Leahy v. National Building & Loan Ass'n

BaRdeek, J. It would be practically impossible, within reasonable limits, to trace out the chrysalis character .of the defendant corporation. It was first organized in 1887, its ostensible purpose being the accumulation of funds by monthly contributions of its members, making loans to its members and stockholders, and making such other investments as it might deem proper, the buying, selling, and holding of real estate, and the holding and selling of real estate or other property taken on foreclosure. Its capital stock was $5,000,000, divided into ten series of $500,000 each, the par value of each share being $100; and the shares were made payable in monthly instalments of seventy cents on each share. From time to time during its existence its articles of organization were changed, until at the time of its decease it was presumably a genuine building and loan association. During the period of its existence it adopted by-laws and issued stock on the different schemes and plans as set out in the statement of facts, and upon other plans not material to this decision. 'During all its mutations its paramount theory — 565 — was akin to that of the ordinary building and loan association, although it did not conform to the law of this state in manner of dealing with its members or in the character of the stock issued. It finally crystallized itself into a regular building and loan association under the provisions of the law of this state, and it is upon that status we must define and determine the rights and relations of its members and stockholders. What we say in this opinion must be deemed to apply to all the petitioners alike, unless a contrary purpose is evident from the language used. The fundamental idea of a building and loan association is mutual profit sharing. Its business necessarily is confined to its own members. Its object is to raise a fund to be loaned to its members. Each shareholder, whether a borrower or nonborrower, participates alike in all profits earned, and alike must assist in bearing the burden of expenses and losses. Such associations are the only ones that can issue their capital stock before it is paid for. The member makes his application, receives his stock, and agrees to pay for it in monthly instalments at a fixed rate. In case of default, he is subject to fine, which goes into the general profit fund for all alike. When the aggregate dues he has paid, with the credited earnings, equal the face value of his stock, he can no longer share in the earnings, and his stock is retired, and his membership in the corporation ceases. Eut the member has no claim to, or property in, any specific fund of the association. Atwood v. Dumas, 149 Mass. 167. The theory of our statutes and the law of all the cases is to the effect that such associations are purely mutual in their character, and that the members share in the common gains, and, from the very necessity of their relations, must bear a proportionate share of the losses. Probably, under our law, such an association would have no right to issue what is called “definite contract stock.” Such stock is opposed to the fundamental principle of such associations. The members themselves constitute — 566 — the corporation. It bas no capital except such as it receives from its members in monthly instalments and its interest earnings. When the corporation aggregate agrees with all its members to pay them a definite amount at a given time, regardless of whether the anticipated profit has been earned or not, unless the requisite profit has been earned it is quite evident that some one must suffer. The principle of equality and mutuality would thereby be destroyed. But in the present case it is unnecessary to determine whether such stock would be ultra, vires or not. The parties before the court all stand on the same footing in this respect. They were all bound to take notice of the limitations on the powers of the association; and when they became members and assented to the contract in that form they became foreclosed from contesting it. They must all stand or fall together, and our chief concern is to see that justice and equity is done between them. It is insisted, however, that this association was not organized as a mutual company, and therefore the right of the members must be determined according to the strict letter of their contracts. The impossibility of performance of these contracts has been determined by the judgment of insolvency. It is admitted on all sides that the company cannot carry out its plans as originally intended. But who constitute the corporation, if not its members? Each member has a contract with every other member. The nonborrowers hold on agreement that, if they make certain payments for a given length of time, the corporation will pay them a definite sum at the expiration of that period. The borrowers have the same contract to begin with, but which has been modified to the extent that the corporation has advanced to them an amount equivalent to the face value of their stock, upon which the borrower agrees to pay, in addition to the monthly payments on his stock, certain fixed interest charges. Both agreements were made in contemplation of a profit of $32.80 per share. Under the plan of — 567 — organization this profit was to come from interest earnings, fines, etc., and from no other source. This fact, taken in connection with the charter and by-laws, leads to no other conclusion than that this Avas a mutual profit sharing institution. ¥e must now determine the status of these several members, and their relations to each other; the corporation being insolvent. In other words, what effect has the insolvency of the association upon the membership contract and upon the loan contract ? The authorities are not entirely in accord upon that subject. Substantially all agree that the insolvency of the association has the effect at once to stop all liability for stock payments. Endlich, Building Asso. (2d ed.), § 523; Strohen v. Franklin S. F. & L. Asso. 115 Pa. St. 273. And this applies equally whether such members be merely investors or also borrowers. “ The liability to pay monthly dues or fines, or interest on the amount advanced, cannot extend beyond the existence of the association.” Cook v. Kent, 105 Mass. 246. The dissolution of the association necessarily puts an end, not only to its capacity to receive, from time to time, the small payments due from its members, but also to the possibility of their being turned to account, for their benefit, by means of the system of investment and reinvestment peculiar to the building association. The member’s duty to make regular stock payments — a duty incident to his membership only — ceases, for the stock itself is destroyed, and the membership dies with the corporation. Not only is. this so, but the further fact is established, almost without dissent, that upon the premature dissolution of such an association the advanced members may be compelled to pay forthwith the balances due from them on their securities, although the latter be given in terms only for the payment of instalments. Endlich, Building Asso. § 523; Weir v. Granite State P. Asso. (N. J. Ch.), 38 Atl. Rep. 643; Curtis v. Granite State P. Asso. 69 Conn. 6; Waverly — 568 — M. & P. L., L. & B. Asso. v. Buck, 64 Md. 338; Low St. B. Asso. v. Zucker, 48 Md. 448; Buist v. Bryan, 44 S. C. 121. Thus it seems that, as the corporation is defunct, membership ceases, and all contracts must, therefore, of necessity be set aside. It is upon the theory of the rescission and abrogation of the contracts that equity steps in, and winds up its affairs, and makes a ratable distribution of assets. In this connection it may be well to refer to a clause on each certificate of membership issued prior to 1895. After certifying that the member is the holder of so many shares of stock of a certain maturity value, and in consideration of the first payment, together with the agreements contained in the application for membership, etc., the association will pay the member the maturity value of the stock upon the expiration of the period therein limited, the stock certificate further says: “ This certificate is issued to and accepted by the holder upon the following express terms and conditions: 1st. The said shareholder shall not have any claim or interest in the affairs, assets, or funds of this association, nor the control of them, except as above specifically set forth, and assumes no liability of any kind whatsoever except as herein-before described.” It is urged that under this contract the shareholder had no' liability except the payment of his monthly instalments, and it follows as a necessary corollary that he is not liable for any losses or expenses. It is doubtful if this would be the legal effect of the contract when we come to consult the by-laws, which are printed on the back of all stock except prepaid certificates. But, whether it would or not, the insolvency of the association is alike fatal to this as well as to the other terms of the contract. If this were not so, it would lead to endless confusion and complication. If this claim is good for one, it is good for all. If these borrowers are exempted from liability for losses, then every nonborrower may claim the same privilege, and each stockholder would, in legal effect, become a preferred cred — 569 — itor in the order in which he took membership,— a proposition utterly at variance with the scheme of the organization, and in violation of the plainest principles of equity. This leads us to a consideration of the status of the borrowing members with reference to the corporation, and their liability to sustain their ratable share of the losses of the association. Does the borrowing member still remain a member of the corporation ? Under the charter and by-laws there can be no reasonable doubt but that he does. He is not in the position of an ordinary borrower of money. He remains a member of the association, subject to its charter and by-laws, and in taking the advance on his shares he is only allowed to anticipate the final redemption of all shares. His assignment of his stock as collateral to his loan does not cancel his membership. By the very terms of his loan he agrees to pay the dues on his stock until maturity. He participates in the earnings which are to go towards discharging the obligations on his loan, and to shorten the time when he will be fully discharged therefrom. Eversmann v. Schmitt, 53 Ohio St. 174; Endlich, Building Asso. §§ 122-124; Mechanics B. & L. Asso. v. Conover, 14 N. J. Eq. 219; Parker v. Fulton L. & B. Asso. 46 Ga. 166. Hence, being equally entitled with all the others, in the direct ratio of his interest in the society, to share in the common gains of the enterprise, he is liable to contribute, in the same proportion in which he expects to profit, to the losses and expenses incident to the management. Endlich, Building Asso. §§ 77-79, 518; McGrath v. Hamilton S. & L. Asso. 44 Pa. St. 383. The association being insolvent, nothing remains to be done but to wind up its affairs so as to do equity between the creditors and between the members themselves. As regards the latter, care should be taken to adjust the burdens equally, and not to throw upon either borrowers or nonbor-rowers more than their respective shares. Just how to reach this result has given rise to a great contrariety of decisions. — 570 — Tbe learned judge of the superior court held, as to the Langworthy petition, that the mortgagor should be charged with the amount of her mortgage, with legal interest, and credited her with all payments made to the association, with legal interest. This ruling, in effect, gave her, not only the benefit of all interest payments, but also all payments made on her stock, in reducing the amount of her mortgage debt. This could only be justified on the theory that when she obtained a loan she ceased to be a member of the association. As we have already seen, he was not justified in such a conclusion. Her rights should have been ascertained and defined on the basis that she remained a member, notwithstanding her loan. To allow Mrs. Langworthy to credit upon her mortgage her payments on her stock, would enable her to escape responsibility for her share of losses, and throw them wholly upon the nonborrowers; in other words, the borrowers would escape without loss. So palpable an injustice cannot be sanctioned. While the mortgage may secure the payment of both stock dues and interest, they stand upon an entirely different footing. Interest is not paid as a stockholder, but as a borrower. Stock dues are paid by all members, and the funds accumulated by their payments belong to all the members alike. If by maladministration of the affairs of the association the fund is diminished, the losses should fall evenly upon all. As we view it, the equitable rule would be to charge the petitioner with the amount of her loan at legal interest, and credit her with all interest payments made by her, on the principle of partial payments, as stated in Hill v. Durand, 58 Wis. 160, and upon payment of the balance found due, then to release her mortgage. This is the rule adopted in Pennsylvania, the mother of building and loan associations in this countoy, and finds ready support in other jurisdictions. Strohen v. Franklin S. & L. Asso. 115 Pa. St. 273; Rogers v. Hargo, 92 Tenn. 35; Weir v. Granite State P. Asso. (N. J. Ch.), 38 Atl. — 571 — Rep. 643. Whatever may be due her upon her stock can be readily ascertained when the affairs of the corporation are wound up and final distribution made. The same rule must be applied to the order made on the White and Van Pelt petition. White became a member in his lifetime, and afterwards secured a loan. His status as a member became fixed at that time. The contract became no more sacred or inviolable because of his death. Neither did the fact that these petitioners afterwards became the owners of the mortgaged premises change the situation. They can secure no greater rights than White would have had had he lived. In equity they might possibly be subro-gated to the right to claim whatever may be found due on stock, but that is not now available in reduction of the mortgage debt. As to the Eggleston petition, a somewhat different question has arisen. The court below found that she never became a member of the association, but was a creditor thereof, and entitled to be paid the amount she had paid in with interest, in common with other creditors, and in preference to the claims of stockholders; in other words, that her transaction with the association was, in legal effect, but a loan of so much money. We need not concern ourselves over the question of whether, under its articles, the corporation had authority to issue this class of stock or not. The stock was issued and accepted by the petitioner, and we cannot permit either the receiver or the holder to question its validity. It is certainly valid as between the parties, so long as it does not contravene public policy and was not issued in defiance of any statutory prohibition. We are not advised of the precise ground upon which the court based its decision. Probably it was upon that clause in the certificate before quoted, to the effect that the holder should have no claim or interest in the affairs of the association, etc. The certificate under which the petitioner makes claim recites that she — 572 — is “ the owner of nineteen shares of stock ” in the association, of tbe par value of $100; that she has paid therefor $1,105.80, being ninety-six payments of seventy cents each, less a rebate of $9 on each share. In consideration thereof the association agrees to pay her $100 for each share at the end of ninety-six months. This includes a profit of $32.80 on each share, besides the rebate, and is the same profit that was to be paid to other ¡stockholders. Article 29 of the bylaws provided that the board of directors might offer for sale “ prepaid stock, or stock upon which instalments may be fully paid in advance.” There can be no doubt but that Mrs. Eggleston made her investment under this by-law, and it is equally clear that she thereby became a member of the association. The fact that her relations with the company were somewhat limited did not prevent her becoming a member. Such construction must be given the certificate as will effectuate the intention of the parties. The first part of the certificate deals with both parties on the basis of petitioner’s membership in the association. To construe the limiting clause mentioned to devest her of membership in the association, is to render the other part of the certificate entirely nugatory. This would be contrary to the evident intention of the parties, and contrary to the rules of construction laid down in Wis. M. & F. Ins. Co. Bank v. Wilkin, 95 Wis. 111. On the basis that the petitioner became and is a member of the association, the contract between them became impossible of performance, because of the insolvency of the company. Upon that basis her counsel argues that her stock became preferred, and entitled her to payment in full, in preference to holders of other kinds of stock. Just why this is so is not at all evident. There is nothing in the stock contract or in the charter or by-laws that would give it this distinctive character. All classes of stock are equally meritorious, and in marshaling the assets no stockholder, in the — 573 — absence of some provisions in tbe charter or by-laws of the association, should be given preference over another. Hohenshell v. Home S. & L. Asso. 140 Mo. 566. The case of Gibson v. Safety H. & L. Asso. 170 Ill. 44, seems to me to be especially applicable to the matter under consideration. The court says: “ Each of these certificates was issued upon the payment to this association of fifty dollars. The holders now say that the association had no authority under the law to issue them. In other words, they contend that a building and loan association, under the statutes of this state, cannot lawfully issue paid-up stock; and from that premise they conclude that they themselves may repudiate the validity of the stock, and, to the extent of the money paid therefor, they should be treated as preferred creditors of the association. If it be true that the association had no authority of law to issue the stock, it is equally true that the holders of the stock had no right or authority of law to accept it; and, if they were claiming any benefit therefrom, other stockholders might, with propriety, question the legality of the transaction. But the holders of the stock are in the anomalous position of themselves repudiating its validity, and thereby seek to obtain an advantage over those who are the legal stockholders of the association. It seems to us unreasonable to say that these stockholders may be allowed to assert the illegality of the action of the building association, to which they themselves were parties, and at the same time, by reason of that illegality, place themselves in a better position than they would have been had their stock been valid. They bought paid-up stock. They paid for it. No one is questioning their right to the benefit of that stock, and, clearly, they cannot be heard to do so.” This leaves very little more that needs to be said. The failure of the association is a calamity both to the prepaid and deferred payment stockholders. In their tribulation, when they appealed to the court of conscience, they must be con — 574 — tent to be put on as nearly an equal footing with other stockholders as human judgment can place them. This will be done by allowing the petitioner’s claim as a stockholder, and giving her a just share of the assets, after all losses and expenses have been adjusted and paid. By the Court.— As to the appeal from each of the three orders mentioned, the orders of the superior court of Milwaukee county are reversed, and the cause is remanded for further proceedings according to this opinion.