Knox Nat Farm Loan Ass v. Phillips

• Decision Date: 01 February 1937
• Docket Number: No. 389,389
• Citation: 300 U.S. 194,57 S.Ct. 418,81 L.Ed. 599,108 A.L.R. 738
• Parties: KNOX NAT. FARM LOAN ASS'N et al. v. PHILLIPS
• Court: U.S. Supreme Court

300 U.S. 194

57 S.Ct. 418

81 L.Ed. 599

KNOX NAT. FARM LOAN ASS'N et al.

v PHILLIPS.

No. 389.

Argued Jan. 14, 15, 1937.

Decided Feb. 1, 1937.

Messrs. Peyton R. Evans, of Washington, D.C., and Gerald E. Lyons, of Cresco, Iowa, for petitioners.

Mr. Wm. E. Richardson, of Washington, D.C., for respondent.

Mr. Justice CARDOZO delivered the opinion of the Court.

The controversy in this case makes it necessary to determine the remedies available to a shareholder in an insolvent farm loan association upon the refusal of a demand for the retirement of his shares.

Respondent is the owner of a farm in Knox county, Ohio. His vendors were members of the Knox National Farm Loan Association, a co-operative membership corporation chartered under federal law. Federal Farm Loan Act, July 17, 1916, c. 245, § 7, 39 Stat. 365, 12 U.S.C. § 711 (12 U.S.C.A. § 711). Through that association they procured a loan from the Federal Land Bank of Louisville, giving a mortgage as security. Part of the proceeds of the loan (i.e., 5 per cent. thereof) they used for the purchase of stock in the co-operative association, there being a requirement of the statute that 'any person desiring to borrow on farm land mortgage through a national farm loan association shall make application for membership and shall subscribe for shares of stock in such farm loan association to an amount equal to 5 per centum of the face of the desired loan, said subscription to be paid in cash upon the granting of the loan.' Federal Farm Loan Act, § 8, 12 U.S.C. § 733 (12 U.S.C.A. § 733); cf. § 9, 12 U.S.C. 745 (12 U.S.C.A. § 745). The statutory plan has already been expounded in opinions of this court. Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 203, 41 S.Ct. 243, 246, 65 L.Ed. 577; Federal Land Bank v. Gaines, 290 U.S. 247, 54 S.Ct. 168, 78 L.Ed. 298; Federal Land Bank v. Priddy, 295 U.S. 229, 55 S.Ct. 705, 79 L.Ed. 1408.

Upon the purchase of the farm by respondent in October, 1927, he assumed the payment of the mortgage debt, succeeding at the same time to the interests of his vendors in the stock of the association and to the attendant liabilities. The shares were of the par value of $265. They had been pledged with the association, in accordance with the requirements of the statute (section 8, 12 U.S.C. § 733 (12 U.S.C.A. § 733)) as security for the loan. The association on its part had subscribed for an equal amount of the shares of the federal land bank, the lender of the money, leaving the shares so subscribed for as a pledge for the security of the lender. This too was a procedure called for by the statute. Section 7, 12 U.S.C. § 721 (12 U.S.C.A. § 721). From time to time thereafter there were payments on account, with the result that the loan had been reduced by March, 1933, to $2,122.46, at which time respondent made an effort to clear the farm of the mortgage and to put an end also to his liability as shareholder. To that end he paid the association $1,857.46 to be transmitted to the bank, insisting that the deficiency ($265) be satisfied through the retirement of the shares. The bank accepted the payment as one upon account, but refused to discharge the mortgage without payment of the balance. At that time, by concession, the association was insolvent. Its capital was impaired; it was indebted to the bank upon other mortgage loans, being liable as indorser or otherwise when it borrows for a member (Federal Land Bank v. Gaines, supra); it had no moneys in its treasury wherewith the shares could be retired.

The courts took up the controversy. Respondent joined the bank and the association as defendants in a suit in the court of common pleas of Knox county, Ohio. He prayed for judgment against the bank that the mortgage be held to have been canceled and extinguished and for judgment against the association that the shares of stock be paid off and retired, and that the business of the association be wound up and liquidated. For answer, the bank and the association took the ground that the partial payment made was insufficient to discharge the mortgage; that there could be no retirement of the shares while the association was insolvent; that the state court was without jurisdiction to liquidate the business of the association, an instrumentality of the federal government; and that jurisdiction in that behalf resided in the federal government exclusively.

Two decrees were rendered by the court of common pleas. The first, filed October 7, 1935, provides that the mortgage lien shall be canceled by the bank upon tender by the plaintiff of $265 in addition to the payment previously made, the tender to be kept good by payment into court. The second, filed November 18, 1935, directs the farm loan association to retire the respondent's shares, and gives him judgment against the association for the par value thereof. It appearing that the association was unable to pay the judgment by reason of insolvency, a receiver was appointed to take possession of the assets and liquidate the business, the association of its officers being required forthwith, upon the demand of the receiver, to surrender any property in their possession or under their control. From the decree of November 18, the defendants prosecuted an appeal to the Ohio Court of Appeals,^** which affirmed with an opinion. A petition for review by the Supreme Court of the state was submitted and denied. We granted certiorari (299 U.S. 533, 57 S.Ct. 116, 81 L.Ed. —-) to set at rest far-reaching questions as to the meaning and administration of an important act of Congress.

At the outset a doubt as to our jurisdiction calls for scrutiny and judgment. The case being here after a decision of a state court, jurisdiction is not given us unless the decree to be reviewed is final. Judicial Code § 237, 28 U.S.C. § 344 (28 U.S.C.A. § 344). Respondent has been adjudged entitled to the payment of a specific sum of money, but he is also to have a receiver who is to liquidate a business, the court reserving the right to control the conduct of its officer and to rescind or modify its order. Does the appointment of a receiver postpone the stage of finality until his work is at an end?

The primary purpose of the suit was the recovery of a judgment for the par value of the shares. Any other relief prayed for or awarded was tributary to that recovery; it was a form of equitable execution to make collection possible. When the amount invested in the stock was adjudged to constitute a debt, whatever folloed in the decree was auxiliary and modal. The association and its officers were not directed to account, and to surrender what was found owing at the close of the accounting. They were directed to make delivery and to make delivery at once. We think they were subjected to a present obligation as immediate and absolute as if the assets were to be wrested from them by execution directed to the sheriff. Winthrop Iron Co. v. Meeker, 109 U.S. 180, 183, 3 S.Ct. 111, 27 L.Ed. 898; St. Louis, I.M. & S.R. Co. v. Southern Express Co., 108 U.S. 24, 28, 29, 2 S.Ct. 6, 27 L.Ed. 638; Thomson v. Dean, 7 Wall. 342, 19 L.Ed. 94; McGourkey v. Toledo & Ohio Central Ry. Co., 146 U.S. 536, 13 S.Ct. 170, 36 L.Ed. 1079; Collins v. Miller, 252 U.S. 364, 371, 40 S.Ct. 347, 64 L.Ed. 616; Chase v. Driver (C.C.A.) 92 F. 780, 785; City of Des Moines v. Des Moines Water Co. (C.C.A.) 230 F. 570, 573; Victor Talking Machine Co. v. George (C.C.A.) 69 F.(2d) 871, 879.

Accepting jurisdiction, we are brought to a consideration of the merits.

A national farm loan association is a co-operative enterprise. Its members must subscribe for its shares to the extent of 5 per cent. of the loan to be procured in their behalf. Federal Farm Loan Act, § 8, 12 U.S.C. § 733 (12 U.S.C.A. § 733). The association in its turn, upon the procurement of the loan, subscribes to stock of the land bank to an equivalent extent. Section 7, 12 U.S.C. § 721 (12 U.S.C.A. § 721). With few exceptions, the only assets which a farm loan association has or can have are the shares which it takes in the federal land bank to counter-balance the shares of its own stock taken by he borrower, together with dividends distributed by the bank, and reasonable charges for necessary expenses, not in excess of '1 per centum of the amount of the loan applied for.' Byrne v. Federal Land Bank, 61 N.D. 265, 277, 237 N.W. 797, 802; cf. § 11 as amended 12 U.S.C. § 761, subd. 3 (12 U.S.C.A. § 761 subd. 3). To add to the protection of the bank and other creditors, the shareholders in the association are chargeable under the law as it stood at the date of these transactions with personal liability up to a designated maximum. 'Shareholders of every national farm loan association shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such association to the extent of the amount of stock owned by them at the par value thereof, in addition to the amount paid in and represented by their shares.' Section 9, 12 U.S.C. § 744 (12 U.S.C.A. § 744).¹ Upon evidence that an association has failed to meet its obligations the Farm Credit Administration may declare it insolvent and appoint a receiver, subject to the proviso that this shall not be done until the total defaults shall amount to at least $150,000 in the federal land bank district, unless such association shall have been in default for a period of two years. Section 29, 12 U.S.C. § 961 (12 U.S.C.A. § 961). There shall be no voluntary liquidation without the consent of the supervising federal authority. Section 29, 12 U.S.C. § 965 (12 U.S.C.A. § 965.

The background has now been indicated against which we must view the question whether a member of an association who has paid his loan in full may have his shares retired and recover their par value when the association is insolvent. In support of such a recovery respondent relies upon two sections of the statute. By section 7 (12...