 Am. St. Rep.); People v. Lowe, 117 N. Y., 175; 22 N. E., 1016 (see also, End. Bldg. Ass’ns [2d ed.], 477); Am. & Eng. Ency. Law (2d ed.); 1080; Post v. Association, — 85 — 97 Tenn., 408; 37 S. W., 216; 34 L. R. A., 201; Strohen v. Association, 115 Pa., 273; 8 Atl., 843.” In the latter opinion, supra, Judge Brannon says: “Seeing that, upon insolvency of a building association, it must be wound up, and to that end that its borrowing members, though their debts are not yet payable, must pay up at once, the question is one of account between them and the association. How shall they be charged? I answer, with debt and interest. End. Bldg. Ass’ns, 528-531. With what shall they be credited ? Lanswer, with payments made expressly on such indebtedness, and with fines and premiums, but not with periodical dues paid on stock. End. Bldg. Ass’ns, 477. . . . . Counsel for the knitting companies say, as above stated, that when those companies made the contracts of loan, and assigned their stock for security for the debt, and the contract gave them the power to pay dues on stock up to a certain amount, and thereby cancel their indebtedness, they were not members in future, and cannot be held to be still paying dues on stock; that such payments are not to be credited on stock, as would be the case of non-borrowing members, but all -payments of dues must go on their indebtedness-. The proposition that they cease to be members is not sound in law. They still continued members of the association. 7 Thomp. Corp., secs. 8772, 8773, where it is stated that only Virginia and the District of Columbia have held that the relation of stockholder ceases under the circumstances stated above. See same work, p. 332, saying: ‘The member, as a borrower, is still a member, with all his rights, except as pledged. He may vote, hold office, transfer his shares, subject to the lien, and do everything another shareholder may do.’ Lister v. Association, 38 Md., 115, holds the same doctrine. So End. Bldg. Ass’ns, sec. 123. See 5 Am. & Eng. Dec. Eq., 234. To sustain the proposition that when these borrowing members gave their bond for the advance of money, and assigned their stock as collateral, they ceased to be members, and were absolved from all obligations to sustain any share of losses, we are cited to — 86 — End. Bld. Ass’ns, sec. 81, reading thus: 'The liability to contribute to expenses ceases with the cessation of membership bona, fide, and with the consent of the association. If, upon becoming a borrower, the member relinquishes his membership, or if, being an investor merely, he avails himself of a provision in the rules or by-laws of the association, or of the statute supreme over it, to withdraw himself from it, he cannot subsequently be made liable for its debts and losses, and called upon by the society to contribute toward their payment.* Clearly so. If he relinquishes his membership or withdraws, he is no longer a member; but merely borrowing, giving bond and pledging stock as collateral, do not losé him the benefits or release him from the obligations of membership.....Being still a member after such borrowing, the party occupies the twofold character of debtor and stockholder, and his payments on debts are payments of debts, and his payments on stock are payments on stock — so intended in both cases. When insolvency comes, he is still a member of the association, organized as well for his benefit as that of other members; and other members not borrowing are entitled to call upon him to still occupy the status of a member, and help bear the burden of disaster. He has no right to apply his stock payments on his-indebtedness. When insolvency comes, the original plan of the association is defeated. Such operations as were contemplated by all members, borrowers, and non-borrowers, are unavoidably frustrated. They cannot be accomplished. The association cannot demand further payments on stock, because, its business being stopped, it cannot apply such payments to effect the design for which they were stipulated to be made, and the consideration for their payment has ceased. Close up the affairs of the association is the only alternative. To do this, outstanding debts must be paid, chiefly from debts due from members, though not yet mature, because the association owns these debts as material assets, and indispensable to pay outstanding debts, and then to be divided among stockholders. The — 87 — member wbo is a borrower, as sucb, occupies tbe position of a borrower. Tbe relation between tbe association and bim makes him its debtor for tbe money advanced to bim, and be must pay at once, to enable tbe association to do tbe only thing it can do — wind up. Out of tbe assets, including tbis indebtedness of tbis .stockholder, a division is made, after payment of debts among tbe stockholders, including tbis borrowing stockholder. Tria stock is worth what bis dues and other sources of revenue make it worth. What he paid in dues must go on bis stock, to constitute tbe capital stock, as be contracted to pay sucb dues on his shares of stock, not on bis debt. Here he is a stockholder, not a debtor. His contract of subscription is for stock, and bis dues go on that by contract. Only in one event, by the contract, can those dues paid, for stock go to pay tbe debt; that is, when, in case of success of tbe association, those dues, with dues from other members and other sources of income, bring tbe stock to par, and thus discharge tbe debt, by tbe letter of tbe contract. But that being defeated by disaster, tbe set-off of stock against debts cannot be made. Tbe member cannot be allowed to go on paying dues, in specific performance of tbe contract, for tbe company is incompetent to go on. Tbe time has come when tbe outside debts must be paid — when members must suffer some loss. It -is obvious, they ought to suffer tbis loss equally — borrowing and non-borrowing stockholders. Now, if you credit A’s dues paid on bis stock upon bis debt, be gets tbe benefit of them in full, whereas B, wbo has no money borrowed from tbe association, but who paid tbe same amount of dues as A, gets no benefit from those dues. Tbis, in justice, cannot be allowed. So tbe true rule is, in case of insolvency, to keep A in bis twofold character — debtor and stockholder. Make bim pay back to tbe common treasury what be borrowed from it, and -thus end bis relation of debtor; and later, when the assets have been collected, and tbe divisible fund, after tbe payment of debts, is found, give bim bis share in that fund, much or little. All shareholders will thus stand equal. There — 88 — are some authorities contra, but the great current of authority, the latest and best considered, as building associations have increased, sustain this' position. In the great case, Strohen v. Association, 115 Pa., 273; 8 Atl., 843, the court stated the matter thus: ‘The insolvency of the company puts an end to its operation as a building association. To a certain extent, it also ends the contracts between it and its members, and nothing remains but to wind it up in such manner as to do equity to creditors and between the members themselves. As regards the latter, care should be taken to adjust the burden equally,- and not throw on either the borrowers or non-borrowers more than their respective share. That result may be reached by requiring the borrower to repay what he actually received, with interest. He would then be entitled, after the debts are paid, to a pro rata dividend with the non-borrower of what he had paid upon his stock. He will thus be obliged to bear his proper share of losses. To allow him to credit upon his mortgage his payments on his stock would enable him to escape responsibility for his share of the losses, and throw them wholly upon the non-borrowers. In other words, the borrower would escape without loss. It will not do to administer the affairs of an insolvent corporation in this manner.’ To same effect, see 5 Am. & Eng. Dec. Eq., 254; Leahy v. Association (Wis.), 76 N. W., 625; 69 Am. St. Rep., 945; 5 Am. & Eng. Eq., 206; Price v. Kendall (Tex. Civ. App., 1896), 36 S. W., 810; Eversmann v. Schmitt, 53 Ohio St., 174; 41 N. E., 139; 29 L. R. A., 184; 53 Am. St. Rep., 632; Weir v. Association (N. J. Ch.), 38 Atl., 643; Wohlford v. Association, 140 Ind., 662; 40 N. E., 694; 29 L. R. A., 177; Post v. Association, 97 Tenn., 408; 37 S. W., 216; 34 L. R. A., 201; Thomp. Bldg. Ass’ns, 396.” It follows from these views that the accounting in these cases was had upon the wrong basis. It should be remarked that the law of building and loan associations is just now assuming definite shape, and the learned and accomplished chancellor be — 89 — low could hardly be expected to anticipate a doctrine as to accounting just now being for the first time firmly established. There is only one other point that we will notice in these eases, and that is this-: that these suits are not administration suits — not being brought as such. We do not think, however, that the form in which the. suit has been brought should dominate the method of accounting. What these borrowers are equitably entitled to, they should receive; but they should receive only that, whether the suits be administration suits or not. The equities by which the substantial rights are determined cannot be made more or less by the particular procedure resorted to. On the return of these cases into the chancery court, if there can be an estimate made of the value of the shares of these borrowers, such as will certainly not give them more than the shares will be worth on a fipal settlement, such ascertained value of the shares may be credited on the loan. If not, no stock dues should he credited on the loan, but the borrowers should be remitted to their right to receive whatever the value of these shares my be, when finally ascertained by the proper procedure. Both cases reversed and remanded.