Smith v. Bath Loan & Bldg. Ass'n

• Citation: 136 A. 284
• Parties: SMITH, Bank Com'r, et al. v. BATH LOAN & BUILDING ASS'N.
• Decision Date: 09 February 1927
• Court: Supreme Judicial Court of Maine (US)

136 A. 284

SMITH, Bank Com'r, et al.

v. BATH LOAN & BUILDING ASS'N.

Supreme Judicial Court of Maine.

Feb. 9, 1927.

Report from Supreme Judicial Court, Sagadahoc County, in Equity.

Receivership proceedings by John G. Smith, Bank Commissioner, and others, against the Bath Loan & Building Association. On petition of the Bath Trust Company, receiver, for instructions. The case was heard by a single justice on an agreed statement of facts and reported for decision. Decree in accordance with opinion.

Argued before WILSON, C. J., PHILBROOK, STURGIS, and BASSETT, JJ., and MORRILL, A. R. J.

Walter S. Glidden, of Bath, for petitioner.

Cram & Lawrence, of Portland, for intervening shareholders.

PHILBROOK, J. The defendant association is in the hands of a receiver, and this proceeding is brought by that official, asking for instruction as to the performance of certain duties.

On taking possession of the books, records, and papers of the defendant association, the receiver ascertained that out of a total number of approximately 275 shareholders, 134. on May 10, 1926, the date of the injunction against doing further business, were what is commonly known as "borrowing shareholders"; that is to say, had procured cash loans from the association, evidenced by their respective promissory notes, and secured by mortgage of real estate and by a pledge of their respective shares of stock, as additional collateral—all of such loans being made in the ordinary course of business, and in accordance with the by-laws of the association, and the statutory provisions regulating the same. None of said borrowing shareholders were required to pay a premium for their respective loans. The remaining shareholders of the association (with the exception of five who effected so-called "share loans," that is, had borrowed money from the association upon the security of their shares alone) were, on said date, ordinary shareholders, who had not availed themselves of their privilege as members of the association to apply to and receive from it any cash loans, and who may be designated as "investing shareholders."

Immediately upon the qualification of the receiver, the claim was made to it by the so-called "borrowing shareholders," or by some of them, that, in settling and adjusting their respective loans, they were legally and equitably entitled to set off against the original amount of such loans the withdrawing value of their respective shares as at May 10. 1926, and were legally and equitably entitled, upon payment of the difference between the original amount of such loans, plus accrued interest, if any, and the withdrawing value of their shares, to receive a full discharge of their obligations to the association and a cancellation, surrender, and release of their respective promissory notes, and of the mortgages given to secure the same, and of the shares pledged as additional collateral thereto.

In consequence of such claim, the receiver instituted this proceeding asking the court for instruction as to whether it shall allow in set-off, to such borrowing shareholders, the full withdrawing value of their respective shares in the association. The case was heard below by a single justice, on an agreed statement of facts, and reported to this law court, which tribunal is to render such decision thereon, and give such instructions, as may be equitable and proper.

Except in a few jurisdictions where the statutory remedy of dissolving building and loan associations on suit brought by state officials is exclusive, and precludes the appointment of a receiver in an ordinary action in equity, it is the rule, both under statute and otherwise, that resort may be had to a court of equity for the appointment of a receiver of a building and loan association, and, on the filing of a sufficient bill by the proper party, the court will appoint a receiver when it appears that it is unsafe and inexpedient to further continue the business, either because of a loss of public confidence therein, or because of its insolvency or mismanagement. 9 C. J. 903. and cases there cited. Hence, quere, whether this proceeding may be properly said to have been instituted under the provisions of P. L. 1923, c. 144, § 50, as suggested in the agreed statement of facts, since that section applies only to "any savings hank, or institution for savings," and, strictly speaking, building and loan associations do not fall within either of these two classes.

In Palmer v. Construction Co., 121 Me., at page 190, 116 A. 220, our court has said that:

"The principal object of a building and loan association is to create a loan fund for the benefit of its borrowing members, the underlying idea being that by means of the system of small periodical payments provided, people of limited means will be enabled to become the owners of homes, and thrift, economy and good citizenship will thereby be promoted."

Reducing the above quotation to its lowest terms, it is plain that the principal object of a loan and building association is to produce a loan fund for the benefit of its borrowing members; hence it is not a "savings bank, or institution for savings."

That such is the object has also been held in Johnson v. National Building Ass'n, 125 Ala. 465, 28 So. 2, 82 Am. St. Rep. 257; National Home Building Ass'n v. Home Savings Bank, 181 Ill. 35, 54 N. E. 619, 64 L. R. A. 399, 72 Am. St. Rep. 245; Commonwealth v. Home Building Ass'n, 127 Ky. 537, 106 S. W. 221; Eversman v. Schmitt, 53 Ohio St. 174, 41 N. E. 139, 29 L. R. A. 184, 53 Am. St. 632 (a case arising where the association was insolvent); Folk v. State Capital Ass'n, 214 Pa. 529, 63 A. 1013; Robertson v. American Homestead Ass'n, 10 Md. 397, 69 Am. Dec. 145, and extended note thereunder.

Under the general rule of equity jurisdiction above quoted, however, this case is properly before us.

As already intimated, the principal issue, as between the nonborrowing and the borrowing shareholders, is whether the latter must, by reason of the insolvency of the association, and its consequent inability to carry out its original plan of operation, pay to the receiver the entire amount of their original loans, and await the settlement of the receiver's account for a return to them of the value of their shares as established by subsequent developments, or be allowed the withdrawal value of their shares in their settlement with the receiver.

The receiver's position is that all borrowers must at once pay the full amount of their original loan, being allowed no set-off or credit for any value inhering in their shares, but being obliged to wait for liquidating dividends at the end of the receivership. The borrowing shareholders oppose this contention.

Loan and building associations are creatures of statute, and it follows that the statutes which give them being must be followed so far as provisions for their existence, powers, rights, and liabilities, as well as the rights and liabilities of their members, are concerned. In respect to those matters, where no such provisions are made, the general principles of law and equity will prevail.

Neither in R. S. c. 52, nor in P. L. 1923, c. 144, an extensive act "to revise and consolidate the banking laws of this state," are to be found any provisions relating to the marshaling of assets, or determination of the rights and liabilities of members, in those instances where the association has become insolvent.

The borrowing shareholders, to some extent at least, rely upon the provisions of P. L. 1923, c. 144, § 110, which reads as follows:

"A borrower may repay a loan at any time, upon application to the association, whereupon, on settlement of his account, he shall be charged with the full amount of the original loan, together with all monthly installments of interest, premium and fines in arrears, and shall be given credit for the withdrawing value of his shares pledged and transferred as security, and the balance shall be received by the association in full satisfaction and discharge of said loan."

This section is applicable only when the association is a going, solvent concern, for it is thoroughly settled by the authorities that, when insolvency ensues, the contract between the borrower and the association is abrogated. People's Building & Loan Ass'n v. McPhllamy, 81 Miss. 61, 32 So. 1001, 59 L. R. A. 743, 95 Am. St. Rep. 454; 4 R. C. L 387; 9 C. J. 991, and cases there cited.

Statutes and rules conferring the right of withdrawal are not applicable after the association becomes insolvent, and a member then has no right to withdraw or to perfect an incompleted withdrawal. In New Jersey Bldg. Loan & Inv. Co. v. McNulty (N. J. Ch.) 71 A. 493, the court says that—

"These provisions as to the right to withdraw and the terms upon which such withdrawals are to take place are dependent upon the association being a going concern. They cannot apply during insolvency. Insolvency at once abrogates such provisions of the contract between the association and the shareholders."

See, also, Groover v. Pac. Coast Sav. Soc, 164 Cal. 67, 127 P. 495, 43 L. R. A. (N. S.) 874, Ann. Cas. 1914B. 1261, and Chapman v. Young, 65 Ill. App. 131, where this rule is fully discussed.

Where a building and loan association becomes insolvent, three views have been advanced in regard to the relative rights and obligations of the borrowing and the nonborrowing shareholders. The first view is that the relation between the...