Bertche v. Equitable Loan & Investment Ass'n

ROBINSON, J. — This is a proceeding in equity, brought in the Pettis county circuit court, by the plaintiff as a stockholder, against the Equitable Xoan & Investment Association of Sedalia, and the directors of said association, to enjoin the defendants from carrying out a resolution of the board of directors made in April, 1898, directing the release of certain deeds of trust given to the association by some twenty borrowing or advanced stockholders to secure the payment of loans or advancements on their shares. There was a trial in the court below, resulting in a judgment enjoining and restraining defendants from carrying out said resolution and directing the annulment and rescission thereof. Defendants, having unsuccessfully moved for a new trial, bring the case here by appeal. The petition alleged, in substance, that the association was organized under the Revised Statutes of 1879 relating to building and loan associations, and that plaintiff is the — 349 — owner of twenty-five shares of free and unredeemed stock of said association, of the par value of $200 per share, issued in April, 1894, upon which the dues have been regularly paid, and that she has not received any advancements thereon; that under the statutes of Missouri governing associations of this character, the association loaned its accumulated funds to divers members thereof, upon the pledge of their several shares of stock; or, in other words, that the association redeemed the shares of such members in advance before they were fully paid up, by advancing to such borrowing members, who successfully bid in open meeting for the right of such priority or advancement, the full face value of their shares upon such borrowing members pledging their shares of stock to the association and executing their obligation in writing, whereby they agreed to pay the dues on their several shares of stock, and the interest and premium on the same so advanced, together with all fines and penalties, and thereupon such borrowing members secured the payment of their obligations by executing to the association their deeds of trust upon unincumbered real estate owned by them. Plaintiff further alleges that the board of directors have unlawfully and wrongfully, and in violation of the rights of plaintiff and other free shareholders, caused to be made and entered of record the following resolution, to wit: ■' “Whereas, certain members, shareholders of the Equitable Loan & Investment Association, have received loans or advancements upon their shares of stock in the sum of $200 each, and upon which, by the terms of their respective deeds of trust, they have paid the full amount of their dues, interest and premiums, the same being for the full term of one hundred months from the date of their respective certificates of stock, as in their respective deeds of trust provided. “And, whereas, each and all of said members, hereinafter mentioned, have fully complied with the requirements — 350 — as sot forth in their obligations and agreements made with this association, and have complied with the provisions of their deeds by- payment of the amounts set forth therein, as due thereunder, and, “Whereas, each and all of said members, after said compliance with the terms of the respective obligations, have formally demanded of this association a release of their respective deeds of trust, and cancellation of their stock, in satisfaction thereof, and have made tender of the proper funds for the release thereof. “Therefore, be it ordered by the board of directors of said Equitable Loan & Investment Association that the president of said association be, and he is hereby, ordered forthwith to execute quitclaim deeds to each and all of the hereinafter mentioned members, or to enter satisfaction on the margin of the record as required by law, releasing their respective deeds of trust given to secure each and all of said obligations, and in full discharge thereof. “And be it further resolved, that the loss, if any, sustained by said association on account of said shares of stock not having earned their face or maturity value, upon which said loans or advancements were obtained, be, and the same is hereby ordered, to be equally charged to all of said non-borrowers or free stockholders in said association and such borrowing members who do not hold definite contracts for the maturity of their loans, and that the same be borne by and equally distributed and apportioned to all the free and non-borrowing stockholders in said association in proportion to the number of shares held by each.” The plaintiff next alleges that the directors of the association propose and intend to carry out said resolution and release the deeds of trust therein referred to, notwithstanding the shares of such borrowing members have not earned the full face or maturity value thereof. The petition further alleges that the shares of such borrowing mem — 351 — hers have only earned, and consequently are only worth, the sum of $141.14 per share, and that if the deeds of trust given by such borrowing members are released and their notes canceled, then such borrowing shareholders would receive upon their shares $58.86 per share in excess of their actual value, thereby causing a resulting loss to the association in the amount of such excess, which loss would fall upon and be borne wholly by the plaintiff and other free shareholders similarly situated; and that the contemplated act of the directors is an unjust and unwarranted discrimination in favor of such borrowing shareholders, and against the rights of the free and unborrowed stockholders, and violative of the rights of mutuality between the respective members of said association. It is further alleged that all of the deeds of trust sought to be released contain clauses providing that the same shall be released at the end of one hundred months, providing the ■dues, interest and penalties thereon shall have been paid for the full period of one hundred months, which provisions, it is claimed, is ultra vires and void and in violation of the principles of mutuality between members, and in violation of the statutes of this State governing building and loan associations; and that the directors had no power to make such contracts with its borrowing stockholders; and that there ■was no by-law of said association authorizing the making of such contracts; and that in causing such provisions to be inserted in the deeds of trust in question the directors acted beyond the scope of their authority, to the injury and prejudice of the plaintiff and other non-borrowing members of the’ association. The petition prays that the defendants be enjoined and restrained from carrying out the provisions of said resolution and releasing the deeds of trust and other obligations of such borrowing stockholders until their shares of stock shall, have reached their full face or maturity value, not — 352 — withstanding their deeds of trust provide that their shares of stock shall be deemed to have matured at the end of one hundred months. After admitting that the shares of stock pledged by the borrowing members had not reached their full face value at the expiration of the one hundred month period, the answer, among other things avers, in substance, that if said contracts were beyond the power of the association to make, then and in that case the contract made and entered into as aforesaid, would under the statute, be usurious and subject the association to a greater loss than to carry out the same according to their terms. It was further averred that if the association is en-. joined from releasing the deeds of trust in question that it will be compelled to defend a greater number of suits in different circuit courts in this State and put to great expense and cost of litigating with a large number of borrowers who hold like definite contracts. The answer further avers that if said contracts w'ere not valid and binding upon the association, then the loan in question was usurious for the reason that the by-laws of the association provided that the accumulated funds of the association should be loaned at a minimum premium, and that all of the loans or advancements in question were made in pursuance of such by-laws, and that during the entire period of one hundred months t such borrowers had paid such fixed and stated premiums, and if the association was enjoined from carrying out its contract in this regard, the association would be compelled to account to such borrowers for the entire amount of interest, premium and dues paid by them during the existence of their loan, which amount would greatly exceed the amount due on .the money borrowed, and the association compelled to pay the same, thereby sustaining much heavier losses than would be suffered by the — 353 — free shareholders if the officers of the association were permitted to carry out the resolution. The reply was a general denial. The deeds of trust ordered released by the resolution in question were executed in 1890, to secure loans or advancements to the several borrowers named in the resolution. T líese advanced members have paid their monthly dues, interest and premium for the full period of one hundred months, as required by their contract, but their shares of stock have not yet matured or reached their full face value, being worth only $141.14 per share.' Consequently if the resolution is carried out and the deeds of trust released there will be a resulting loss to the association of $58.86 on each remaining share of stock therein, which must be borne wholly by the free and non-borrowing stockholders. All the deeds of trust covered by such resolution, together with the obligations secured thereby, contain the folloAving provision, to wit: “The payment of said monthly sum of - dollars, being the monthly dues, interest and premium for the full period of said one hundred months, and of all fines and penalties, shall entitle each of said shares of stock to redemption by said association at the par value of $200 each, and the said shares so entitled to redemption shall, at the end of said hundred months, be taken and canceled by said association in full satisfaction of this obligation and of the deeds of trust given to secure the same; in consideration of which said redemption of said shares of stock and the satisfaction of this obligation and said deed of trust at said end of one hundred months, we do hereby waive and release all other or further right, interest and benefit in or to the profits and earnings of said association, and hereby transfer and assign the same to said association.” The above contract appearing in the deed of trust is the basis of defendant’s contention that the deeds of trust — 354 — should be released at the expiration of one hundred months, regardless of the fact that the stock so pledged had not matured. The plaintiff is a non-borrowing stockholder, holding twenty-five shares of stock in the association of the par value of $200 each, having subscribed therefor on April 20, 1894. The borrowing members, mentioned in the resolution directing a release of their several deeds of trust, having paid all their monthly dues, instalments and premiums in accordance with the terms of their obligations for the period of one hundred months, applied to the association for a release of their deeds of trust and the cancellation of their pledged shares, but the association refused to satisfy and cancel same. Thereupon several suits'by borrowing stockholders were instituted against the association in different circuit courts throughout the State to obtain decrees canceling their notes and deeds of trust. Certain of said cases having been decided adversely to the association the resolution adverted to was passed by the board of directors of the association, but before it had been complied with by the officers of the association this action was commenced to enjoin defendants from carrying out the provisions of the resolution and to restrain the directors from entering satisfaction of such deeds of trust at the end of the one hundredth month. The evidence shows that the shares of stock pledged by the borrowing members, whose deeds of trust are sought to be released, have not matured, but on the contrary are only worth $141.14 per share. It further appears that it is utterly impossible to carry out the agreement to mature these shares in one hundred months, and also to mature the shares of plaintiff and other free shareholders containing a similar provision as to the time of maturity. The plaintiff contends that the special clause contained in the note and deeds of trust under consideration, providing for a release thereof at the expiration of a period of one — 355 — hundred months from their date, regardless of the maturity of the stock, is ultra vires and void, and in'violation of the statutes of this State governing building and loan associations, and that such clause is violative of the principle ofnratuality between, the stockholders contemplated by the statute, and beyond the poAver of the association. These contentions raise the question Avhether the statute of Missouri governing building and loan associations, and the by-laAvs of the association passed in conformity thereAvith, must be treated as forming a necessary part of the contract, and the borrowers’ obligations made to conform thereAvith, or AAdiether the acceptance of the borroAvers’ notes and deeds of trust containing the special clause in question is binding upon the association, regardless of its earnings, especially, Avhere, as is this case, these provisions can not be carried out Avithout entailing a loss of $58.86 upon the free and non-borroAving shareholders. In other words, whether the contracts as Avritten should prevail, or whether the statute then in force should be so read into the contract as to prevail over its language. Section 2812, Revised Statutes 1889, in regard to building and loan associations provides that the directors of the associations shall hold stated meetings at which such sums of money as may be determined shall be offered for loan to all the members in open meeting. The shareholder who shall bid the highest for the preference or priority of the loan shall be entitled to receive the loan whose amount shall not exceed the number of shares of stock held by such shareholder multiplied by the par value thereof. Good and ample security shall be given by the borroAver to secure the monthly payments contracted to be made by him. Section 2813, provides that a borrower may repay a loan at any time. In case of the repayment of the loan before the expiration of the one hundredth month after the organization of the corporation there shall be refunded to such — 356 — borrower one per cent of the premium paid for every month of said hundred months then xmexpired. Section 3, article 1, of the by-laws of the association, provides as follows: “Upon each and every share of stock there shall be paid as follows, viz., upon shares of $200 each the sum of $1 per month, and upon shares of $100 each the sum of fifty cents per month, and upon shares of $400 each the sum of $2 per month, as dues until the dissolution of the association or the maturity of the series in which said stock shall be issued.” By section 3, article II, it is provided that at each monthly meeting of the association the funds on hand shall be offered for loan, and the shareholder who bids the highest premium per share for the preference or priority of the loan shall be entitled to receive the par value of the stock, less the amount of said premium. Section 5, article II of the by-laws, provides that before receiving said loan the borrower shall submit a full description of the property offered as security for the same, etc., and upon acceptance of such security by the board of directors, shall execute his note for the par value of said stock so bid off or redeemed. By section 6, article II, of the by-laws, it is provided that the condition of said note shall require the payment of monthly dues on the shares so redeemed, and the monthly payment of interest on the face value of said note at the rate of seven and two-twentieths per cent per annum. And section 7 provides that a deed of trust shall be executed on the borrower’s property to secure compliance with the conditions of his note, and also the performance of all obligations imposed upon him by the rules of the association. The significance of the statute and by-laws referred to is apparent. Neither the statute nor the by-laws authorize the fixing of a period of one hundred months at which the stock shall reach its par value. At best it is but a mere — 357 — estimated period within which the stock will mature, and in no sense of the word a guarantee that the shares should mature within that length of time, and is applicable only in determining the amount of premium to be returned to the borrower who repays his loan before the expiration of the one hundredth month from date of loan. Under this section, if the borrower repays his loan before the expiration of the one hundredth month he receives back a certain per cent of the premium paid. It was never contemplated that this section should have the effect of maturing the stock at the expiration of one hundred months, regardless of the earnings of the association. If the statute governing building and loan associations, and the by-laws passed in conformity therewith, fixed no definite or arbitrary period at which the shares shall reach their par or maturity value, for a gr'eater reason the association, a mere creature of the statute, can not fix an arbitrary period of one hundred months or any other time within which the shares of its members shall reach maturity. The law governing the formation of building and loan associations contemplates a scheme for paying the capital stock in instalments, so long as such periodical payments, taken in connection with its other income arising from fines, dues, interest and profits, are necessary in order to bring the stock up to par. This value represents the amount which the shares are expected to be worth, when, together with the profits upon investments, etc., it has accumulated to the amount contemplated at the outset. The actual value of the share may be very small indeed during the first years of the association’s existence. But the par value is fixed from the beginning. The association may be said to have accomplished the purpose of its organization when by the periodical payments made by its members, and the gains therefrom, each member has paid up to the amount fixed by its charter. [Endlich on Bldg. Assn’s (2 Ed.), sec. 12.] — 358 — It is a well settled proposition that the transaction between the association and its members is not a loan in a direct sense of the word, bnt only a prepayment or advancement to the shareholders of that to which he will ultimately be entitled. When a borrower pays a premium on account of an advancement made on his stock his agreement is that he will at the time of making the loan sell to the association his prospective interest therein for such percentage, less the par or paid-up value of his stock as he may at the time of such advancement agree to pay. That is to say, he sells his prospective interest to the association for par if he has no competitors, but if there are others bidding for competition with him for preference and priority, then he sells his prospective interest for such a sum as he is forced by competition to deduct therefrom. The transaction is regarded then in the light of a sale by the borrower to the association of his prospective interest, the association paying him at a time when he needs the money, the amount which would be due him at the time of the dissolution of the association in the ordinary course of business. Endlich on Building Associations [2 Ed.], section 331, in speaking of the advancements of the association to its borrowing members, thus states the rule: “As to the repayment of the principal, the design is most simple. The member, bound by his original contract with the association! to make stated periodical payments of fixed amounts, strengthens his undertaking, to the greater security of the association which has' parted with its funds to him.......by mortgaging his property as a pledge for such discharge to the end of the society’s existence........ The member, mindful of the impossibility of evasion, continues to pay his regular dues. These, together with all similar payments made by the other members, and together with all the revenues from whatever sources flowing into the society’s coffers, are added to the common treasury and again made the means of securing new profits, until the — 359 — period arrives wlien the association is ready to wind up. The shares, his own interest in the society’s accumulations, have now reached their contemplated value. But the borrower has anticipated that result, and in so doing has given the association the right to make itself whole, to reimburse itself not only for what it has given him, but also for what he has agreed to add to that amount by way of premium offered, out of the sum standing to his credit as a member of this society. That sum is necessarily the amount he has received, plus the premium he has bid. The society appropriates this and the principal is repaid.” Again at section 338, the same author says: “Whatever is paid by the borrower by way of premium, interest, dues, fines, etc., becomes a portion of the common fund, and being reinvested adds its profits to the great bulk in which he has a proportionate interest; and these being again reinvested, and so on ad infinitum, continue to swell the assets of the association until in due course of time, distribution can be made, and advanced members may be relieved of their obligations. Thus the borrower himself profits by his own payments.” The question as to the rights and obligations of the stockholders and the association has received much consideration of late in several of our sister States, and the trend of the more recent decisions is that any contract made by such an association in contravention of the statute and its by-laws is ultra vires and void. All members must participate equally in the profits and bear the losses, if any, in the same proportion. This is the fundamental law of building and loan associations organized under the different statutes throughout the Union. The provisions in the borrower’s notes and deeds of trust sought to be released, to the effect that the shares of stock pledged to secure their payment shall reach their full par value at the end of one hundred months and the securities canceled and satisfied regardless of the earnings of the association, — 360 — is clearly subversive of tbe legislative scheme governing building and loan associations and contrary to the clear letter and spirit of our statutes. Tbe plan wbicb seems to have been adopted by tbe association in respect to tbe loans in question is glaringly prejudicial to tbe non-borrowing members, and its enforcement will work a great injustice and hardship. Besides it would be inequitable and unfair. Tbe rights of tbe borrowers must be determined from tbe standpoint of their relation to tbe non-borrowing stockholders. Tbe former voluntarily applied to and became members of tbe association, and tbe by-laws not repugnant to tbe statute are binding upon them as well as upon tbe other members of tbe association. One who becomes a member of an association becomes chargeable with tbe knowledge of the provisions of its charter and by-laws and is bound by them. He can not be ignorant of them, nor can ho refuse obedience to them unless indeed they are illegal or require tbe performance of acts wbicb tbe law forbids. Bylaws not illegal, and not requiring tbe performance of acts contrary to law, must therefore be deemed binding upon all persons who become members. [1 Beach on Private Corporations, sec. 321; Endlich on Bldg. Ass’ns, sec. 271; Mechanics & Traders L. & B. Ass’n v. Vierling, 66 Ill. App. 621.] Tbe provisions of tbe by-laws, as already seen, provide for tbe payment of dues, interest, etc., by stockholders until such time as their shares shall mature and tbe stock be worth its full par value. And if tbe borrowers did not read tbe by-laws it was their fault. Tbe association being organized under a mutual plan must treat all of its members equally, and any contract whereby one stockholder obtains greater share of profits than another would be violative of tbe principle of mutuality between tbe stockholders. Tbe plainest principles of justice and honesty clearly forbid that one class of stockholders equally meritorious should be compelled to suffer — 361 — that others may profit thereby. In the last reported case to which we have been cited on the subject, King v. International Bldg. Loan & Inv. Union, 170 Ill. 135, the court there holds, that a building and loan association, organized and based on the mutual plan, requiring subscription to its capital stock to be made in periodical payments, which should continue until the payments, together with the earnings of the association should equal the full face value of the shares, has no authority to issue a certificate of stock wherein it agrees to pay the subscriber the full face value of each share at the end of six years, on payment of seventy-five per cent per month on each share during said period. In the case of Wierman v. International Bldg., Loan & Investment Union, 67 Ill. App. 550, the appellate court of Illinois held that a building and loan association is a mutual company and bound to treat its members equally, and any contract made by such association in contravention of such mutuality is ultra vires and void. To the same effect is Baltimore B. & L. Ass’n v. Powhatan Imp. Co., 39 Atl. Rep. 274. The same conclusion was reached by this court in banc in the recent case of Fisher v. Patton, 134 Mo. 32. In that case Eisher, a stockholder, sought to enjoin the directors of the Richmond Building & Loan Association from releasing certain deeds of trust given by borrowing members to secure advancements made on their shares of stock, and from releasing other securities held by the association, and to prevent the association from discontinuing the collection of its interest, dues and penalties from the stockholders until the assets of the association were sufficient to enable each.share of stock to be matured by obtaining its par value of $200. The court held that any stockholder could maintain a suit to restrain the directors of the association from closing out a series of shares before its maturity, and from releasing securities of borrowing members, and other acts — 362 — tending to prevent the stockholder’s shares from obtaining their full par value. Building and loan associations, as already seen, are created for certain purposes, and there is an implied contract with its members that it shall not divert its funds or powers to other purposes. Such diversion would be violative of the statute under which it was organized, as well as the principles of mutuality between the members. In the case of Ins. Co. v. Leslie, 24 N. E. Rep. 1072, a question of relation to the waiver by agreement found in the policy of certain statutory provisions was considered. Referring to these provisions the Supreme Court of Ohio says: “These sections were in force when the policy in suit was issued and entered into, and became a part of the contract of insurance, fixed the measure of obligation created by it and controlled its construction and operation . . . The statute rests upon considerations of public policy. . . . The statute can not be treated as conferring upon the insured a mere personal privilege which he may waive or qualify by agreement. It has a broader scope. It molds the obligations of the contract into conformity with its provisions, and establishes the rule and measure of the insurer’s liability.” To the same effect is Havens v. Ins. Co., 123 Mo. 416; Daggs v. Ins. Co., 136 Mo. 382; Reed v. Painter, 129 Mo. loc. cit. 680. In Wall v. Equitable Life Assur. Society, 32 Fed. Rep. 273, the question arose whether the statute of this State providing that a policy of insurance should be non-forfeitabie after two annual premiums had been paid should prevail in a suit on a policy (executed in this State while this statute was in force) which by its terms required the payment of three annual premiums before the policy became non-forfeitable. In other words, the question is very similar to the one raised by this record, that is to say, whether the provisions of the borrowers’ obligations and deeds of trust — 363 — should prevail, or whether the statute and by-laws then in force should be so read into the contracts as to prevail over the special clause above mentioned. ' Mr. Justice Brewer, who wrote the opinion, said: “It was evidently intended by its (the State’s) legislation to provide a fixed and absolute rule applicable in all cases — absolute and universal, because if it applied only in cases in which the policies were silent, or if it could be waived or changed, a child can see that it would protect only so far as the insurance companies were willing. So, although no words of penalty are attached, no express denial of the right to waive, in fact no words of negation in any direction, yet it seems to me fair to say that the affirmative language of this statute discloses a public policy which no court ought to question or refuse to enforce. The legislature has by this language declared a rule in respect to forfeitures in life- insurance policies; it has thus established the policy which it believes should obtain in this State, and it is my duty to administer the laws of this State in the spirit in which they were enacted, and to uphold both their letter and their spirit.” In the case of Latimer v. Equitable Loan & Investment Company, recently decided by the United States Circuit Court for the western district of Missouri, and reported in 81 Fed Rep. 776, the question arose whether the statute of Missouri permitting a member to withdraw at any time was to be treated as forming a necessary part of the contract, or whether the acceptance of a certificate with a clause curtailing the right of withdrawal to a period of less than one hundred months from its date is binding upon a stockholder, and the court held that the statutory right of ending the stockholder’s relation to the association by withdrawal was a fundamental right evidencing a public policy which can not be waived or contracted away by any one or more members of the association and that the plaintiff in that — 364 — case, having given the requisite notice, was entitled to recover the amount paid on his stock, notwithstanding the terms of his certificate postponing the exercise of this right until an unexpired term of one hundred months shall have elapsed. It seems to us that this case is exactly in point. The question here was not involved in Sawyer v. Menominee Loan & Bldg. Ass’n, 103 Mich. 228, and like authorities cited by defendants in support of their contention. That case bears little or not at all upon the question here; besides it was decided by a divided court. In that case the secretary of the association in setting forth the advantage to be gained by a borrower, among other things represented that such borrower could pay a loan at any time, at the end of any quarter, and could settle on the basis of the loans being canceled in eight years, and at one-eighth thereof each year, taking the actual money loaned as the basis, and, so far as settlement was concerned, disregard the premium for the loan. The secretary explained that the association could do this because of the advantages it had in compounding interest monthly and receiving interest on instalments and premiums, and that the right to settle on this basis was guaranteed by the by-laws. Whatever may be the justification of the Michigan court for its treatment of the question the rule announced in that case has no application to the altered facts presented by this record. Here there was no representation of facts fraudulent or otherwise, while in that case the secretary went further than merely expressing his opinion as to the outcome of the loan under the by-laws of the association as a result of its financial operations, and made the distinct representation, on which the borrower acted, that the premium bid for the loan might be disregarded by the borrower in liquidating his indebtedness. In the light of the foregoing authorities, we think that the provisions of the notes and deeds of trust in question — 365 — are in contravention of the chartered powers and by-laws of the association, and subversive of both the letter and spirit of the legislative scheme governing building and loan associations in this State, and beyond the powers of the board of directors. No question as to the usurious character of the loan •under consideration properly arises in .this case, as appellants contend, but if it did and was for determination, but one conclusion could be reached on the facts disclosed by the records herein. Notwithstanding the positive allegations in defendant’s answer, “that in the by-laws of the association it was provided that the accumulated funds of the association should be loaned at a fixed minimum premium and that all the loans or advancements in question were made in pursuance of said by-law,” the secretary of the association when testifying at the trial in this case, says, that each and every loan made by the association to its borrowing members was upon competitive bidding in open meetings, and that the by-laws of the association provide and require all bids for money to be so made. A copy of the by-laws to that effect was also offered and read in evidence. The facts as disclosed by this record, show conclusively, that the loans to the borrowing members was not usurious. It follows from what has been said that the judgment of the circuit court should be affirmed. Gantt, O. J., Burgess, Williams and Marshall, JJ., concur; Brace, L, not sitting.