Loftus v. Mason

• Decision Date: 07 January 1957
• Docket Number: 7254.,No. 7253,7253
• Citation: 240 F.2d 428
• Parties: Don A. LOFTUS et al., Appellants, v. Norman P. MASON, Commissioner of Federal Housing Administration, Albert M. Cole, Housing and Home Finance Administrator, and Federal Housing Administration, Appellees. SHIRLEY-DUKE APARTMENTS, SECTION I, Incorporated, et al., Appellants. v. Norman P. MASON, Federal Housing Commissioner, and Federal Housing Administration, Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

240 F.2d 428 (1957)

Don A. LOFTUS et al., Appellants, v. Norman P. MASON, Commissioner of Federal Housing Administration, Albert M. Cole, Housing and Home Finance Administrator, and Federal Housing Administration, Appellees.

SHIRLEY-DUKE APARTMENTS, SECTION I, Incorporated, et al., Appellants. v. Norman P. MASON, Federal Housing Commissioner, and Federal Housing Administration, Appellees.

Nos. 7253, 7254.

United States Court of Appeals Fourth Circuit.

Argued November 20, 1956.

Decided January 7, 1957.

Armistead L. Boothe, Alexandria, Va. (Boothe, Dudley, Koontz & Boothe, Alexandria, Va., on the brief), for Don A. Loftus and others.

Carl Budwesky, Alexandria, Va., for Shirley-Duke Apartments, Section I, Inc., and others.

Melvin Richter, Atty., Dept. of Justice, Washington, D. C. (George Cochran Doub, Asst. Atty. Gen., L. S. Parsons, Jr., U. S. Atty., Norfolk, Va., and Marcus A. Rowden, Atty., Dept. of Justice, Washington, D. C., on the brief), for appellees.

Before PARKER, Chief Judge, SOBELOFF, Circuit Judge, and R. DORSEY WATKINS, District Judge.

PARKER, Chief Judge.

These are appeals from decrees denying injunctions in two cases heard together in the court below and argued together here. The appellants, whom we shall refer to hereafter as plaintiffs, are Virginia corporations which had constructed apartment houses with the proceeds of loans guaranteed by the Federal Housing Administration, hereafter referred to as F.H.A. The cost of construction of these apartment houses was less than the proceeds of the loans and the corporations had distributed the excess received from the loans among their stockholders under the guise of dividends. The F.H.A., which had guaranteed the payment of the loans, held preferred stock of the plaintiffs giving it the right to remove the boards of directors and elect new boards for their control upon violation by them of charter provisions. Contending that the payment of these "dividends" was such violation, it was proceeding to exercise its right to remove the old boards and elect new boards of directors to assume control of plaintiffs for the purpose of suing to recover the "dividends" when these suits were instituted to enjoin such action on its part. From the entry of decrees denying injunctions on the ground that the F.H.A. was proceeding in accordance with its rights under the corporate charter and the law applicable in the premises, the plaintiffs have appealed.

There is no dispute as to the facts upon which the District Judge acted in denying the injunctions. The common stockholders of the plaintiffs had made no more than a token investment in their stock and the preferred stock issued to the F.H.A. was insignificant in amount and was issued for the sole purpose of giving the F.H.A. the right to police corporate activities for the protection of its rights as guarantor of loans.¹ The apartments were built entirely with funds obtained by plaintiffs on loans guaranteed by the F.H.A. Although these loans were supposed to be limited to 90% of cost and were limited to 90% of "estimated cost," 12 U.S.C.A. §§ 1701, 1743, they were in fact largely in excess of actual cost, so that a large sum remained which plaintiffs proceeded to distribute as "dividends" to common stockholders whose investment was insignificant in comparison with the amount thus paid to them out of the proceeds of the loans.² The pertinent facts were thus correctly and succinctly stated by the trial judge:

"To encourage the erection of low cost rental housing the Congress of the United States authorized the Federal Housing Administration to insure repayment of loans made for that purpose up to 90% of the estimated cost of the projects. Under this law the Beverley Manor corporations and the Shirley-Duke corporations obtained loans, on their notes secured by mortgages on the properties and insured by the Administration in the sum of $8,826,400 and $13,746,000 respectively. The actual cost of the completed project of Beverley Manor was $762,654.53 less than its insured loan and of the Shirley-Duke $1,878,937.16 below its insured loan. However, the full proceeds of the loans had been received by the corporations, and soon after the completion of the projects the corporations disbursed these remaining moneys — the difference between the actual cost of the projects and the insured loans — to its stockholders as dividends. These differences were made apparently available for dividends by carrying the moneys into `surplus\', on the corporation\'s balance sheet, through a write-up, on a reappraisal, of the valuation at which the projects were entered. The Federal Housing Commissioner, being of the opinion that the corporate charters prohibited the payment of dividends out of any funds or assets except earnings, formally declared the instant appropriations violations of the charters. The court concurs — the insured moneys were not available for dividends.

"As a part of the insurance plan the Commissioner had acquired at a nominal price all of the preferred stock of each corporation. Each charter provided that any violation of its terms should be considered a default on the part of the corporation; and upon any such default the charter empowered the Commissioner, as the sole preferred stockholder, to remove the board of directors and elect a new set of his choice. On receipt of notice of his intention to invoke this sanction, the corporations brought these suits to enjoin his proposed action." 139 F.Supp. 208.

The District Judge denied the injunction on the ground that the F.H.A. was acting within its rights under the corporate charter, the pertinent provisions of which are as follows:

"Article IV. * * * (b) The net earnings of the corporation, after providing therefrom dividends on First Preferred Stock and on the Second Preferred Stock as hereinabove provided, and all reserves hereinafter required, may be applied each year in payment of dividends to the holders of Common Stock or may be applied or used in the redemption of the Second Preferred Stock as hereinafter provided. (No second preferred stock was ever issued.)

* * * * * *

"Article V. The Corporation shall not without prior approval of the holders of a majority of the shares of First Preferred Stock, given either in writing or by vote at a meeting of the First Preferred Stockholders called for that purpose (a) assign, transfer, dispose of or encumber any real or personal property, including rents, except as specifically permitted by the terms of the mortgage or deed of trust, * * *".

We are in accord with the holding of the District Judge for reasons adequately stated by him in his memorandum; and little need be added to what is there said. The charter provisions above quoted are but two of numerous provisions designed to give the F.H.A. control over building corporations whose operations were to be conducted for the profit of common stockholders but at the risk of F.H.A., which guaranteed the payment of loans from which the real invested capital of the corporations was derived. The corporate charters, the form of which was prescribed by F.H.A. limited strictly what might and what might not be done by the corporations so long as the insured loans remained unpaid. They were forbidden to engage in any business other than the building and renting of the apartment buildings for which the loans were obtained. They were forbidden to retire the preferred stock held by the F.H.A. No dividends were to be paid, except with the consent of a majority of each class of shares, until all amortization payments under the mortgage had been paid and a reserve fund created. In case of liquidation, all debts of the corporations were to be first paid, including the insured mortgage, and the net assets were then to be applied to the payment of the first and second preferred stock before any distribution could be made to the common stock. The corporations might not, without the approval of F.H.A. as holder of the first preferred stock, dispose of or incumber any real or personal property, except as specifically permitted by the insured mortgage, or "remodel, reconstruct, demolish or subtract from the premises", or charge rents in excess of schedule, or require as a condition of occupancy of any unit in the project the purchase of stock, or consolidate or merge with any other corporation, go into voluntary liquidation or carry into effect a plan of reorganization, or effect any change in capital stock. As said by the District Judge:

"This charter gives the preferred stockholder, for the period of the insurance, complete oversight of the corporation, its real and personal property, its revenues, and its disbursements. Under its terms the only corporation funds or property distributable or alienable, except for operating costs, without the approval of the preferred stockholder are net earnings."

Among the limitations upon the powers of the corporations is the restriction of section IV(b), quoted above, providing that net earnings may be applied in the payment of dividends. The general rule is that dividends may be paid only from net earnings. 13 Am. Jur. p. 650 et seq.; Mobile & Ohio R....