GREENE COUNTY NAT. FL ASS'N v. Federal Land Bank

• Decision Date: 13 December 1945
• Docket Number: No. 10034.,10034.
• Citation: 152 F.2d 215
• Parties: GREENE COUNTY NAT. FARM LOAN ASS'N et al. v. FEDERAL LAND BANK OF LOUISVILLE et al.
• Court: U.S. Court of Appeals — Sixth Circuit

152 F.2d 215 (1945)

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

No. 10034.

Circuit Court of Appeals, Sixth Circuit.

December 13, 1945.

F. H. Parvin and B. B. Fraker, both of Greeneville, Tenn., for appellants.

William C. Goodwyn, of Louisville, Ky., and W. Carroll Hunter, of Washington, D. C. (W. C. Goodwyn, of Louisville, Ky., John E. Lee, of Kansas City, Mo., W. Carroll Hunter, of Washington, D. C., David C. Walls, U. S. Atty., of Louisville, Ky., and Robert H. Shields, of Washington, D. C., on the brief), for appellees.

Before SIMONS, ALLEN, and MARTIN, Circuit Judges.

SIMONS, Circuit Judge.

The appellants seek review of a decree dismissing their complaint against the bank, the individual members of its Board of Directors and the Farm Credit Administration. The complaint sought to enjoin the bank from carrying out a plan approved by the Farm Credit Administration for the relief of National Farm Loan Associations in the Fourth Farm Credit District, the capital of which had become impaired, and for other purposes presently appearing. Originally four of the associations had joined in the action. Two of them have submitted to the decree, without appeal, the United States was permitted to intervene in support of the defendants below, and joins in their support of the District Court adjudication.

The Farm Credit Administration, the bank and the constituent Farm Loan Associations, owe their existence to and derive their powers from the Federal Farm Loan Act of July 17, 1916, as amended and now codified in 12 U.S.C.A. §§ 636 to 1012. Originally the banks and associations were under the supervision of the Federal Farm Loan Board within the Department of the Treasury. The functions of the Board were transferred to the Farm Credit Administration by Executive Order No. 6084, dated March 27, 1933, and later to the Department of Agriculture by Reorganization Plan No. 1, § 401, effective July 1, 1939, 12 U.S.C.A. preceding section 636.

Detailed analysis of the statutory scheme is impossible within the normal confines of an opinion. The Supreme Court has had occasion to consider certain aspects of the Act in respect to the organization and functions of federal land banks, and to declare that they are instrumentalities of the federal government engaged in the performance of an important governmental function. Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 41 S.Ct. 243, 65 L. Ed. 577; Federal Land Bank v. Gaines, 290 U.S. 247, 54 S.Ct. 168, 78 L.Ed. 298. It is necessary, however, to an understanding of the issues here presented, to consider the general structure of the Farm Credit System. 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 the loan associations, subject to the general control and direction of the Secretary of Agriculture. The banks and associations function cooperatively as inter-dependent operating units of a long-term farm mortgage loan service provided by the Act. On December 31, 1943, there were in existence in the twelve farm credit districts, each with a federal land bank, 3024 associations, including the 432 associations in the Fourth Farm Credit District in which the appellants function.

The mechanics provided for the carrying out of the purposes of the Act require that a prospective borrower make application to the association in his locality for membership therein. Before a loan is made by the bank it must be approved by the association and by a land bank appraiser appointed by the Farm Credit Administration. The association endorses all loans made through it by the bank and services them. 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 to the association as collateral security for the loan. The association, in turn, purchases a like amount of stock in the bank and pledges it as collateral security for its endorsement liability. The stock of the borrower and the association is required to be paid off at par and retired upon full payment of the loan by the borrower. Where, however, the association is indebted to the bank on its endorsement liability, the proceeds of the stock of such association are set off against the indebtedness. When the association does not receive the proceeds for the retirement of its stock because of such setoff, and is therefore unable to redeem the borrower's stock, it issues to the borrower a stock retirement certificate reciting that the stock has been cancelled and retired and that the certificate evidences the right of the recipient to share in the association's net assets on the basis of the number of his shares, but not to exceed their par value.

For many years the bank here involved absorbed losses incurred in connection with the loans made by it and endorsed by national farm associations, but in 1929 it discontinued this practice. The capital stock of many associations in the district beame impaired, and since an association with impaired capital could not accept applications for new loans, its income from fees of applicants was cut off. Many of the associations were thus disabled from exercising their functions in carrying out the purposes of the Act, and others were threatened with disability. This result was to a great extent attributable to the smallness of the association's territory, and so, to a volume of business too limited 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, of $1,480,286.41, after applying the proceeds of capital stock of former members of the association who had paid their mortgage loans in full without receiving proceeds from the cancellation of their stock.

The general policy of federal land banks during the first twelve years of their existence, was to pay small dividends annually, but in January, 1932, the Act was amended to provide that no dividend could be declared without the approval of the Farm Credit Administration, and no dividends were paid by the bank from 1932 through 1943. It was understood that general economic conditions would prevent approval of dividends by the supervisory authority.

On July 19, 1943, the directors of the bank approved a plan which provided for cancellation by the bank of the then existing indebtedness to it of insolvent associations, amounting to $1,480,286.41, and by which there was made available to such associations an additional sum of $1,004,875.00, for the purpose of satisfying the claims of former members of such associations who held outstanding stock retirement certificates. The plan also provided for the establishment, by the bank, of reserves to the extent necessary to take care of estimated forseeable losses for which the associations might become liable. These reserves were also available to associations with capital not presently impaired, to the extent necessary to provide for foreseeable losses. It is to be observed that the cancellation of indebtedness, the furnishing of funds to liquidate claims of stockholders and the establishment of reserves, were not based on the amount of capital stock held by the associations, nor upon any provision in the plan for credits or advances to associations with unimpaired capital. The bank estimated that the plan would result in savings to it of over $308,000 annually, and that such savings would absorb the cost of the plan over a period not to exceed 8½ years. The plan also provided for reduction, by consolidations, in the number of associations in the district from 434 to 94. Repayment by the associations of the funds advanced either by cash or credits, was not contemplated, and it is part of the plan that no association shall participate in either payments, credits or reserves against future losses unless it agrees to such consolidations as the bank shall propose.

At the time of the hearing below, land banks in many other districts had developed or were studying similar plans, and some of these had already been adopted and put into operation. For all of them, including the Louisville Bank, the plan adopted by the Houston Bank of Texas was the prototype, and other plans followed its general pattern. The Louisville Bank plan was to become operative as of December 1, 1943, if and when accepted by the stockholders of not less than 70% of the associations. The Farm Credit Administration formally approved the plan on July 31, 1943. Having been accepted by 71.52% of the associations by January 1, 1944, and an agreement having been entered into by the bank with each accepting association, the plan became effective. At the time of trial below it had been accepted by 80% of the associations owning 76% of the bank's stock, and the member borrowers of these associations represented 77% of all borrowers...