119 F. 652 | 6th Cir. | 1903
after making the foregoing statement of the case, delivered the opinion of the court.
The question is whether the interveners, holding the very peculiar certificates called “Final Dividend Income Stock,” are entitled to preference in the distribution of the assets of an insolvent building loan association, or whether they must share ratably with those members of the association who are confessedly holders of ordinary shares of stock. If the certificates represent money merely loaned to the association, money borrowed for the purpose of carrying on the legitimate business of the incorporation by advancing those shareholders hold-' ing what is known in the parlance of such clubs as “installment stock,” then it is too plain for argument that the holders of such certificates are creditors, and entitled to be paid in preference to any and every class of mere stockholders.
The power “to borrow money and issue notes or bonds upon the faith of the corporate property, and also' to execute a mortgage or mortgages for repayment of money thus borrowed,” is every explicitly granted to all corporations organized for individual profit under the general law of Tennessee authorizing the organization of such corporations. Acts Tenn. .1875, c. 142, § 3; Shannon’s Code Tenn. § 2054. The' provisions of section 2054 are included in the powers of every building and loan corporation organized under the general law of Tennessee. Acts 1875, c. 142, § 14; Association v. Cowley (Tenn. Ch. App.) 52 S. W. 313; Shannon’s Code, § 2180. But the power to borrow for proper corporate purposes has been implied under charters and laws not explicitly granting it. Murray v. Scott, 9 App. Cas. 519, reversing In re Guardian Permanent Ben. Bldg. Soc., 23 Ch. Div. 440. And so is the weight of modern cases. 4 Am. & Eng. Enc. Law, 1022, and cases cited. -
The constitution of the Cumberland Association provided that the by-laws might provide “for the issuance of such bonds, certificates of deposit, or other securities of the association as the board of directors may from time to time deem it advisable to issue and sell to investors, and the stockholders may by resolution confer power upon the board of directors to pledge the mortgages, bills receivable, and other securities of the association to secure such bonds, certificates of deposit, or bills payable of the association.” The fifteenth by-law was in these words:
“The board of directors are authorized and empowered from time to time to cause to be issued by the president and secretary such notes, bonds, certificates of deposit, and other evidences of debt as may be necessary for*657 money borrowed for tbe use of tbe association or deposited with it for investment. They shall prescribe tbe time for which said notes, bonds, certificates, or other evidences of debt shall run, the extent to which they or any of them shall share in the profits of the association, arid may fix the terms and conditions of each issue of such security. The funds derived from such sources shall be, unless borrowed for a temporary specific purpose, placed in the loan fund of the association.”
By resolution of the stockholders of April 5, 1893, the directors were given authority to deposit the securities of the association to secure any loan under by-law 15. There was no by-law explicitly authorizing shares of prepaid or preference stock on November 1, 1893, the date of the trust agreement with Wiehl, Probasco & Co. But at the regular annual meeting of the voting stockholders, July 10, 1894, the action of the directors in issuing such shares and in securing same by the deed of November 1, 1893, was unanimously confirmed and ratified; the action of the stockholders being put in, the form of an amendment to the by-laws. July 13, 1897, the by-laws were formally amended, so as to more distinctly authorize such shares and for securing same by pledge or deposit of the mortgage notes of the association. The issue of such shares began in January, 1894, and continued until 1898; each certificate being certified to as secured under the agreement of November 1, 1893. The certificates outstanding at one time aggregated $50,000, but when this bill was filed all had been paid off according to the contract except $22,000.
It is not at all clear that these certificates do not in substance represent loans, and not membership in the corporation. Very similar certificates have been held to constitute the holders creditors, and as such entitled to priority, at least over members. Cook v. Association, 104 Ga. 814, 30 S. E. 911; Building Co. v. Silverberg, 108 Ga. 281, 33 S. E. 908; Burt v. Rattle, 31 Ohio St. 116; Dickinson v. Trust Co. (Sup.) 52 N. Y. Supp. 672; Munhall v. Boedecker, 44 Ill. App. 131. But it is not necessary to decide whether the holders of these special certificates are entitled to priority as creditors, because it is very clear thát, if they are not creditors, it is because they are preferred stockholders,—preferred both as to dividends, if there were profits applicable to dividends, and principal, to the extent that the assets set apart for that purpose will satisfy their claims.
But the appellants, the receiver and certain unadvanced stockholders, say that the association had no power to issue preferred .shares, or to secure sarnie, as against the ordinary shareholders, and that the certificates are valid only as ordinary, unpreferred, prepaid shares, being entitled to no priority either as creditors or preference shareholders. Did the association exceed its powers in issuing preferred prepaid shares and in securing them by a pledge of its assets? The question is to be answered apart from any question as to the effect of such a preference upon general creditors. There are no general creditors. The question here is whether the preference accorded this class of stock is valid as against other members of the corporation who have assented to or acquiesced in its issue ?
Much has been said about the issuance of preferred shares being “violative of the principle of equality and mutuality,” which, it is said, is the distinctive thing characterizing such associations. That pre
In order to “advance members” there must be a fund out of which they may be advanced. The slow accumulations from subscribers paying only two dollars per share each month was doubtless found unsatisfactory to those it was intended to assist in the acquisition of homes by the aid of such companies. This amendment was accepted by this association April 5, 1893, and on November x, 1893, the directors .authorized the issuance of the shares in question and the
But it is said that the amendment does not authorize any preference, except one out of the profits for the payment of the preferential dividend, and that the agreement to redeem or cancel these shares in preference to- others out of assets set apart for that purpose is beyond the scope of the power. To admit that the charter as thus amended does not expressly authorize a preference in respect to the principal of such shares does not advance the argument. To issue preference shares is within the implied authority of every corporation, unless prohibited by some positive provision or repugnant to the general object and purposes of the organization. Now, if the organic law of this association has been so amended as to invite a class of shareholders solely for the purpose of enlarging the fund accessible to the installment or borrowing members, we are wholly unable to see how it can be said that associations having not only the express power to borrow money for corporate purposes, and to secure same by mortgage, but the power to -issue prepaid shares bearing a fixed dividend payable out of the profits, may not prefer such shares both in principal and dividends. There is no public policy against it, and the preference is neither unjust nor immoral. It is, after all, but a form of borrowing; the lender receiving a limited dividend in place of interest and having no further interest in the association.
Building and loan associations are peculiar corporations. In none other is it admissible that the capital shall be withdrawn at the will of the stockholder. But in these it is expressly provided that any stockholder may withdraw, on giving 30 days’ notice thereof, and receive “the amount paid in and such proportion of the profits as may have accumulated.” The only limitation upon the privilege found in the charter is that but one-half of the funds in the treasury is subject to such demands without the consent of the directors. This withdrawal privilege, it has been held by some courts, is suspended upon insolvency, and all paid alike, whether notice has been given before insolvency or not. Latimer v. Investment Co. (C. C.) 81 Fed. 776; 4 Am. & Eng. Enc. Law, 1051; Post v. Association, 97 Tenn. 408,
We have not been referred to any decisions by the Tennessee courts which involve the power of associations organized under the laws of Tennessee to issue shares preferred as to dividends and principal. Province v. Association, 104 Tenn. 458, 58 S. W. 265, involved only the power of such associations to contract to mature shares within a definite time. The holding there was that any contract by which “it should undertake to give one of its members a greater share of profits than another, or to relieve him preferentially from the full discharge of his. obligation to the association by payment of a part, would be in, violation of this principle of mutuality.” The certificates here involved present no such contract. In Post v. Association, 97 Tenn. 408, 37 S. W. 216, 34 L. R. A. 201, it was held that dues paid in advance,- upon ordinary installment shares, under an agreement that interest should be allowed upon such advance, did not constitute the stockholder, in a case of insolvency, a creditor to the extent of such advance. After referring to the provision forbidding the requirement of a greater monthly payment than two dollars on each share, Judge Wilkes, in speaking of the arrangement by which payments of dues might be made in advance and interest allowed- thereon, said:
“It was, in some respects, the same tiling as if the association, in order to accommodate its borrowers, had gone to some bank or outside person and borrowed money to put into the association. Such a proceeding is not warranted by the charter, or the proper scope and scheme, of a building and loan association. They should not be borrowers of money, but only .lenders, for the proper purposes of their creation.. To allow the amounts advanced to be paid back would be to sanction such proceedings as legitimate loans, to convert capital into loans, and to create preferred stock, in order to work out supposed equities. We think the proper holding upon this matter is to treat the advances as payments upon stock, and not as loans to the company; and this is, in effect, carrying out the intention of the parties, which was to pay up their stock in advance, and, by anticipation of its maturity, receiving a discount by so doing.”
The conclusion that such payments should be regarded as advance payments on stock, “and not as loans to the company,” was the ground upon which the decision was put, and a proper interpretation
The power to borrow for the purpose of lending to members was recognized as one which existed within limits by the Tennessee court of chancery appeals in Association v. Cowley, 52 S. W. 313. In re Guardian Permanent Ben. Bldg. Soc., 23 Ch. Div. 440, is a well-reasoned case, and is directly in point. In that case a by-law was held valid which gave directors power to issue paid-up shares with the right to withdraw in preference to the ordinary unadvanced members. The case on this point was affirmed in Murray v. Scott, 9 App. Cas. 519. In Murray v. Scott, just cited, the power to borrow money to enlarge the lending fund, and to secure such loans by a preference over all shareholders and .members, was recognized as a valid power by implication, and held to be a legitimate method of carrying out the ends and objects of the association; no such power having been either granted or prohibited.
In conclusion, we hold that the power exercised in issuing prepaid shares, preferred as to dividend and principal, is a valid exercise of the powers of the corporation inter se, and not so inconsistent with the purposes and objects of such an association as to be regarded at this late day as a void and illegal thing.
A question has been made against the validity of these shares as preferred shares, because,, when some of the shares were issued, there was no by-law authorizing such action by the board of directors. This was cured by the subsequent confirmation of what had been done, both in respect to shares already issued and in the execution of the trust agreement of November 1, 1893, to secure such preferred shares as should from time to time be issued. This curative action was given the aspect of an amendment to the by-law, and operated both retrospectively and prospectively. Aside from this affirmative action of the stockholders, there is abundant evidence in the reports of the officers, the action of subsequent stockholders’ meetings in sanctioning the payment of dividends on such shares, and in the literature of the association, that the action of the directors in this matter was notorious. There was no objection or protest until the insolvency of the association was evident.
Until January, 1898, the only shares which had the right to vote were shares called “common stock.” At that time the right of voting was, at a meeting in which every class of stock participated, extended to stockholders of every class, including these fixed dividend stockholders. We had occasion lately to determine the effect of this extension of the right of management upon the contracts with the “common
The decree gave to these certificates interest after payment of last dividend. This is error. The contract did not require the payment of interest. The dividend was not payable at all events but only out of profits. This is the plain meaning of the contract. Lockhart v. Van Alstyne, 31 Mich. 76, 18 Am. Rep. 156; Warren v. King, 108 U. S. 389, 2 Sup. Ct. 789, 27 L. Ed. 769; Cook, Corp. § 271; Taft v. Railroad Co., 8 R. I. 310, 5 Am. Rep. 575. When the association became insolvent, it ceased to have any profits out of which to pay dividends. The decree will be modified, so as to give a preference to the principal, without interest. If the assets were sufficient to repay the entire capital, and leave a surplus, a different question would arise; for such surplus would be profit.
The decree is in all other respects affirmed.