State ex rel. McCormack v. American Bldg. & Loan Ass'n
| Decision Date | 03 May 1941 |
| Citation | 150 S.W.2d 1048,177 Tenn. 385 |
| Parties | STATE ex rel. McCORMACK, Com'r of Insurance and Banking, et al. v. AMERICAN BUILDING & LOAN ASS'N et al. |
| Court | Tennessee Supreme Court |
Appeal from Chancery Court, Shelby County; L. D. Bejach, Chancellor.
Insolvency proceedings by the State of Tennessee, on the relation of James M. McCormack, Commissioner of Insurance and Banking and another, against the American Building & Loan Association, wherein a receiver was appointed, and wherein A W. Burdick, Jr., and others filed claims which were resisted by the receiver. To review a decree of the Court of Appeals on appeal from the chancery court, the receiver and others bring certiorari.
Decree of the Court of Appeals modified and as modified affirmed and cause remanded to the chancery court for further proceedings.
Canale, Glankler, Loch & Little, Harold S. Leeker, James L. Hutter, Jr., and Ceylon B. Frazer, all of Memphis, for complainants.
Cooper Turner, Jr., Ernest Williams, George Klepper, Bartels & Bartels, F. B. Gianotti, Jr., Harsh, Harsh & Harsh, A. B. Pittman, A. E. Horn, R. H. Stickley, J. R. Walker, Jr., C. C. Castles, King, Taylor & King, J. R. Gilliland, Pat J. Lyons, Winstead Johnson, Gordon I. Gordon, Rosenfield & Borod, and J. Granville Farrer, all of Memphis, for defendants.
In this cause the affairs of the American Building and Loan Association are being liquidated and the questions presented to us involve the proper distribution of its assets among its stockholders. The matter received careful investigation at the hands of the chancellor and of the Court of Appeals and the two courts agreed for the greater part in their views. Although we found ourselves in harmony with most of the conclusions of the other courts, owing to the magnitude and variety of the interests affected and the importance of the outcome to the members of the Association, we granted all petitions for certiorari and have heard argument with respect to all rulings of the Court of Appeals that have been appropriately challenged.
The American Building and Loan Association was organized in May, 1889, under section 14 of chapter 142 of the Acts of 1875, the general corporation statute. Under that statute the Association was authorized to issue installment stock only. Chapter 12 of the Acts of 1893 authorized building and loan associations to issue prepaid stock and paid-up stock, and in April of that year the charter of the defendant Association was amended to obtain for the Association this privilege.
The by-laws of the Association provided in detail for the issue of installment and paid-up shares. All such shares were subject to call for payment and cancellation after five years from the date of issuance.
The by-laws provided that the monthly payments on installment shares, described as Class A, should be 50¢ on each $100 share and a fine was provided for delinquency.
With respect to paid-up shares, the bylaws provided that the member should pay $100 per share for the same at the time of the subscription; that the holders of such shares should not receive dividends in excess of 6% per annum, which dividends were payable semi-annually, but it was provided "in no case shall dividends be paid in excess of the net earnings." The paid-up shares herein issued called for interest at the rate of 5% per annum.
For more than thirty years after the organization of defendant Association its business prospered. Dividends were declared semi-annually, holders of installment stock frequently being credited with dividends amounting to 8% per annum. Dividends of 5% per annum were regularly paid to the holders of paid-up shares, they, under their contract with the Association, not being entitled to any further share in the profits of the business.
Owing to the depression in the value of real estate, the assets of the defendant Association consisting of mortgages on real estate had depreciated by 1932. A further depreciation followed during the next four or five years, although dividends were still declared up until 1936. The Association by this time was in serious difficulties and was under close scrutiny of the State examiners. Certain steps were taken to ameliorate these difficulties. Just here it is sufficient to say that the present bill in the name of the State on the relation of the Commissioner of Insurance and Banking and the Attorney General, an insolvency bill, was filed in January, 1937, and a receiver appointed for the Association on January 16 of that year.
The debts of the Association have been paid. Assets are about $2,000,000. Outstanding stock claims are about $3,000,000, for about $1,700,000 of which priority of payment is sought. The chief controversy to be determined is between the installment stockholders and the paid-up stockholders as to whether the latter are entitled to preference in the distribution of the assets of the concern. Certain groups or individuals seeking preferential payment assert equities peculiar to themselves. These equities not being the same as to all groups or individuals, separate consideration of the rights of several claimants is required.
The general plan and purpose of organizations like defendant Association is familiar and has been frequently elaborated by this and other courts. There is nothing unusual in its charter or by-laws.
The primary object of such an organization is to enlist as its members wage earners and people of small means, and by a compulsory system of savings, enforced by dues exacted and fines for delinquency, to accumulate a sufficient fund to the credit of each member to enable him to become the owner of a home. Originally these associations issued installment stock only. Quite commonly the members would obtain loans from the association to apply on the purchase of homes, borrowing on their stock and also securing the loans by mortgages on the real estate purchased. These loans would be satisfied by the accumulation of dues and dividends and the stock that had been issued to the borrowing members would be retired and the mortgages satisfied.
The reason for extending membership in such associations to paid-up stockholders was to enable the institutions to obtain more funds to lend to its borrowing members. A paid-up member has the right to vote and participate in the direction of this institution's affairs. He shares in the profits of the association. When there is a net profit applicable to dividends he receives 5% on his stock. Out of the remainder of such net profit applicable to dividends, the installment stockholder gets what is left.
The courts all stress the co-operative nature of building and loan associations. They have been likened to partnerships. They are mutual organizations. Each member or stockholder undertakes to share the profits and the losses. This court has said of such enterprises "one of the leading features was that the members were kept upon a strictly co-operative basis, with mutual advantages and benefits"; and again, "Strict mutuality and equality of benefits and obligations must be kept the groundwork and basis of these associations, and, if they are not so founded, they are not truly building and loan associations entitled to the protection given such associations by the statute"; McCauley v. Workingman's Building & Saving Association, 97 Tenn. 421, 429, 431, 37 S.W. 212, 214, 35 L.R.A. 244, 56 Am.St.Rep. 813; and the court has further said, "The theory on which associations like the present are organized, and the rule of law as applied to them by all the cases, is that they are mutual in their character, and the members share in the common gains and losses"; Province v. Interstate Building & Loan Association, 104 Tenn. 458, 58 S.W. 265, and finally, State ex rel. v. Folk, 124 Tenn. 119, 135 S.W. 776, 778.
Taking up the claims of the shareholders to preferential treatment in the apportionment of the assets of this insolvent institution, we first consider the rights of
Such members cannot be regarded as creditors. Our statutes under which this Association was created and functions repel the idea. Although for a time the issuance of paid-up shares was not sanctioned by our laws, all the while the defendant Association was authorized by its charter and the statute "To borrow money, and issue notes or bonds upon the faith of the corporate property, and also to execute a mortgage or mortgages as further security for repayment of money thus borrowed." Section 5, chapter 142, Acts 1875 Shannon's Code, § 2054(7). It is apparent therefore that chapter 12 of the Acts of 1893, empowering building and loan associations to issue paid-up shares was not enacted to permit such associations to float an indebtedness and issue evidences thereof. Such power already existed.
Section 1 of chapter 12 of the Acts of 1893, carried into Shannon's Code at § 2175, runs as follows:
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