fact that generally speaking, a corporation may purchase stock which it has issued. The general rule appears to be that: 84

A private corporation may purchase its stock if the transaction is fair and in good faith, if it is free from fraud, actual or constructive, if the corporation is not insolvent or in process of dissolution, and if the rights of its creditors are in no way affected thereby.

In view of the fact that a corporation may, under the conditions stated in the foregoing quotations, purchase its capital stock, it appears that there should be no doubt of the right of a cooperative to revolve its capital which is evidenced by stock or other certificates, especially as in the usual situation a cooperative would not actually be depleting its capital because the amount of current contributions to capital would be equivalent to the amount of capital which would be retired, thus leaving the cooperative with substantially the same amount of capital after the transaction had been completed that it had prior thereto. In any event, there would appear to be no basis for applying a stricter rule to the retirement of funds in a revolving fund than is applied in an ordinary case involving the purchase of its own stock by a corporation.

As previously indicated, an association may use stock, revolvingfund certificates, or a certificate bearing a different designation to evidence capital in the revolving fund. In fact, it is not indispensable that any form of certificate be issued to evidence such capital, if the bylaws of the association are clear and specific with reference thereto. In any instance in which it is clear that the obligation of an association to its members on account of money furnished by them for a revolving fund is junior and subordinate to the rights of creditors, it is believed that the right of the association to retire any part of the revolving fund is subject to the rights of existing creditors. The law is well-established that a corporation may not retire any part of its capital stock when to do so adversely affects the rights of current creditors to whom the association is indebted.

In a Minnesota case 85 involving a cooperative, it was said:

To the extent that money, goods or stockholders' notes were exchanged for the stock, the capital of the corporation was depleted. The capital was its own

84 Porter v. Plymouth Gold Mining Company, 29 Mont. 347, 74 P. 938, 101 Am. St. Rep. 569. See also Griffin v. Bankers' Realty Investment Company, 105 Neb. 419, 181 N. W. 169; Howe Grain & Mercantile Company v. Jones, 21 Tex. Civ. App. 198, 51 S. W. 24; Atlanta & Walworth Butter & Cheese Association v. Smith, 141 Wis. 377, 123 N. W. 106, 32 L. R. A. (N. S.) 137, 135 Am. St. Rep. 42; Koeppler v. Crocker Chair Company, 200 Wis. 476, 228 N. W. 130.

85 Lebens, as Receiver of the LeSueur County Cooperative Company v. Nelson, 148 Minn. 240, 181 N. W. 350, 352. See also Learmouth v. Caledonia County Co-operative Association, 109 Vt. 526, 1 A. 2d 732.

property, but it could not be withdrawn or distributed among stockholders without provision being first made for the full payment of corporate debts.

In another case a corporation issued what were described as participating operation certificates, for which the purchasers paid $250 and on account of which they were entitled to receive $500, which was to be paid to the holders of these certificates out of funds obtained by setting aside in a bank 1 cent on each gallon of gasoline and 5 percent on other merchandise sold by each gasoline station concerned. The corporation was placed in the hands of a receiver and the court held that, inasmuch as the participating operation certificates obligated the corporation issuing them to make payments on them only out of receipts from operations, the holders of the certificates were not entitled to claim any part of the funds which had been set aside in a bank (apparently subject to the order of the corporation) with a view to ultimate distribution to the holders of the certificates; but, on the contrary, that the funds should be distributed only among the other creditors of the corporation.86

In a case 87 in which a stock corporation issued what were called trade certificates, the corporation issuing them was placed in bankruptcy and the holder of certain of such trade certificates was held on account thereof to be a creditor whose rights were "founded upon an express contract." A certificate entitled its holder to purchase goods of the corporation "at a profit not to exceed 10 percent" and provided that it should be taken into account in the payment of dividends; but the holder was guaranteed the payment of at least 8 percent per annum on the amount of money which he had "deposited" with the corporation. The court said:

The fact that the certificate is payable in merchandise, after the end of two years, on the demand of the holder, in no way detracts from its value as an obligation to pay.

In a Wisconsin case 88 "participating operation certificates" were secured by a deed of trust on real estate. They were payable out of a fund to be created by the deposit in a bank for that purpose of 1 cent for every gallon of gasoline and kerosene sold by the corporation concerned which guaranteed that the certificates would "be paid on or before ten years from the date hereof." The corporation was placed in bankruptcy and its trustees sold the real estate "subject to all legal liens and encumbrances." The purchaser contended that it took title

86 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. E. 317; In re Hawkeye Oil Company, 19 F. 2d 151.

87

88

In re Spot Cash Hooper Company, 188 F. 861, 863.

Kettenhofen v. Sterling Oil Company, 226 Wis. 178, 275 N. W. 425.

free from the deed of trust securing the certificates. It was urged that the holders of participating operation certificates had the status of "stockholders, profit-sharers, and coadventurers," and not that of creditors, but the court held that as there was a definite promise to pay the certificates on or before 10 years from date the relation between the corporation and the holders of certificates was that of debtor and creditor and that the holders were thus entitled to the security afforded by the deed of trust. On the other hand where participating operation certificates did not have a maturity date and were by their terms payable only out of proceeds arising in the operations of the business, it was held in bankruptcy that the holders of such certificates were * coadventurers * "not creditors, but * *." and that the rights of such holders were "subordinate to those of general creditors." 89

*

While the writer is of the opinion that the revolving-fund plan of financing may be adopted under the laws of any State, and that such a plan constitutes a valid contractual relationship for which there need be no specific statutory authority, the fact that some States have specifically authorized such a plan 9o is some indication of the increasir.g recognition given to this cooperative device.

90

Although a member may have withdrawn from an association, this does not give him a right to receive his interest in a revolving fund, except at the time and in the manner stated in the bylaws.91

Whether blue-sky laws of a given State are applicable to revolvingfund or other like certificates is a question which should be inquired into in every instance. In a Wisconsin case 92 it was held that the corporation involved was prohibited from offering for sale certain socalled good-will contracts unless and until a permit had been issued by the Railroad Commission of the State. In this case the court pointed out that the good-will contracts were neither stock on the one hand nor bonds on the other, but held that this did not prevent them from being a security within the definition of the statute.

89 In re Hawkeye Oil Company, 19 F. 2d 151, 152. See also G. B. McAbee Powder & Oil Company v. Penn-American Gas Coal Company, 295 F. 630.

90

Iowa Code of 1935, secs. 8512-g30, g33; 1939 Supplement, Utah Revised Statutes, sec. 2-0-9.

91 Reinert v. California Almond Growers Exchange, 9 Cal. 2d 181, 63 P. 2d 1114, 70 P. 2d 190; Parker v. Dairymen's League Co-operative Association, Inc., 226 N. Y. S. 226, 222 App. Div. 341.

92 Brownie Oil Company v. Railroad Commission, 207 Wis. 88, 240 N. W. 827, 87 A. L. R. 33. See also State v. Gopher Tire & Rubber Co., 146 Minn. 52, 177 N. W. 937, 938.

Courts have not infrequently been perplexed as to the character of particular forms of certificates which were before them, primarily because of their hybrid character and their ambiguous provisions.93

On principle it is believed that certificates issued by cooperative associations, irrespective of their designation, should be subordinate to the rights of general creditors for the reason that the members should finance and bear the risks of their own enterprise. The real status of certificates issued by an association should be apparent on their face.

Associations Operating in Various States

MAY

an association formed under the laws of one State do business in other States? At the outset it may be said that generally speaking the power of a corporation to act outside the State of its creation need not be expressly conferred, but may be implied; provided, of course, the State in which a foreign corporation does business consents, and also provided there is no restriction in its charter. The charter of a corporation is the same abroad as it is at home, and whereever it goes for business it carries its charter as the law of its existence. When a State permits a foreign corporation to come within its borders, it is presumed to have consented that the corporation may exercise all the power conferred by its charter and the laws pertaining thereto, unless prohibited from so doing by some direct enactment of the State or some rule of public policy.9

94

If an association desires to enter into marketing contracts with producers in States other than that in which organized, must the association comply with the laws of those States respecting foreign corporations? All the States, it is believed, have statutes relative to foreign corporations doing business within their borders. If a cooperative association formed in one State enters into marketing contracts with producers in another State, and the products covered by the contracts on delivery to the association are to be moved out of the State or delivered to the association outside the State in which grown, then it seems clear that an association would not be required to comply with the laws of the State with respect to foreign corporations.

93 28 Columbia Law Review 65.

95

*Milton-Freewater & Hudson Bay Irrigation Co. v. Skeen, 118 Ore. 487, 247 P.

756, 761.

95 Currin v. Wallace, 306 U. S. 1, 59 S. Ct. 379, 83 L. Ed. 441; but see Gwin, White & Prince, Inc. v. Henneford, 193 Wash. 451, 75 P. 2d 1017.

The situation would involve interstate commerce, and the Supreme Court of the United States has held that a corporation of one State may purchase goods in another State for shipment out of the State without the consent of the latter. The following quotation is taken from an opinion of the Supreme Court of the United States.

A corporation of one State may go into another, without obtaining the leave or license of the latter, for all the legitimate purposes of such commerce; and any statute of the latter State which obstructs or lays a burden on the exercise of this privilege is pro tanto void under the commerce clause.

Where goods in one State are transported into another for purposes of sale, the commerce does not end with the transportation, but embraces as well the sale of the goods after they reach their destination and while they are in the original packages. Brown v. Maryland, 12 Wheat, 419, 416–447; American Steel & Wire Co. v. Speed, 192 U. S. 500, 519. On the same principle, where goods are purchased in one State for transportation to another the commerce includes the purchase quite as much as it does the transportation.

In no case has the court made any distinction between buying and selling or between buying for transportation to another. State and transporting for sale in another State. Quite to the contrary, the import of the decisions has been that if the transportation was incidental to buying or selling it was not material whether it came first or last.

97

In a Nebraska case it was urged that a cooperative association incorporated under the laws of Kansas could not maintain a suit in Nebraska because the association had not complied with the laws of that State respecting foreign corporations, but the Supreme Court of Nebraska held that the association was engaged in interstate commerce and hence was not required to comply with the laws of Nebraska affecting foreign corporations.

A number of the States have provisions in their statutes which specifically refer to cooperative associations formed in other States.98 For instance, two provisions from the laws of Indiana 9 illustrative of this matter read as follows:

(1) Before any foreign corporation without capital stock and not for pecuniary profit shall be permitted or allowed to transact business or exercise any of its corporate powers in the State of Indiana, it shall be required to file in the office of the secretary of state a copy of its charter or articles of incorporation, duly certified and authenticated by the officer who issued the original, or the officer with whom the original was filed or recorded.

*

98 Dahnke-Walker Milling Co. v. Bondurant, 257 U. S. 282, 283, 290, 291, 42 S. Ct. 106, 66 L. Ed. 239. See also Currin v. Wallace, 360 U. S. 1, 59 S. Ct. 379, 83 L. Ed. 441.

"Nebraska Wheat Growers' Ass'n v. Norquest, 113 Neb. 731, 204 N. W. 798. 98 Laws of New York 1926, ch. 231.

"Acts of 1921, p. 117.