Stone v. Schiller Building & Loan Assn.

• Decision Date: 05 January 1931
• Docket Number: 212
• Citation: 302 Pa. 544,153 A. 758
• Parties: Stone v. Schiller Building & Loan Assn. et al., Appellants
• Court: Pennsylvania Supreme Court

153 A. 758

302 Pa. 544

Stone v. Schiller Building & Loan Assn. et al., Appellants

No. 212

Supreme Court of Pennsylvania

January 5, 1931

Argued November 24, 1930

Appeal, No. 212, Jan. T., 1930, by defendants, from decree of C.P. Lackawanna Co., March T., 1926, No. 14, for plaintiff on bill in equity, in case of Minnie L. Stone v. New Schiller Building & Loan Association, its officers and stockholders. Decree modified and affirmed.

Bill for receiver, and to levy and collect assessments on stockholders of building and loan association. Befor ANDREW B. SMITH, P.J., SEARLE and VALENTINE, JJ., specially presiding.

The opinion of the Supreme Court states the facts.

Decree for plaintiff. Defendants appealed.

Error assigned, inter alia, was decree, quoting record.

Decree, as modified, is affirmed at appellants' cost.

M. J Martin, with him Paul G. Collins, for appellants. -- Plaintiff is barred from relief by her own laches: Kinter v. Commonwealth Trust Co., 274 Pa. 436; Patton v. Trust Co., 276 Pa. 95.

Equity will not lend its aid to one who has slept on his rights until the original transaction is obscured by lapse of years and death of parties: Dalzell v. Lewis, 252 Pa. 283; Taylor v. Coggins, 244 Pa. 229; Whitney v. Fox, 166 U.S. 637; Hardt v. Heidweyer, 152 U.S. 547; Marble Co. v. Wiggins, 12 Pa.Super. 577.

The individual defendants are responsible, only if their action was negligent or they failed to exercise ordinary business judgment: Spering's App., 71 Pa. 11; Swentzel v. Bank, 147 Pa. 140; Watt's App., 78 Pa. 370; Lincoln Market Co.'s Case, 190 Pa. 124; Com. v. B. & L. Assn., 20 Pa.Super. 101.

John H. Price, with him Jerome I. Myers and Cole B. Price, for appellee. -- The capital of a corporation is a trust fund for the payment of creditors; stockholders who diminish that fund by distribution among themselves, receive it impressed with the trust, which a court of equity will enforce: Stang's App., 10 W.N.C. 409; Chambersburg M. & B. Assn.'s App., 2 Walker 488; Clum & Atkinson v. R.S. Co., 26 Pa. Dist. R., 18, 20; C.P.R. Co. v. Fitler, 60 Pa. 124; Trust Co. v. Simpson, 10 Pa. D. & C., 403; Smith v. Blachley, 188 Pa. 550; Hughes v. Bank, 110 Pa. 428.

It is apparently well settled that directors and stockholders are liable to account for corporate assets, as trust funds, where preferences have been given in distribution: Cochran v. Shetler, 286 Pa. 226; Kurtz v. Bubeck, 39 Pa.Super. 370; Loan Society v. Eavenson, 248 Pa. 407; Loan Society v. Eavenson, 241 Pa. 65; Beatty v. Guaranty Co., 226 Pa. 430; Bradly v. Jennings, 201 Pa. 473.

All courts having general equity jurisdiction have inherent power to appoint receivers in ordinary equitable adversary cases, preserve property, etc.: Cunliffe v. Consumers Assn. of Am., 280 Pa. 263; Cochran v. Shetler, 286 Pa. 226; Parry v. Lackawanna, etc., Assn., 72 Pa.Super. 603.

Before FRAZER, C.J., WALLING, SIMPSON, KEPHART, SADLER and SCHAFFER, JJ.

OPINION

MR. JUSTICE KEPHART:

Schiller B. & L. Assn., one of the appellants, was incorporated in 1894 with a capital of $1,000,000. L. A. Lange was its executive secretary. December 1, 1909, his father, Christian Lange, subscribed for 325 shares of its stock, paying therefor $54,000 and taking title thereto in the joint names of himself and wife. Two months later it was discovered that Lange, the secretary, had misappropriated some $237,000 of the association's money. The state banking department then directed liquidation of the affairs of the association. Lange, the secretary, to settle the defalcation, transferred certain property to the association and among the items was an attempted assignment of the block of 325 shares of stock. It had been ineffectively transferred to him by his father. The association accepted it supposing he had a right to assign it. A short time thereafter the son absconded from the jurisdiction. Christian Lange and his wife notified the association five years later, February 3, 1915, that they desired to secure the withdrawal value of this stock. The stock was thereafter assigned to their daughter, Minnie L. Stone, appellee, who instituted an action on June 1, 1915, against the association in the Court of Common Pleas of Lackawanna County to recover the withdrawal value of the stock. This was on the theory that as the stock belonged to her father and mother as tenants by entireties, the transfer to the son by the father conveyed no title. This action was prosecuted to judgment in her favor March 12, 1927; the amount found due was $111,551.87. The association having been forced into liquidation by this shortage, the officers from 1910 to 1926 paid all claims of shareholders except appellee; and having applied for dissolution, Minnie Stone then brought this proceeding in equity in effect to recover that sum of money from the association, its stockholders and officers, who were such since 1915. The court below appointed a receiver, made an order for discovery, and granted other relief, from which defendants appeal.

The judgment of the common pleas court as such cannot be contested here; it is res judicata for what it lawfully embraces. It binds us to the fact that Minnie L. Stone was the owner of the stock, and that the amount then found to be due was $111,551.87. But this sum does not fix the amount appellee can recover, as there are certain elements making up the judgment which must receive further consideration when it is to be given effect in equity.

In the liquidation of a corporation its property is a trust fund for the payment of its debts and should be so regarded. All the creditors are entitled to have their debts paid out of the corporate assets and they are preferred to shareholders: Christian's App., 102 Pa. 184, 188, 189. See Wabash, etc., Ry. Co. v. Ham, 114 U.S. 588. Shareholders have equal rights in the distribution of corporate assets after the general debts of the corporation have been paid: Christian's App., supra: Love v. Clayton, 287 Pa. 205. A withdrawing shareholder is at no time a creditor of the association as that term is usually understood: Christian's App., supra. Withdrawing shareholders of a building and loan association, suspended in payment as appellee has been, have equal rights. A distribution of the assets among members without paying or securing the sum found due to another shareholder would be improper as to the latter, and such funds may be pursued in the hands of the members unlawfully receiving them, as an over payment: Kurtz v. Bubeck, 39 Pa.Super. 370.

A building and loan association is much like a partnership though possessing corporate rights: Christian's App., supra. Unlike a corporation, its shareholders may withdraw their contributions under certain limitations. The Acts of April 22, 1850, P.L. 550; April 29, 1874, P.L. 73, 97, and April 6, 1870, P.L. 56, permit shareholders to withdraw the amount paid in less all fines and other charges, which include a due proportion of expenses: Folk v. State Capital Savings and Loan Assn., 214 Pa. 529, 540. In this respect there is no conflict in the several acts.

Withdrawal by a shareholder of his contribution presupposes that sufficient assets or a relative proportion of them will remain for the benefit of those who continue to be active members: Christian's App., supra. Withdrawal necessarily reduces capital as it takes the amount paid in by the shareholder. The statement that sufficient assets must remain means that where there is or may be an impairment of capital the right to withdraw is not unlimited: Folk v. State Capital Savings and Loan Assn., supra. But, where there is no impairment of capital, the shareholder's right to withdraw is complete; and he may enforce it by suit at law: U.S. Building and Loan Assn. v. Silverman, 85 Pa. 394; McGovern v. Cosmopolitan Savings & Loan Assn., 44 Pa.Super. 212. This situation is not difficult, but where a shareholder asserts his right by suit, when there is or may be a material impairment of capital, difficulty arises. It has been stated that such action may be pursued to judgment in all cases: U.S. Building and Loan Assn. v. Silverman, supra. This is not a correct view. In that case it was pointed out that if the affidavit of defense had set up losses resulting from depreciation of property or otherwise, or had it set forth an indebtedness, a proper set-off would have been allowed. The case does not support an unqualified right to judgment in every action. It depends on whether the association is solvent or insolvent. An insolvent association is one that, after paying its general creditors, cannot pay back to its shareholders, dollar for dollar, the amount of contributions: Kurtz v. Bubeck, supra; Endlich on B. & L. Associations, 2d edition, section 511.

The fundamental basis governing the right of withdrawal is that the association must be solvent. Insolvency, actual or potential, is incompatible with the right to withdraw. A withdrawing member can obtain no advantage or priority over his fellow members through suit and judgment under such circumstances (Christian's App., supra); a judgment is ineffective for any purpose except that it may hasten further liquidation. If the association were liable to judgment and execution at the hands of every withdrawing shareholder, it would result in a race for judgment whereby the assets would be eaten up through forced sales: O'Rourke v. West Penn Loan and Building Assn., 93 Pa. 308; Andrew v. Roanoke B. & L., 98 Va. 445.

Solvency in connection with a building and loan association is not a matter of bookkeeping but of sound business judgment. Where an association is insolvent, as that term is generally understood, or where a succession of withdrawals would precipitate insolvency, or have a strong tendency to do so, a...