71 N.J. Eq. 613 | New York Court of Chancery | 1906
The defendant, an insolvent corporation, having issued certificates for the payment of money which it denominated “income stock,” the holders of it demand that certain assets of the company, pledged for its security, be applied towards the redemption of these certificates in preference to the ordinary stock, such as is usually issued by a building and loan association. The defendant was organized prior to 1897, under the statute authorizing the incorporation of building and loan associations, approved April 9th, 1875, and in its articles of association provided that income stock might be issued under such terms and conditions as the directors should prescribe, the dividends on this stock, such as the directors might fix, to be in lieu of any further participation in the profits of the corporation, the holder to have the right to surrender the certificate and receive the principal of his investment within sixty days after such surrender. The articles also provided that ten per cent, of the face value of the stock, and a monthly charge of sixteen and one-half cents on each $50 paid, should be deducted for the expenses of the association.
On. June 10th, 1897, the association and the Fidelity Title and Deposit Company entered into an agreement, the opening recitals being
“That whereas, the association is about to issue what is known as income stock, to be sold to investors generally, with coupons attached, payable quarterly, with interest* at the rate of six per cent, per annum; and whereas, it is desired that the said stock shall be deposited with the trustee until sold by the association, the redemption thereof, as also the payment of the coupons, to be secured as hereinafter provided.”
The agreement then provided that this stock was to be deposited with the trust company and by it delivered, on the order of the association, when paid for at par, whereupon the association was to assign to the trustee real estate mortgages equal in value to the stock sold, to be held by the trustees as collateral security for the redemption of the stock, and deposit with the trustee all interest payments received on account of such mortgages towards the payment of the coupons for interest attached
“altogether upon the proceeds of such assigned mortgages for the redemption of their stock at maturity, and upon the deposits aforesaid for the payment of interest coupons,”
and in case of a default in the payment of any principal or. interest due on any of said mortgages, other mortgages were to be assigned in the place of those in default, and should any of said mortgages be foreclosed, the proceeds of the sale of the mortgaged premises should be deposited with the trustee.
Some of this stock was issued, placed in the hands of the trustee,, and twenty-nine certificates, representing a value, at par, of $4,800, were sold, of which $1,100 in value were redeemed before insolvency, leaving outstanding $3,700, with interest unpaid from April, 1902. About the time the stock was issued mortgages were assigned to the trustee as collateral for its redemption, but they were afterwards withdrawn and cash deposited with the trustee of an equal amount, the sum in hand at the time the receiver was appointed being $3,890.70.
The certificates were sold to investors who were not otherwise members of the association, and were in the following form (omitting formal parts):
“This certifies that there has been paid to this corporation the sum of one hundred and fifty dollars in cash. The bearer is entitled to receive from this corporation the face value hereof, on sixty days’ notice, at any time after three years from date hereof; pending such redemption, interest will be paid hereon, at the rate of six per cent, per annum, on the first days of October, January, April and July, in each year, on the presentation and surrender of the attached coupons, when payable. The principal and interest thereof are secured as certified in the trustee’s certificate endorsed hereon.”
The endorsement on the certificate made by the trustee recited that the association had deposited with it
“money equal in amount to the par value of the income stock called for in this certificate, or has assigned to it mortgages upon real estate represented to be of equal value, and to have been executed and recorded according to law, as collateral to secure the redemption thereof at maturity, and which money the said Fidelity Title and Deposit Company hereby agrees to apply to the redemption thereof at maturity.”
The act under which this association was formed, and in force in ISO1? when the certificates in question were issued, contained no authority for the issue of any such stock as is denominated in the articles of association “income stock,55 and the issue thereof would be ultra vires the association. The holders of the certificates now under discussion insist that they are not stockholders, but holders of a certificate of indebtedness of the asso
On the argument my attention was called to two reported cases to which I shall briefly refer. 'The first was In re Guardian Permanent Beneficial Building Society, 23 Ch. Div. 440. Here the security deposited to secure the loan was required to be given up because the officers of the association, in disregard of the rules governing their powers, had authorized an unlimited borrowing, and for that reason the court held that the loan did not create either a legal or equitable debt from the society to the person making the loan, but in that case the court was influenced by the fact that in some cases the funds loaned were not applied to the payment of the obligations of the company, but “were lent to unadvaneed members,” and' “got so mixed up in a way which renders it difficult to say how far they have been applied in one way and how far in another,”' but nevertheless
The other case cited was Towle v. American Building and Loan Association, 75 Fed. Rep. 938. There the court said that the certificates held by the claimants, and for which preference in-payment was asked, was nothing more than capital stock, and that the holders thereof constituted simply a different class of stockholders. This case, however, is not applicable here, for the certificates in that case purported on their face to be stock. The only difference between the questioned stock and the other stock certificates of the same corporation was that in. one case the holder had paid in full when the stock was issued, while in the other payments were to be made periodically.
More in point, however, is Wilson’s Case, L. R. 12 Eq. 521. Here a building society borrowed from Mr. Wilson $2,001, for which he was given a written acknowledgment of the amount borrowed, together with the pledge of certain securities which were delivered to him as collateral for the payment of the loan, subject to the right of the obligor, in any of such securities, to pay the same, in which case new securities of adequate value were to be delivered and pledged in the place of those taken up. The society becoming insolvent,' the public liquidator demanded the surrender by Wilson of the securities. This was refused, and the refusal sustained by the court, without passing upon the right of Wilson to enforce his securities. It, however, recognized the lien which Mr. Wilson had, and refused to disturb it or to require him to 'surrender the securities, leaving him to indemnify himself therewith in any manner permitted by law. In the case we are considering the security is money in the hands of a trustee for the use of the creditors, and no question of the right to reduce securities to money can arise.
The other objection made to the payment of these certificates is based upon the claim that the act under which the association
The receiver will be advised that the holders of these certificates are creditors, and not stockholders; that they are entitled to be paid in full, principal and interest, and are not subject to deduction for costs, expenses or premiums, and that the fund