Standard Savings & Loan Ass'n v. Aldrich

• Decision Date: 23 July 1908
• Docket Number: 1,788.
• Parties: STANDARD SAVINGS & LOAN ASS'N v. ALDRICH.
• Court: U.S. Court of Appeals — Sixth Circuit

163 F. 216

STANDARD SAVINGS & LOAN ASS'N v. ALDRICH.

No. 1,788.

United States Court of Appeals, Sixth Circuit.

July 23, 1908

This is an appeal from a decree dismissing a petition filed by an intervener in a creditor's suit pending in the Circuit Court. The Standard Savings & Loan Association and the Michigan Savings & Loan Association are two corporations organized under the general law of Michigan providing for the creation of building and loan companies. The Michigan Association became insolvent. Under a general creditors' bill filed in the Circuit Court, diversity of citizenship existing, a receiver was appointed, its assets impounded, and the creditors who desired to share in the distribution of assets required to file their claims Among the creditors who came in by intervention to assert a claim was the Standard Savings & Loan Association. The claim, as stated in the petition, was for money loaned, originally aggregating $65,000, which, by credits, had been reduced on April 1 1901, to $46,103.67. To secure this indebtedness it was averred that the Michigan Association had assigned certain real estate mortgages made to it by borrowing members. These securities, the petitioner consenting, were turned over to the receiver; the order providing that such lien as the Standard Association had against them should be transferred to the fund which should be realized from their collection by the receiver. A decree, by consent of the receiver, was entered July 1901, fixing the amount of the indebtedness of the Michigan Association to the Standard Association on account of the transaction referred to at $44,240.33, but reserving any question of the 'status' of the claim or interest. In July, 1904, this order was vacated so far as it determined any indebtedness, and the receiver allowed to withdraw his answer and to file defenses to the claim. Upon a final hearing the judge denied all relief and dismissed the intervening petition.

D. C Rexford, for appellant.

De Forest Paine, for appellee.

Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.

LURTON Circuit Judge (after stating the facts as above).

1. There was no error in vacating the order determining the indebtedness of the Michigan Association to the Standard Association. Although the order was made at a subsequent term, yet the order set aside was not final, but interlocutory, and, upon good cause shown, might be set aside at any time before the close of the term at which the final decree was enrolled. Loeser, Trustee, etc., v. Savings Bank (decided at this session) 163 F. 212. The facts upon which the court acted in setting aside that order and allowing defense to be made to the claim amply justified the action of the court.

2. The origin of the debt in question was this: In November, 1897 the Michigan Association, though still a going concern, was in fact insolvent, and much in need of money to satisfy demands of withdrawing shareholders. In this emergency it applied to the Standard Association for assistance.

The negotiations were carried on by their respective secretaries, Galvin for the Standard Association and Wemple for the Michigan Association. These secretaries were the real managers of these associations and, to quote counsel, 'were the whole thing.' The evidence makes it plain that the purpose of the Michigan Association in borrowing was to pay off importunate withdrawing shareholders, and this purpose was as well known to the lender as the borrower. Indeed, Mr. Galvin, the man of all work for the Standard Association, and the negotiator of the loans, admits that the original plan was that the money loaned should be paid direct to such withdrawing shareholders, and that he therefore paid to himself, in his character of withdrawing shareholder, $3,500, but did not carry out the scheme of direct payments further because of bookkeeping complications. To carry out the arrangement the Michigan Association subscribed to the requisite number of shares in the Standard Association, and upon the footing of a shareholder applied for and obtained the loans in question, using same as stated above. That the Michigan Association had no power to become a shareholder in the Standard Association is not disputed. The enabling act under which both associations were organized provides that such companies may be created 'for the purpose of building and improving homesteads and lending money to the members only. ' Comp. Laws Mich. 1897, Secs. 7554, 7581. The investment of funds in the shares of a company organized for a like purpose is beyond the scope of the most liberal view of the incidental or implied powers of such companies. The objects of such associations being only to lend the funds contributed by members for the purpose of building and improving homesteads, one such association could not become a member of another, nor could it lend its own funds except to its own members for the purpose indicated. The concession therefore that the Michigan Association could not legally become a member of the Standard Association, and that the latter could not legally lend its money to an association which was not and could not lawfully become a member, has not been inadvertently made. Thompson on Building Associations (2d Ed.) p. 215, Sec. 114; 4 Am. & Eng. Enc. of L. (2d Ed.) p. 1028; Kadish v. Garden City Loan Ass'n, 151 Ill. 531, 38 N.E. 236, 42 Am. St. Rep. 256; North Am. Building & Loan Ass'n v. Sutton, 35 Pa. 463, 78 Am. Dec. 349; Mechanics' Association v. Agency Co., 24 Conn. 159.

The question as to whether, in the absence of statutory authority, such an association has the power to borrow money for the legitimate purposes of the association, such as to pay maturing shares and thereby avoid recalling or assigning profitable investments, has not often arisen and need not be here decided. The English authorities need to be distinguished, for they turn, in the main, upon whether the loans were made in accordance with rules adopted by the association made by authority of the general enabling acts. In Murray v. Scott, 9 App. Cas. 519, 538, it was held that the incorporating act having given power to the members to make rules and regulations for the conduct of the business, not in conflict with the objects and purposes of the society or the terms of the act, was broad enough to sustain a rule allowing the managers to borrow for the legitimate purposes of the business; but such a power, resting upon implication, is not an unlimited power to borrow.

In the case just cited, the Earl of Selborne very well said: 'The only real and true limit of the rule making power, as to a matter not governed by the general law of the realm or by any express prohibition in the statute, must be that pointed out by Gifford, L.J. The power cannot be so exercised as to make the society a thing different from a benefit building society formed for the purpose and in the manner defined by the act.'

In Cunliffe Brooks Co. v. Blackburn & District Benefit Society, L.R. 9 App. Cas. 857, it was held upon full consideration that, when no rule allowing borrowing had been adopted, overdrafts were borrowings and ultra vires. The matter is generally regulated by statute in the United States, and in Wilson v. Parvin, 119 F. 652, 56 C.C.A. 268, we held that under the Tennessee incorporating act such associations had power to borrow for the legitimate purpose of their business. The Michigan statute providing for such associations confers no power to borrow, but does not in terms prohibit such transactions. If the Michigan Association had any such power, it arises by necessary implication and must therefore be limited to the necessary and legitimate purpose of the organization, as defined in the enabling act. Goss v. Peters, 98 Mich. 112, 57 N.W. 28, construing an act defining the powers of mutual fire insurance companies, points clearly to a very narrow power of borrowing by such associations as those here involved, if any such power exists under any circumstances. 4 Am. & Eng. Enc. of Law, 1023; North Hudson Bldg. Ass'n v. Hudson National Bank, 79 Wis. 31, 47 N.W. 300, 11 L.R.A. 845; Blackburn Building Ass'n v. Cunliffe Brooks Co., L. R. 22 Ch.Div. 61, 70. The members of the Michigan Association had adopted no rules authorizing the managers to borrow money for any purpose; but, assuming that the corporation had an implied power through its directors and managers to borrow money, it was a power limited to the necessary and legal purposes and objects of the business. The known and assumed purpose for which this money was borrowed was to pay off withdrawing members. Of this purpose the lending association had full notice through its secretary, by whom the whole matter was arranged and negotiated. The evidence makes this clear, and we so find the fact to be. The power to borrow money to pay off withdrawing stockholders cannot be legitimately inferred or implied. The scheme of the enabling act, as indicated by the general purpose of such associations as well as by the terms and conditions under which shareholders are allowed to withdraw dues paid in and a proportionate share of the profits earned, is that only current income shall be so applied. The withdrawal of a shareholder is the withdrawal of capital pledged primarily to creditors and to carry on the business for which the association was organized. The funds applicable therefore to the payment of withdrawing shareholders is the fund arising from the current contributions of a solvent and going association, and no other funds can be legitimately so applied. This we think plain from the relation of shareholders to such associations and is plainly indicated by the proviso of the sixth section section of the enabling statute:

'That not more than one-half of the

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