Manorita v. Fidelity Trust & Loan Co.

TOULMIN, District Judge. The petitioner avers that nothing is due on the mortgage mentioned in the petition, and that there is nothing owing on or secured by said mortgage, except the last note mentioned therein, payment of which is offered, and tender thereof made. Petitioner prays that the receiver he restrained from selling the property described in the mortgage, and that he he directed to accept the amount of money tendered, and to surrender said note, and to cancel and surrender said mortgage. The receiver, answering, admits that all the notes mentioned in the mortgage, except the last one, have been paid, and admits the tender alleged, hut denies that the mortgage was executed to secure only the notes described therein, and insists that a large sum of money in addition to the last-mentioned note is due on said mortgage, to wit, the sum of $1,200. There is nothing in the answer that shows how said sum is due, and nothing in the mortgage which specifically shows that the money loaned to petitioner was an advance on her stock in the company. There is nothing in the mortgage as to the probable time [9] of the maturity of ihe stock, or when the shares would reach their par value. There is nothing in the mortgage to indicate that the maturity of Hie loan depended on the maturity of the stock. The mortgage recites that it “is intended as security for the payment of the sum of $2,856.20, the same being principal, interest, and premium of a loan from said company, * * which said loan is evidenced by 77 promissory notes of even date with the mortgage, each for the sum of $80.60.” Among other covenants contained in the mortgage, the mortgagor’agrees to keep and perform promises and engagements made and entered into with said company according to the true intent and meaning of its by-laws and articles of association, the effect of which, I presume, is that she will pay all lines, fees, penalties, etc., in accordance with the by-laws of the company. The agreed statement of facts shows that the petitioner was a shareholder in said company. Her certificate of stock and the by-laws of the company are in evidence. They provide that each shareholder shall pay a monthly installment of 85 cents on each share for every month until maturity. The articles of association of the company provide that -when funds are on hand the company shall lend the same 1o any shareholder, on such security and on such terms and conditions as may be prescribed by the by-laws, and that the loans made ai-e to be paid according to the terms agreed on. The mortgage provides, as 1 have said, that petitioner would keep and perform the promises and engagements made according io these by-laws and articles of association; also that the property will be kept insured, and the taxes paid, etc. It further provides that if default shall be made in the payment of any of said notes, or any part thereof, or in case of failure to duly observe and keep the by-laws of the company, or in case of a breach of any of the covenants and agreements contained therein, the whole of the principal, interest, premium, fines, dues, and costs shall at once become due and payable, at the option of the company; and the right is given ihe company io sell the real estate conveyed by the mortgage, and out of the proceeds of sale, after paying certain expenses, to reserve enough to pay all principal, interest, premium, dues, fines, taxes, insurance, or other evidences thereby secured to be paid. It is further provided that if the mortgagor fails to effect insurance on the property, or to pay the taxes on it, as she covenants and agrees to ¡lo, and the company effects such insurance, and pays the taxes, as it is therein authorized to do, then the amounts so paid shall be a lien on the premises, added to the amount to be secured by the mortgage; but there is no provision in the mortgage (hat, on failure to pay fees, fines, or dues. Hiere shall he a lien on the property to secure their payment. The mortgage provides that it is to be void if the full payment of the principal and interest be made as therein specified, and if each of the covenants he well and truly kept and performed, as specified and provided for. ' It matters not whether the money received hv the petitioner and secured by the mortgage be called a loan, or simply an advance to her on her shares. The mortgage was given to secure the repayment of the money in the manner and upon the terms therein men [10] tioned. Association v. Read, 93 N. Y. 474. Payments upon stock are not payments on the mortgage debt, and do not ipso facto work an extinguishment of so much of the mortgage. The payment on one is not necessarily a payment on the other. Southern Building & Loan Ass’n v. Anniston Loan & Trust Co., 101 Ala. 582, 15 South. 123, 29 L. R. A. 120. While the mere fact that a payment on stock is not itself — that is, has not the effect of — a payment on the'mortgage, yet there is nothing in the articles of association or in the by-laws to prevent the parties to the transaction from so contracting. The mortgage is the contract, and it prescribes the manner and the terms in and upon which the money is to be repaid, and they are not in contravention to the by-laws or the articles of association. The agreed statement of facts shows that the sum of money evidenced by the notes, the payment of which is secured by the mortgage, was made up of monthly instalments on stock, and interest and premiums on loan, and the pass book in evidence shows that the money, when paid on the notes, was so applied; thus showing the construction put on the contract by the parties themselves. So, then, the monthly payments on stock were designated in the mort-" gage as principal. There is no other provision in the mortgage that can be considered as securing such monthly payments. The mortgage, by its terms, was executed to secure a specific sum of money, being principal, interest, and premium, and in addition thereto such sums as the company would have had to pay out for insurance and taxes. If “principal” therein mentioned was not meant to be the monthly payments provided for by the by-laws, then such monthly payments have not been made. But it is evident that “principal,” as that term is used in the mortgage, and monthly payments on stock are the same thing, while it is not clear what is meant by “dues” spoken of. Let us suppose that the affairs of the company had not by this time gotten into the court and the hands of a receiver; can it be questioned that, on payment of all the notes provided for (there being no default shown in any of the other covenants contained in the mort: gage), the petitioner would be entitled, not only to the surrender of the notes, but also to the cancellation and surrender of the mortgage? If her shares of stock had not been matured at that time, she would still be obligated to continue the monthly payments on them, for her promise and engagement as a shareholder bound her to make such payments until the maturity of her stock. But she has given no security that she would make such payments after the maturity and payment of the notes. The only effect of her failure to keep this promise and undertaking would be a forfeiture of her stock. She would then be, as to forfeiture and penalties, on the same footing with nonborrowing shareholders, who give no security for monthly payments on their stock. To hold that the mortgage was given- to secure the payment of the principal of the loan, to wit, $1,800, interest and premium, and also to secure the payments on stoqk, as contradistinguished from such principal, would, it seems to me, place the borrowing shareholder in a worse condition than the [11] nonborrowing shareholder. There would he no equality in this. Surely, such a condition was not contemplated in the organization of the company, in the contract for subscription of stock, or in the contract for the loan. The position of the petitioner seems to be this: She had advanced or loaned to her the estimated par value of her stock at its maturity. She was requii*ed to repay in monthly installments the amount advanced, with certain charges, as interest and premium, added thereto, in a given or definite period of time, and she was required to give security (both real estate and a transfer of her stock) that she wrould make the payments as specified. It was an advancement or a loan to her of a sum of money, with an agreement to repay it in monthly installments, with interest, and a “bonus” for the loan, for the repayment of which she gave the security required. There is no default shown in the payment of the notes or in the keeping and performing of any of the" provisions of the contract. Without such default, there is no forfeiture of the mortgage, and no power in the company to sell the property conveyed by it.5 If I am correct in my construction of the contract, there was nothing owing on the mortgage debt at the time the affairs of the company went into the hands of the receiver, except the last: note of $30.60, which became payable a short time thereafter, payment of which was tendered to the receiver and by him refused. It appears that the receiver then sold the property, and at the sale himself became the purchaser. But the so-called “insolvency” of the company, and the proceedings to wind it up, put an end to its operations, and to the contract between it and its members, at least so far as future performance is concerned. Curtis v. Association (Conn.) 61 Am. St. Rep. 17 (s. c. 36 Atl. 1023); Knutson v. Association (Minn.) 64 Am. St. Rep. 410 (s. c. 69 N. W. 889), and authorities therein cited; Sullivan v. Stucky (C. C.) 86 Fed. 491. All authorities agree that, on the premature abandonment of the enterprise by its so-called insolvency and by the winding it up by judicial proceedings, the original contract between the company and the borrowing shareholder cannot be carried out, and that neither party is bound to its literal fulfillment, but they differ as to the relative rights and obligations of the company and its borrowing shareholders, and as to the rule by which such rights and obligations should he settled. See authorities supra; McIlwaine v. Iseley (C. C.) 96 Fed. 62; Douglass v. Kavanaugh, 33 C. C. A. 107, 90 Fed. 373. Now, nothing remains but to wind up the affairs of the company in such a manner as to do equity to creditors and between the members of the company themselves. The question is, how shall it be done? Many of the courts, so far as possible, treat the changed condition of affairs as equivalent to a rescission of the contract, and hold that, in adjusting matters between the company and its members, the principle of rescission should be applied as far as it is just and equitable; that each borrowing member indebted to the company should he charged with the amount received by him, .with legal interest from the dale of the loan, and should be credited, on [12] the principle of partial payments, with all sums paid, — as for interest, premiums, monthly installments on stock, or otherwise. While this appears to be a reasonable and just rule, it must be remembered that the borrowing member is no less a stockholder in the company, and his relations to the company as such are not changed by the fact that he is also a borrower. He is not relieved, in case of the company’s insolvency, from liability to contribute his share with other stockholders to its losses, and is not entitled to a cancellation of his mortgage on payment of the mortgage debt, or to receive a surplus remaining in case the property is sold under the mortgage, until the final adjustment of the accounts between the company and its stockholders. Lauer v. Association (C. C.) 96 Fed. 775; Curtis v. Association, supra; Robertson v. Association, 69 Am. Dec. 154-165; Strauss v. Association (N. C.) 23 S. E. 450, 30 L. R. A. 693; Buist v. Bryan (S. C.) 61 Am. St. Rep. 787 (s. c. 21 S. E. 537). The statute of Alabama provides that, upon foreclosure of any mortgage of land by a member of a building and loan association, to such association it shall credit, as of the date made, upon the entire debt claimed by the association, all payments made upon such debt, whether of principal, premiums, or interest, and the stock pledged for such loan shall be credited on the said loan at its actual value. Code Ala. § 1135. It seems to me that this is a just rule, upon which the account between the borrowing member and the association should be settled in the case of the insolvency of the association and the winding up of its affairs by the court, with the qualification, however, that the borrowing member should contribute his pro rata share to the losses of the association. This rule, as far as practicable,, I adopt in this cause.