Assets and Creditors

HE rules which are applicable to business concerns generally, in determining their assets and their liabilities, are applicable to cooperative associations. Ordinarily, property to which a concern has legal title is one of its assets. 40

41

The question, What constitutes assets of a cooperative association arises most acutely when the rights of creditors are involved. Goods received by a factor, commission man or other agent to sell and then account to the consignor therefor are not liable for the personal obligations of the agent. Likewise, a factor or other agent has no authority at common law to pledge goods received by him to be sold and, without authority from the owner, such goods could not be pledged for an amount in excess of advances made and expenses incurred by the agent on account of such goods.42 These fundamental principles are fully applicable to cooperative associations that operate on an agency basis.43

If an association is so operating, the members may, in their market ing agreements, confer on the association authority to borrow on the commodities owned and delivered by them. This is purely a matter of contract. If such authority has been conferred on an association and it has obtained loans on the commodities, the lender, if the requisite formalities have been met, has a good lien on the commodities. It is assumed, of course, that there are no prior and superior liens. As indicated a cooperative may not give a lien on goods which it does not own, or with respect to which it is not authorized to give a lien, to an extent beyond its financial interest therein. On the other hand, the fact that an association operating on an agency basis has the power to borrow on such commodities does not mean that the commodities are assets of the association from the standpoint of an attaching creditor who has not made a loan on them.44

See Revolving-Fund Plan of Financing, p. 276.

4123 C. J. 352.

42 Allen v. St. Louis Bank, 120 U. S. 20, 7 S. Ct. 460, 30 L. Ed. 573.

43

Imperial Valley Long Staple Cotton Growers' Association v. Davidson, 58 Cal. App. 551, 209 P. 58.

*Runciman v. Brown, 223 Mich. 298, 193 N. W. 880; Taylor v. Rugenstein, 245 Mich. 152, 222 N. W. 107; Gobles Cooperative Association v. Albright, 248 Mich. 68, 226, N. W. 876.

If no loans have been obtained on commodities being handled on an agency basis and the members have not agreed that the commodities shall be liable for the debts of the association, they may not be held therefor. Obviously when an association has only authority to borrow on commodities and does not have title thereto, the commodities are not assets of the association from the standpoint of attaching creditors. Normally an association has a lien on commodities received from a member for all advances made to him and for the amount of its "charges." But when an association makes an agreement that it will pay certain notes held by a third person out of the proceeds received from a member's commodities, the rights of the association are junior thereto.45

If an association takes title to commodities which it is handling it is believed that such commodities are liable to seizure for debts of the association; 46 and this conclusion would seem to be demanded where the statute under which an association is incorporated specifically provides that if an association enters into a contract of sale with producers "it shall be conclusively held that title to the products passes absolutely and unreservedly, except for recorded liens, to the associa tion upon delivery," 47 which provision appears in several of the cooperative marketing acts.

Of course, deductions which an association is authorized to make from sales proceeds are ordinarily assets of the association and likewise any "profits" made by an association are assets thereof, although the members are the ultimate beneficiaries of such profits.48

In an Idaho case 49 the court said:

Conceding that profits earned by co-operative nonprofit associations belong to the members, and not to the association itself, we understand the rule to be that such profits are subject to the claims of such associations' creditors, and that, not until such claims are liquidated, may there be a distribution of profits to members. In fact, there can be no profits to distribute until debts are discharged or funds set aside to satisfy them. This is the rule of corporations generally.

45 Robinson v. Harry, 7 Cal. App. 2d 312, 46 P. 2d 806.

46 See When Title to Products Passes to Association, p. 134.

*See sec. 17 of Bingham Cooperative Marketing Act of Kentucky, p. 380 of Appendix.

48 Farmers Union Cooperative Co. v. Commissioner of Internal Revenue, 90 F. 2d 488, affirming an opinion of the Board of Tax Appeals, 33 B. T. A. 225. See also Maryland' and Virginia Milk Producers' Association v. District of Columbia, 119 F. 2d 787.

49 Associated Fruit Co. v. Idaho-Oregon Fruit Growers' Ass'n, 44 Idaho 200, 256 P. 99, 100.

In a Texas case

50

referring to a reserve fund accumulated by

deductions from sales proceeds, the court said:

It is a corporate fund, a trust fund, and cannot be dissipated until the debts of the corporation have been paid.

Illustrating the fact that when a cooperative association is acting as agent only in the sale of commodities received from its members such commodities are not liable for the debts of the association, a Wisconsin case 51 is of interest. In this case, the association was engaged in the sale, on commission, of cheese manufactured from milk belonging to its members. Money derived from the sale of such cheese was deposited by the association in a bank in its own name and the funds were then garnished on account of a debt owed by the association. The court held that these funds could be subjected to the payment of a debt of the association, only to the restricted extent of the compensation to which the association was entitled for the sale of the cheese. The court pointed out that subject to the right of the association to deduct its compensation, the money was held by the association in a fiduciary capacity, and that the character of the fund was not changed by depositing the money in the personal account of the association.

No reason is apparent why the principle followed in the Wisconsin case would not be applicable in any instance in which an association. is operating on an agency basis. The fact that the "compensation" of an association is obtained under the name of commissions instead of under the name of deductions is unimportant, especially as the commissions are ordinarily deducted from sales proceeds.

In California 52 it was held that raisins in the hands of a grower who was under contract to deliver them to an association could not be seized on account of debts of the grower, because title to the raisins

50 Texas Farm Bureau Cotton Ass'n v. Lennox, 117 Tex. 94, 297 S. W. 743. See also McCauley v. Arkansas Rice Growers' Co-op. Ass'n, 171 Ark. 1155, 287 S. W. 419; Burley Tobacco Growers' Co-op. Ass'n v. Tipton, 227 Ky. 297, 11 S. W. 2d 119; Burley Tobacco Growers' Co-op. Association v. Brown, 229 Ky. 696, 17 S. W. 2d 1002.

51

1 Lambert v. Military Ridge Cheese Co., 179 Wis. 359, 191 N. W. 555; Valley Butter Company v. Minnesota Cooperative Creameries' Ass'n, Inc., 300 Pa. 102, 150 A. 157. For other cases announcing a similar principle see Emigh v. Earling, 134 Wis. 565, 115 N. W. 128, 27 L. R. A. (N. S.) 243; First National Bank of Elgin v. Kilbourne, 127 Ill. 573, 20 N. E. 681; Cable v. Iowa State Savings Bank of Iowa, 197 Iowa 393, 194 N. W. 957; National Bank v. Insurance Co., 104 U. S. 54, 26 L. d. 693; Union Stock Yards National Bank v. Gillespie, 137 U. S. 411, 11 S. Ct. 118, 34 L. Ed. 724, 23 C. J. 352.

52

Sun-Maid Raisin Growers of California v. Jones, 96 Cal. App. 650, 274 P. 557, hearing denied by the State Supreme Court; Merriman v. Martin, 113 Cal. App. 167, 298 P. 95.

had passed to the association. A somewhat similar holding was made in Texas.53 Clearly if commodities may not be seized in the hands of a grower because title to them has passed to an association, it would seem to follow that they might be seized in the hands of an association to satisfy a claim against it.

54

The view that commodities received by an association under a marketing contract which purports to pass title thereto may not be seized by a creditor of the association appears to be based on the contention that the plan contemplated by the marketing contract is essentially agency, inasmuch as such contracts commonly provide for the association to sell the commodities covered thereby either separately or on a pool basis, make authorized deductions, and then account. No case to date apparently has passed on this specific point. To support the view that title has not passed would demand a finding either that the parties did not intend that title would pass for any purpose or that it passed only insofar as this was necessary for business purposes. But as an association as agent may be authorized to do anything that is needful in the handling, processing and sale of agricultural products, it is difficult to see the justification for holding that a marketing contract that purports to pass title to commodities is only an agency contract. Clearly parties should be allowed to determine the character of a transaction into which they enter. It is true that deeds intended by the parties to be mortgages have been held to be such by the courts; but this is in accord with the intent of the parties, and not contrary thereto.55

The amount of all unauthorized deductions or withholdings may not properly be regarded as assets of an association; 56 and even when an association is operating under a purchase and sale contract, money in excess of authorized deductions, arising from the sale of commodities received by an association from its members for purposes of sale, does not constitute a part of the property of the association from the standpoint of a bylaw providing that on the termination of membership the interest of a member in the property of the association shall

53 Texas Hay Ass'n v. Angleton State Bank, (Tex. Com. App.), 291 S. W. 846, reversing decision in 285 S. W. 941.

54

"But see Rhodes v. Little Falls Dairy Company, Inc., 230 App. Div. 571, 245 N. Y. S. 432, aff. in 256 N. Y. 559, 177 N. E. 140; City of Owensboro v. Dark Tobacco Growers Association, 222 Ky. 164, 300 S. W. 350; Texas Farm Bureau Cotton Association v. Stovall, 113 Tex. 273, 253 S. W. 1101, reversing Texas Farm Bureau Cotton Ass'n v. Stovall, 248 S. W. 1109; Texas Certified Cottonseed Breeders' Ass'n v. Aldridge, 122 Tex. 464, 61 S. W. 2d 79, reversing (Tex. Civ. App.), 59 S. W. 2d 320; Johnson v. Staple Cotton Co-op. Ass'n, 142 Miss. 312, 107 So. 2. 55 541 C. J. 310-354.

58 Dryden Local Growers v. Dormaier, 163 Wash. 648, 2 P. 2d 274.

cease.57 In other words, sums like those just referred to have the status of debts of the association; and, moreover, their retention is inconsistent with the nonprofit character of an association and the fiduciary relationship existing between an association and its members. A cooperative may receive money from its members for a specific purpose in pursuance of definite agreements with respect thereto, which money does not become a part of its general assets. This is well illustrated by a case involving an organization formed by persons, engaged in the retail grocery business, to function on a cooperative basis in the wholesale handling of groceries. The association had a bylaw reading as follows:

One percent (1%) shall be added to all statements for the purpose of creating a credit reserve fund. Said one percent (1%) shall be credited to each member's reserve fund account and shall be returnable with interest upon the member ceasing to be a member of the Association; less, however, a pro rata percentage of loss sustained by the Association on account of losses or credit extended to members of the Association.

The association went into bankruptcy and, although the assets of the association were insufficient to pay all its creditors in full, it was held that each of the members of the cooperative was entitled to have returned to him the balance remaining in his account which had been obtained in pursuance of the bylaw.

58

On the other hand, when a corporation issued what was known as participating operation certificates for which the purchasers paid $250 and which entitled them to receive $500, to be paid out of funds obtained by setting aside in a bank 1 cent on each gallon of gasoline and 5 percent on all merchandise sold by each gasoline station concerned; it was held that amounts so set aside, but which were really under the control of the corporation, were part of the general assets of the corporation and were distributable only among creditors of the corporation, other than the holders of the certificates.59 If the statute of a State under which an association is incorporated specifically provides that the products delivered to an association by its members are liable for its debts, no reason is apparent why the

67

Bogardus v. Santa Ana Walnut Growers' Association, 41 Cal. App. 2d 939, 108 P. 2d 52; Mountain View Walnut Growers Association v. California Walnut Growers' Association, 19 Cal. App. 2d 227, 65 P. 2d 80.

58 Warner v. Schoner, 90 F. 2d 579. See also Speh v. Bullard, 90 F. 2d 227; but see Maryland and Virginia Milk Producers' Association v. District of Columbia, 119 F. 2d 787.

59 United States & Mexican Oil Company v. Keystone Auto Gas & Oil Service Company, 19 F. 2d 624. See also Stephenson v. Go-Gas Company, 268 N. Y. 372, 197 N. É. 317; In re Hawkeye Oil Company, 19 F. 2d 151.