Greene County Nat. Farm Loan Ass'n v. FEDERAL, ETC.

• Decision Date: 15 November 1944
• Docket Number: No. 671.,671.
• Citation: 57 F. Supp. 783
• Parties: GREENE COUNTY NAT. FARM LOAN ASS'N et al. v. FEDERAL LAND BANK OF LOUISVILLE et al.
• Court: U.S. District Court — Western District of Kentucky

57 F. Supp. 783

GREENE COUNTY NAT. FARM LOAN ASS'N et al. v. FEDERAL LAND BANK OF LOUISVILLE et al.

No. 671.

District Court, W. D. Kentucky, at Louisville.

November 15, 1944.

Susong, Parvin & Fraker and B. B. Fraker, all of Greenville, Tenn., and William F. Clarke, of Louisville, Ky., for plaintiffs.

William C. Goodwyn, of Louisville, Ky., John E. Lee, of Kansas City, Mo., Eli H. Brown, III, U. S. Atty., of Louisville, Ky., W. Carroll Hunter, Sp. Asst. to Atty. Gen., and Robert H. Shields, U. S. Dept. of Agriculture, of Washington, D. C., for defendants.

MILLER, District Judge.

This action was filed by four National Farm Loan Associations with their principal offices in Greene County, Tennessee, against the defendants the Federal Land Bank of Louisville, the individual members of its Board of Directors and the Farm Credit Administration to enjoin the defendant bank from carrying out a plan proposed by it, and approved by the Farm Credit Administration, which, among other things, provides for the cancellation of certain indebtedness owed to the bank and for the distribution by the bank of funds for the purpose of improving the financial condition of certain of the National Farm Loan Associations in the Fourth Farm Credit District. The Farm Credit Administration has previously been dismissed as a defendant on the ground that it was not a corporate entity subject to suit. The facts have been stipulated and the matter is now under submission in chief.

The matter is one arising out of the Farm Credit Administration, as set up and controlled by 12 U.S.C.A. § 636 et seq. Under that legislation the Continental United States, excluding Alaska, is divided into 12 farm credit districts with a Federal land bank in each district. The district of the defendant, the Federal Land Bank of Louisville, is the Fourth Farm Credit District and comprises the states of Ohio, Indiana, Kentucky and Tennessee. The Act provides for the organization by persons desiring to borrow money on farm mortgages of corporations to be known as national farm loan associations with the charter of each association specifying the territory within which its operations are to be carried on. The Farm Credit Administration is vested with supervisory authority over the Federal land banks and national farm loan associations, subject to the general control and direction of the Secretary of Agriculture. The banks and the associations are instrumentalities of the Federal Government and function cooperatively as inter-dependent operating units in the rendition of the long-term farm mortgage loan service provided by the Act. There were in existence on December 31, 1943 3024 associations in all the farm credit districts, including 432 associations in the Fourth Farm Credit District, of which the plaintiffs are four.

The authorized capital stock of the Federal Land Bank of Louisville is $20,000,000, divided into 4,000,000 shares with a par value of $5 each. The Government subscribed to the original capital stock of the Federal land banks, and thereafter made additional subscriptions to the banks' capital stock and also made subscriptions to their paid-in surplus. The defendant bank by December 31, 1924, had completed its return to the Government of the amount of its original capital stock subscribed by the Government, and in 1940 the bank completed its return to the Government of the amounts of both the additional capital stock and paid-in surplus subscribed by the Government. At the time of the filing of this action on January 5, 1944, the plaintiffs were owners of shares of the capital stock of the Federal Land Bank of Louisville as follows:

                Greene County Association   4318 shares
                Hamblen County Association  1197 shares
                Oakhurst Association         890 shares
                Hancock Association          707 shares
                

Practically all of the stock was owned by National Farm Loan Associations in the States of Ohio, Indiana, Kentucky and Tennessee.

A prospective borrower makes application to the association for membership therein. The loan is made by the bank only after the approval thereof by the association and by a land bank appraiser who is a public official appointed by the Farm Credit Administration. The association endorses all loans made by the bank through it and services outstanding loans. The borrower is required to purchase stock in the association in the amount of $5 for each $100, or major fractional part thereof borrowed, and pledges this stock as collateral security for the loan. The association in turn purchases a like amount in the bank and pledges such stock as collateral security for its endorsement liability. The stock of the borrower and of the association is required to be paid off at par and retired upon payment by the borrower of the loan in full. But in instances where an association is indebted to the bank, as for example where another borrower has defaulted in his loan on which the association is the endorser, the proceeds of the stock of such association in the bank are set off against such indebtedness. Since such an association does not receive in cash the proceeds from the retirement of its stock in the bank, it is unable to pay to the borrower who has paid his loan the amount to which the borrower is entitled for the retirement of his stock in the association. In such instances the association issues to the former borrower a "Stock Retirement Certificate" which recites that the stock certificate has been cancelled, the shares of stock have been retired, and "Therefore, this certificate is issued to evidence the right of the above-named person, after all obligations of said association shall have been satisfied, to share in its net assets, together with any other persons having similar rights, on the basis of the number of shares held by each, and not to exceed the par value of said shares." At the time involved in this litigation these outstanding Stock Retirement Certificates of such associations in the Fourth Farm Credit District totaled $1,004,875.

For many years the defendant bank absorbed losses incurred in connection with loans made by it and endorsed by national farm loan associations. In 1929 the bank discontinued its practice of thus absorbing losses on endorsed loans. The capital stock of many associations became impaired, and since an association with impaired capital could not accept applications for new loans, the income in the form of fees from applicants was cut off. Many associations became disabled and many others are on the borderline of disability. This result frequently was attributable to the smallness of the associations' territory, overlapping of its territory with the territory of another association, or too small a volume of business for a prudent distribution of risks. At the time involved in this action there was an existing indebtedness to the Federal Land Bank of Louisville from insolvent associations in the net amount of $1,480,286.41, after applying the proceeds of capital stock of such former members of such associations as had paid their mortgage loans in full without receiving the proceeds of their stock, amounting to $1,004,875 as above referred to.

Associations are classified according to their financial condition. A class 1 association is an association which is solvent in all respects. A class 2 association is an association apparently unable to meet its obligations currently without a present impairment of capital, but which is expected to work out its difficulties within a reasonable time. A class 3 association is an association which is unable to meet its obligations currently without a material impairment of capital but which impairment will not exceed its par value of its capital stock. A class 4 association is an association with a total impairment of capital. Of the 3024 associations in all districts as of December 31, 1943, 1487 were in class 1, 49 in class 2, 665 in class 3, 823 in class 4. The total number of associations in the Fourth Farm Credit District on June 30, 1943, was 434 associations, of which 282 were in class 1, 23 in class 2, 83 in class 3, and 46 in class 4. Each of the plaintiff associations is classified as a class 1 association.

The general policy of Federal land banks during the first 12 years of their existence was to pay small dividends annually. In January 1932 the Act was amended so as to provide that no dividend could be declared by any bank without the approval of the Farm Credit Administration. No dividend was paid by any bank during the period of 1932 through 1943. The financial condition of the Nation for several years following the last dividend by the defendant bank was such as to make a dividend impractical. A dividend was declared by the directors on December 16, 1941, which the Farm Credit Administration declined to approve. The directors of the defendant bank did not make any further declaration of dividend for the reason that it was well-known to them that the Farm Credit Administration, because of certain existing factors affecting the financial condition of the entire Federal land bank system, would not approve a dividend by the defendant bank or any other Federal land bank. As of December 31, 1943, the outstanding capital stock of the Federal Land Bank of Louisville was $7,911,630, while its legal reserve at that time was $11,338,700. As of the same date it had a total of earned surplus, undivided profits and certain reserves of $12,616,141.94. The 12 Federal land banks had outstanding on December 31, 1943, Consolidated Farm Loan Bonds amounting to $1,361,866,900, of which $128,902,100 were issued on behalf of the defendant bank.

The directors of the defendant bank adopted a resolution on July 19, 1943, approving a plan of the bank submitted by the executive officers of the bank, which is the plan under attack in this suit. The plan was approved by the Farm Credit Administration on July 31, 1943. On November 15, 1943, the plan had been approved by...