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the instrument.20 The theory upon which

BUILDING ASSOCIATIONS. these decisions are based denying the valid

LATIMER V. EQUITABLE, ETC. COMPANY. ity of paid mortgages revived by oral agreements between the contracting parties is, that Circuit Court, W. D. Missouri, July 9, 1897. to establish an oral mortgage or oral lien Stock-Payment in Advance.—Under Rev. St. Mo. upon real estate in case the mortgage covers 2810, the director of a building association may rereal property--and that it would be thus es- ceive in advance full payment for its stock, and issue

certificates therefor and agree to pay a certain rate of tablishing an oral mortgage-is against the

interest thereon in lieu of profits. policy of the law and will not be permitted ;

Withdrawal – Waiver.-The right of withdrawal atedly that the absolute payment of a debt without from a building association, as given by statute, can

any agreement or understanding at the time not be waived or contracted away.
that it is to continue in force for some other Stock-PaymentPledge.—A building association

cannot prefer one class of its stockholders over anpurpose will unqualifiedly terminate not only

other by pledge of any of its assets for that purpose. paide its very existence but also the lien secured Te by it, and no revivor can be had by virtue of

ADAMS, D. J.: The defendant is a loan and

building association, organized under and subject sent to be any subsequent agreement, nor new

to the provisions of article 3, ch. 42, Rev. St. Mo. lite be infused into it by an agreement, Section 2810 of such statutes enacts as follows: 1.

that it shall secure a new debt or liability. “The capital stock of any corporation created The agreement being oral, and therefore under this article shall at no time consist of more within the statute of frauds and has no bind

than 10,000 shares of not less than $100.00 each.

The installments on these shares are to be paid at ing effect to create a lien, and to hold that

such time and place as the by-laws shall appoint. liens could be created in this manner would

Tbe by-laws or the board of directors may, if be to annul the statute declaring such agree- they deem it advisable, allow interest not exceed ments void.21 Whatever may be said in favor ing eight per cent. on such installments as are of the contention made by these authorities

paid in advance. Every share of stock shall be. that deny the right in the parties to revive a

subject to a lien for the payment of unpaid in

stallments, fines and other charges incurred paid mortgage by oral agreement, it seems

thereon, under the provisions of the charter and that the doctrine announced in the case of

the by-laws. The by-laws may prescribe the Houseman v. Bodie is unanswerable, where form and manner of enforcing such lien. New it is said : "As between themselves in such shares of stock may be issued in lieu of the sbares

that have been redeemed, forfeited or matured. case, whether or not the mortgage retain life

The stock may be issued in one or in successive is determined by the intent of the parties."22

series, in such amount and at such time as the Finally, it may be therefore well said, that

board of directors, the shareholders or the bythe doctrine announced by the authorities laws may determine. Any shareholder, or the that a mortgage once paid may be revived legal representative of any deceased shareholder, by agreement between the parties, either in wishing to withdraw from the said corporation,

shall have the power to do so, by giving thirty writing or orally, is supported by common

days' notice of such intention to withdraw, such sense und is sustainable upon every princi

notice being given at a regular meeting of the ple of law or equity, as well as good morals. board of directors. On the day following the No substantial reason has been or can be next regular meeting or at any time thereafter, urged against it, and it is in harmony with

the member so withdrawing, or, if deceased, his the very important principle of common law

legal representative, shall be entitled to receive,

on demand, the amount paid in by him or her, of the exercise of absolute ownership and

and such proportion of the profits as the by-laws dominion that the owner has over bis prop

may determine, less all fines and other charges. erty.

John C. KLEBER. Should there have been, however, a net loss, inOlympia, Wasb.

stead of a net gain, then such withdrawing shareholder shall receive the actual amount paid less

his proportion of such net loss." 20 Fort v. Block, 50 Ark. 256; Martin v. Halbrook, 55

From the foregoing it seems plain that the gen. Ark. 569.

eral legislative scheme contemplates the sub21 Thompson v. George, 86 Ky. 311; Bailey v. Rocke. fellow, 57 Ark. 220; Anderson y. Neff, 11 Serg. & R.

scription for stock, after the act of incorporation, 223; Roberts v. Bruce, 91 Ky. 379.

in several successive series, such as may be de22 122 N. Y. 164.

termined by the shareholders, board of directors, or by-laws. These subscriptions are payable in installments, according to the requirements of the by-laws. These installments may be paid

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by subscribers in advance, and, when so paid, the subscribers, in the discretion of the board of directors, or as provided by the by-laws, may receive interest on such advance payments at a rate not exceeding 8 per cent. per annum. peculiar feature of this scheme permits any stockholder who may bave paid one or more installments to withdraw from the association at any time after having given 30 days' notice of his purpose so to do, and, on so withdrawing, to receive back from the association the amount paid in by him, with his proper proportion of the profits if any may have been made, or less his proper proportion of loss if such loss has been sustained. Apart from some other peculiar features, not necessary now to refer to, corporations created under this law are subject to the general principles of statutory and common law governing corporations.

The defendant, claiming to act under the power conferred by the statute of Missouri, on the 4th of September, 1890, issued its series of stock B, containing 500 shares, each for $200, representing an aggregate of $100,000 in par value. The series was issued as full-paid stock. It was not paid in installments of any kind, but in advance, for the full amount of its par value. The certificates representing this series recited, in substance: (1) That dues in full for all the sbares represented by them, at the rate $1 per month on each sbare for the full period of 200 months, has been paid, or, in other words, that the par value of $200 per share bad been paid by the holder. (2) Tbat the shareholder was entitled to redemption of his share at par on, and not before, 100 months from September 4, 1890, the date of the certificates, and also to receive, as his share of the profits and earnings of the business, interest at the rate of seven per cent. per annum. (3) That there had been deposited with a trustee, of whom the defendant Ittel is successor, securities, consisting of stock of the defendant corporation and deeds of trust on real estate, of the actual value of $110,000, to secure the ultimate redemption of this series of stock, and the payment of the agreed interest accruing thereon, semi-annually, prior to its redemption.

The complainant is the owner of four of these certificates, each calling for five shares, or $1,000 in par value of stock. In his amended bill, the complainant sets forth the facts already detailed, and avers further, that, by the provisions of the by-laws of the defendant company, the owners of full-paid shares of stock, like those owned by complainant, were entitled to withdraw from the association, and receive back the amount paid in by them, at any time, on giving 30 days' notice of their intention to withdraw, in like manner as is provided for stockholders on the installment plan. Complainant next avers that he has given the required notice of his intention to withdraw, and that the defendant has refused to pay him back the amount paid in by him, and refused to recognize that he had any interest in the trust

fund referred to in the certificates as pledged for the payment of the face value of these certificates. The bill prays for judgment against defendants in favor of complainant, for the face value of his certificates, and that the trust fund aforesaid be specially charged with the payment of such judg. ment. To this bill a demarrer is interposed. This demurrer raises these questions: (1) Whetber the certificates in question are for stock, and, if so, whether the defendant had power to issue fullpaid stock, and obligate itself to pay a certain rate of interest thereon in lieu of profits. (2) Whether the holder of the full-paid stock has a right to withdraw from the company, and receive back his money paid, on giving the 30 days' notice prescribed by the statute, or whether he is concluded by the provisions found in the certificates to the effect that he is entitled to do so "on and not before 100 months” from September 4, 1890, the date of the certificates. (3) Whetber the holder is entitled to any preferential right to the property undertaken to be pledged to secure the payment of these certificates.

Answering the first of these questions, it appears clearly that the parties to these certificates intended them to be capital stock, as distinguished from an evidence of money loaned. They are denominated capital. In the first place they confer upon the corporation power, averments of the bill, have, from the beginning, been treated as stock, with all the rights, in their bolders, incident to ordinary stock, except as expressly lizited in the certificate. The intention of the parties, unless outside the power of the defendant corporation, should be recognized and enforced. The question, then, is, did the defendant corporation have power to issue and deliver full-paià, interest-bearing stock? The legislation already adverted to, constituting the organic law under which the defendant is organized, provides $ scheme primarily and prominently for paying the capital in installments, so long as such payments. taken in connection with other income, arising from fines, dues, interest, and profits, are neces. sary in order to bring the stock, in actual caloe, to par. But I do not think this primary and prominent feature or method of paying for stock is exclusive. The statute supra, in terms, provides that the installments on these shares are to be paid at such time and place as the by-laws shall appoint." The by-laws or the board of directors may, if they deem it advisable, allow interest not exceeding 8 per cent. on such installments as are paid in advance. These provisione clearly contemplate a variation from the primary and prominent method of paying in the capital. In the first place, they confer upon the corpori. tion power, in and by its by-laws, to fix the time and place of paying the installments. Obviously, under this grant of power, the installments might be few or many, and payable at one time of

It appears from the bill that, pursuant to this grant of power, the defendant adopted a by-law referring to and recognizing paid-up



sbares of stock, and providing for their treat- by the statutes of Missouri upon stockholders, to ment and final disposition. Again, a large withdraw from the association. The statute proand probably the largest source of income vides, as already seen, that any shareholder wishof associations like the defendant is in loan- ing to withdraw from the association shall have ing their money. They are relieved from the power, first giving 30 days' notice of his intenusury laws of the State, and may, in the form of tion, to do so. Upon complying with this repremiums and otherwise, receive interest far in quirement of the statute, the shareholder is enexcess of the legal rates otherwise permitted. A titled to receive, on demand, the amount paid in necessary prerequisite to loaning money is to get by him, together with his share of profits. It is it. Accordingly, investors are encouraged to contended by the plaintiff that he is entitled to take stock, and pay the installments in advance. withdraw from the defendant corporation the They are allowed a fixed rate of interest, not ex- amount of money paid on his certificates, to-wit, ceeding 8 per cent., and the association receives the full face value, notwithstanding 100 months the installments, some or all of them, in advance, have not elapsed since the date of his certificates, and loans them out at a greater rate of interest and notwithstanding the special clause found in than it pays, and this way hastens the day of his certificates that they are not payable for 100 maturity of the stock, for the general benefit of months from their date. This contention raises its members. The general scheme thus indicated, the question whether the statute permitting withthe clear reference to advance payment of stock drawal at any time is to be treated as forming a found in the statute, the provisions relating to necessary part of the contract, or whether the full-paid stock found in the by-laws, clearly es- acceptance of a certificate with a clause curtailtablish the abstract power on the part of the de- ing the right of withdrawal to a period less than fendant to receive payment of its stock in ad- 100 months from date is binding upon a bolder vance, and issue certificates of full-paid stock of such certificate. This right of withdrawal, therefor. If this power exists, reasonable terms and thereby ending one's relation to a corpora and conditions of its exercise may be fixed by the tion, is peculiar to building and loan associations. by-laws or board of directors. The payment of It does not appertain to corporations generally. stock in installments confers many possible ad

The holder of stock of ordinary corporations vantages upon its holder. He participates in the must either transfer his membership to some large premiums and interest received for money purchaser of bis certificate, or must retain his loaned. in the fines and other charges imposed membership till the end of the corporate life of upon associate members. He receives a share in his company, or to such time as, by unanimous all the profits of the association, and this goes to consent of the stockholders, liquidation may be expedite the maturity of his stock, or the profit- agreed upon. He cannot force his company to able winding up of his financial venture. These purchase it, or otherwise, at his pleasure, withadvantages or chances for gain do not appertain draw his capital and portion of profits, and retire to the bolder of paid-up stock. In the nature of from the corporation. the case, he cannot apply his share of profits to The novelty and importance of this right of the payment of his stock. He takes no interest withdrawal are well expressed in Thompson on in the speculative feature of the venture. He has Building and Loan Associations. He says (page money to invest, and is content with a reasonable 64): “One of the most important rights coninterest thereon. Considering all these things, I ferred upon a stockholder is the right of withcannot doubt it was a reasonable exercise of drawal. This right is incorporated in all statpower on the part of the defendant to fix the rate utes. A distinguishing difference between the of interest payable to this class of conservative stockholders of a building association and the investors at 7 per cent. per annum. I shall there- stockbolders in an ordinary private corporation fore hold that the defendant had power to re- is the right of the former, upon giving notice, to ceive payment in advance for the stock in ques- terminate future liability on his stock. He can tion, to issue for it the certificates in question, arbitrarily devest himself of his membership, vut and to obligate itself to pay interest thereon at loose from the association, and end bis duties the rate of 7 per cent. per annum, in lieu of per

and liabilities. In an ordinary corporation a mitting the holders of such certificates to partici- subscriber for stock cannot obtain a cancellation pate in the profits of the business of defendant of his subscription except by the unanimous concorporation. Tbis view finds ample support in

sent of the other subscribers, and then he cannot authority. Hohenshell v. Association, 41 S. W. do it if there were creditors whose rights would Rep. 948; Missouri v. Equitable Loan & Invest- be jeopardized. Even a majority of the stockment Co. (Mo. Sup.; not yet officially reported),

holders cannot withdraw and refuse to proceed 41 S. W. Rep. 916; Towle v. Association, 75 Fed. further in a corporate enterprise; and these rules Rep. 938; People v. Preston (N. Y. App.), 35 N. are said to be just, and based upon a sound public E. Rep. 979; Kent v. Mining Co., 78 N. Y. 159; policy. The liberality of the legislative policy End. Bidg. Ass'ns, $ 462.

can be readily seen in making such a radical The next question to be considered is whether change in the law of corporations by investing the complainant, as the owner of this full-paid the building association stockholder with the stock, is entitled to exercise the right conferred personal right of withdrawal."

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The right of withdrawal, by the provisions and by its terms, required the payment of three anclear meaning of the statutes of Missouri in ques- nua! premiums before the policy became nontion, appertains to all shareholders, whether forfeitable. In other words, the question was holders of installment paying or full-paid stock. very much like the one now before the court, No distinction in this respect is made between namely, whether the contract of the parties as them. By the organic law, the complainant, written should prevail, or whether the statute therefore, has a right to withdraw from the de- then in force should be so read into the contract fendant company at his pleasure, and this right as to prevail over its language. Judge Brewer, of withdrawal is the fundamental feature dis- after announcing that he was disposed to rest bis tinguishing defendant corporation and others conclusion upon considerations of public policy, like it from ordinary corporations. The question, observes: "It was evidently intended by its (the therefore, is whether this important fundamental State's) legislation to provide a fixed and absolute right conferred by statute can be waived by re- rule, applicable to all cases-absolute and uniceiving certificates containing a curtailment of versal--because, if it applied only in cases in this right. I think not. If the corporation can which the policies were silent, or if it could be issue one certificate or one series of stock curtail- waived or changed, a child can see that it would ing this right of withdrawal, it can issue all of protect only so far as the insurance companies its certificates and all of its series of stock in the were willing. So, although no words of penalty same way, and thus practically repeal the statute are attached, no express denial of the right to under which they take their corporate life. waive, in fact no words of negation in any diree

Greenb. Pub. Pol. p. 502, declares the rule to tion, yet it seems to me fair to say that the affira. be in effect, that any contract by which the owner ative language of this statute discloses a publie of corporate stock deprives himself of important policy, wbich no court ought to question or te rights secured to him by the statute, and which fuse to enforce. The legislature bas by this lifhe acquires by virtue of bis ownership of the

guage declared a rule in respect to forfeitures in stock under the statute, is void, and that such life insurance policies. It has thus established shareholder cannot waive it or contract it away. the policy which it believes should obtain in this

In State v. Edwards (Me.), 29 Atl. Rep. 947, a State, and it is my duty to administer the laws of customer agreed to pay more toll than the stat- this State in the spirit in which they were enacted, ute permitted the miller to take, and the court and to uphold both their spirit and their letter." held the contract void, on the ground that the The same conclusion is reached and expressed customer could not waive or contract away his in the case of Society v. Clements, 140 U.S. 23. rights under the statute upon which the miller 11 S. C. Rep. 822. In the light of these and man was permitted to do business. In the case of In- other authorities to which my attention has been surance Co. v. Leslie (Ohio Sup.), 24 N. E. Rep. directed, I am constrained to hold that the state1072, a question in relation to the waiver (by

tory right of ending a stockholder's relation to i agreement found in the policy) of certain statu

loan and building association, by withdrawa tory provisions was considered. In deciding the therefrom is a fundamental right, evidencing case, the court, referring to these provisions, public policy, which cannot be waived or com says: “These sections were in force when the

tracted away by any one or more members of sach policy in suit was issued and entered into, and

association, and that the plaintiff in this case

, became part of the contract of insurance, fixed

having given the prerequisite notice, is entitled the measure of the obligation created by it, and

to recover the face value of his stock, notwitbcontrol its construction and operation.

standing the terms of his certificates postponing The statute rests upon considerations of public the exercise of this right until an unexpired terci policy

* The statute cannot be treated of 100 months shall have elapsed. The next an! as conferring upon the assured a mere personal last questioned to be considered is whetber the privilege, which may be waived or qualified by complainant, as the holder of the certificates ia agreement. It has a broader scope; it molds the

question, is entitled to any preferential right is obligation of the contract into conformity with and to the property undertaken to be pledged ti its provisions, and establishes the rule and meas

secure their payment. This must be answered by ure of the insurer's liability."

determining whether the defendant associaties A large number of pertinent authorities are had power to make the contract so pledging sack gathered together in this last-mentioned case, and

property. The elementary working principue they satisfactorily establish the general principle of the building fassociation scheme," according announced by the Supreme Court of Ohio. See, to Endlich (section 122, supra), is a system also, to the same effect, Havens v. Insurance Co., perfect mutuality and reciprocity and equality a 123 Mo. 416, 27 S. W. Rep. 718. In the case of all members." No provision is found in the of Wall v. Society, 32 Fed. Rep. 273, a question

ganic law authorizing an association like the de arose whether a statute of Missouri, providing that a policy of insurance should be non-forfeit

fendant to pledge any of its assets for the retire able after two annual premiums had been paid,

ment or payment of any of its stock, nor is the should prevail in a suit on a policy (executed in

any general power conferred by statute upon lead Missouri, while this statute was in force) which, i erential stock, from which authority for pledgiza

and building associations to issue preferred pret




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its assets to secure the payment of any of its stock may be inferred. Under such state of facts, it must, in my opinion, be held that the pledge of corporate assets for the retirement or payment of a certain class of its stock, in preference to others, is so violative of the elementary requirement of equality and mutuality as to be absolutely void. Again, loan and building associations, like other corporations, may impair their capital and incur obligations to creditors. Capital is in all cases a trust fund, primarily for creditors. If the defendant association can be sustained in the issue of series B of its stock, amounting to $100,000, or one-tenth of its capital, and securing the payment of the same at par, with annual interest thereon at 7 per cent., by pledging sufficient of its capital therefor, I see no reason why it cannot issue all the balance of its stock in similar series, and in like manner secure the payment thereof. If this can be done, the creditors' trust fund is entirely diverted to the security of its stockholders. The fund which the law devotes primarily to creditors is, by action of others, diverted to a class which, under the law, is made second in the right to the fund. These last observations concerning the rights of creditors are not made because any creditors are now complaining of the conduct of the defendant company, but merely to illustrate the awkward predicament in which the views of complainant's counsel might involve the defendant company. I feel largely relieved from an exhaustive consideration of this last question by the action of the Supreme Court of Missouri in the recent officially unreported case of State v. Equitable Loan & Investment Co. (Mo. Sup.), 41 S. W. Rep. 916. This was a proceeding by quo warranto to oust the defendant of its corporate franchise, because of its alleged unauthorized assumption of power in issuing full-paid stock, and securing the payment thereof by pledges of its assets. Sherwood, J., announcing the opinion of the court, says: “It is quite apparent that the defendant association assumed and usurped franchises and privileges not granted it by the laws of Missouri, in issuing full-paid stock, secured by pledges of other stock of said association, and also by deeds of trust to secure the redemption and payment of said fullpaid stock; * that, though the defendant association had the right to issue full-paid or prepaid stock, there is nothing in the law under which the association was charted that will authorize it to make this full-paid stock preferred stock, by using certain securities of the association to guaranty the payment thereof."

The foregoing is a construction placed upon the statute in question by the highest court of the State; and even if it were not in harmony with my views, which is not true, it would, under well-recognized principles, control my action. The plaintiff therefore is not entitled to any preferential right to the assets alleged to have been pledged to secure the payment of bis stock. It appears from the foregoing that, if this were an

action at law, the demurrer would not be well taken. The plaintiff would be entitled to a judgment against the defendants for the face value of his certificates. This action being in equity, and it appearing that the complainant is not entitled to equitable, as distinguished from legal, relief, the demurrer, for that reason, must be sustained.

NOTE.-The regulations of building associations introduced some 'innovations, which bave since been legalized by statute, more especially the right of withdrawal from membership, which is inherent in no other corporation. The articles of association and the by-laws of a building corporation constitute a contract with its members, which it cannot at its own vo. lition alter so as to change their rights (Engelhardt v. Fifth Ward, etc. Assn., 148 N. Y. 281; Heinbokel v. National, etc. Assn., 58 Minn, 340; Pawlick v. Homestead, etc. Assn., 37 N. Y. Sup. 164; Holyoke, etc. Assn. v. Lewis, 1 Colo. App. 127; In re West Riding Soc., L. R. 45 Ch. Div. 463; O'Malley v. People's, etc. Assn., 92 Hun, 572), even though it has power to alter amend or repeal its by-laws (Insurance Co. v. Connor, 17 Pa. St. 136); nor has the legislature any greater power, Fisher v. Patton, 134 Mo. 32. Though the corporation cannot take away such rights, it may change its by.laws so as to effect, without taking away, the remedy for enforcing the contract. Engelhardt v. Fifth Ward, etc. Assn., supra. It cannot issue preferred shares, nor in any way prefer onemember over another, unless its charters or by.laws give such authority. State v. Equitable, etc. Co. (Mo., June, 1897), 41 S. W. Rep. 916; Hohenshell y. Home, etc. Asso. (Mo., June, 1897), 41 S. W. Rep. 848.

Usury.-The loans made by such associations, including the interest charges and premium, are often in excess of the legal rate of interest. As to whether such laws are tainted with usury, the decisions are at variance. Where such associations are looked upon as partnerships, accumulating a fund for the joint benefit, such loans are considered to be upobjection: able (Goodrich v. Atlanta, etc. Assn., 96 Ga, 803; Shannon v. Dunn, 43 N. H. 194; Hawkins v. Ameri. cus, etc. Assn., 96 Ga. 206; Merrill v. McIntyre, 13 Gray, 157; Roberson's Appeal, 10 Md. 397; Silver v. Barnes, 6 Bing. [N. C.) 180), but the transaction is re. quired to conform to the statute. Brown v. Archer, 62 Mo. App. 277. Again it is held, that laws author. izing such charges are solely for the benefit of local corporations. Southern, etc. Assp. v. Riggle, 4 Pa. Dist. 617. Other courts hold that such contracts are usurious, if they in any mode provide for the pay. ment of any greater sum of money than the principal with legal interest (Building, etc. Assn. v. Logan (Tex. Civ. App., June, 1896), 33 S. W. Rep. 1088; Ab. bot v. International, etc. Assn., 86 Tex. 467; Interna. tional, etc. v. Biering, 86 Tex. 476), that any law al. lowing special corporations to charge a greater rate of interest than the general law permits is special legis. lation and is void. Rowland v. Old Dominion, etc. Assn., 116 N. C. 877; Meroney v. Atlanta, etc. Assn., 116 N. C. 882; Henderson, etc. Assn. V. Johnson, 88 Ky. 191. Nor will such courts extend the rule of comity so far as to recognize the legality of such contracts made by foreign corporations containing provisions, that such contracts are to be considered as made in a foreign State and to be interpreted by its laws. Such provisions are considered to be mere evasions. Southern, etc. Asen. y. Riggle, 4 Pa. Dist. 617; Rowland v. Old Dominion, etc. Assn., 115 N. C. 825; Meroney v. Atlanta, etc. Assn., 116 N. C. 882. Contra: Pioneer, etc. Co. v. Cannon, 96 Pick. 599,

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