Post v. Mechanics' Bldg. & Loan Ass'n

• Decision Date: 14 October 1896
• Citation: 37 S.W. 216,97 Tenn. 408
• Parties: POST v. MECHANICS' BUILDING & LOAN ASS'N.
• Court: Tennessee Supreme Court

37 S.W. 216

97 Tenn. 408

POST v. MECHANICS' BUILDING & LOAN ASS'N.

Supreme Court of Tennessee.

October 14, 1896

Appeal from chancery court, Knox county; H. B. Lindsay, Chancellor.

Bill by Frank H. Post against the Mechanics' Building & Loan Association to wind up defendant as an insolvent corporation. From a decree of the court of chancery appeals reviewing a decree of the chancellor determining the rights of the various parties, several parties appeal. Modified.

WILKES J.

This is a bill filed to wind up the defendant company as an insolvent corporation, and to properly and equitably distribute its assets. It was filed by a shareholder and creditor. The association answered, and admitted its insolvency, and a decree was pronounced maintaining the bill as a general creditors' bill, adjudging the corporation as insolvent and requiring all creditors to come in and file their claims and a receiver was appointed. The chancellor passed upon the rights of the various parties, and gave decree accordingly. The case was appealed, and the court of chancery appeals has passed upon the questions involved, and the cause is now before us on appeal by several parties. The questions presented are important, and some of them quite difficult. We are content to mention and dispose of them as presented. It is found, as a matter of fact, by the court of chancery appeals, that the by-laws of the association contain a provision that no funds of the association should be loaned for a greater premium than 30 per cent., and, as a matter of fact, that the loans were not made under competitive bids but by agreement between the borrowers and association, at a fixed premium, and were evidenced by notes payable six years after date, and secured, principal and interest, by mortgages upon real estate. These mortgages further provided to secure the dues and fines prescribed by the by-laws. No loans appear to have been made to parties other than stockholders in the association, and the stock of the borrowing shareholder was in each instance by the contract pledged to the association to secure the loans made in addition to the real-estate mortgages. The court of chancery appeals find that these mortgages and notes matured at a definite time, and were enforceable at maturity, irrespective of the maturity of the stock hypothecated to secure the loans. The court of chancery appeals held, under this finding and statement of facts, that all of the loans made by the association to its members were in violation of the laws of the state in regard to usury, and that, in the adjustment and settlement of the rights of the parties, the loans should be purged of all usury. It is not necessary to dwell upon the question of whether the loans as made by the association were unlawful, unwarranted, and usurious. We have recently passed upon this question in one of its features in the case of McCauley v. Association, in which we held that such loans were unlawful and usurious, under the statutes of our state, when the premium was fixed upon which loans could be made, and the money was not loaned under free and competitive bidding, as required by the statutes. It is not necessary for us to go further in this case. McCauley v. Association, 96 Tenn. ___, 37 S.W. 212. In accord: Patterson v. Association, 14 Lea, 696; Bates v. Association, 42 Ohio St. 655; Endl. Bldg. Ass'ns (2d Ed.) 409-411; Id. (1st Ed.) 394, 397; Reeve v. Association (Ark.) 18 Lawy. Rep. Ann. 134, note; s. c., 19 S.W. 917.

The next question is: Treating the loans as usurious, upon what basis shall they be adjusted in the distribution of the assets of an insolvent corporation, and in the winding up of its affairs? The court of chancery appeals held that the borrowing stockholders should be charged with the money actually obtained by them from the association, with six per cent. interest per annum upon such amount, but should have credit thereon for all moneys paid by them into the association on any and all accounts, including the payment of dues upon their stock, but that they were not entitled to have these payments credited upon the principle of partial payments. That court was of the opinion that the contracts of the members to pay dues upon their stock, and to repay their loans, were indissolubly tied together; that the payment of the former was intended as a payment pro tanto of the latter, and, inasmuch as the loans were usurious, the subscriptions were also tainted, and the borrowing stockholders were entitled to have their payments on stock dues credited upon the loans from the association. The court further held that, as a matter of fact, the dues paid into the association were paid in on stock, and that, under a proper construction of the contracts and law applicable to them, the agreement to pay dues, fines, and interest all entered into the undertaking of the borrowing member when he made his loan, and the taint of usury, therefore, attached to the whole transaction, and for this reason that court concludes that the payments upon stock should be credited upon the loans. The effect of this would be to relieve the borrowers from all losses in the business of the association, and throw such losses exclusively upon the nonborrowing stockholders. We think the question involved in this feature of the case is not one of fact, but of law and fact, to be determined by a proper construction of the charter, by-laws, and contracts entered into by the borrower and stockholder with the association. We are of opinion the court of chancery appeals is in error in not observing the distinction, well settled, between the borrower's relation to the association as a borrower and as a stockholder. Upon this point that court says: "The one distinct from the other may be thinkable, but, from a judicial view, they are essentially parts of one and the same contract so far as the construction of the contract is concerned. This being so, the element of usury, tainting the note, taints also its necessary element of payment as fixed by the contract." The subscriptions to stock, and the obtaining a loan, are two distinct things; and, while one is clearly dependent upon the other, still they are not indissolubly connected. A shareholder may never become a borrower. While it is the original scheme that all shareholoders will become borrowers, still it is not compulsory. Likewise,...