Layton v. Hough

REYNOLDS, P. J.

(after stating the facts). — The claim of the executor of Mr. McCormack is, that having purchased these notes, he had acquired their collateral, the stock, and that that purchase carried with it the right to any dividend which had been declared in favor of stockholders, here 18 per cent. The assignee claims that he never pretended or intended to sell the shares of stock to Mr. McCormack; that he never did sell them; that he had no power-to do so, and that Mr. McCormack is charged with notice of the law, which the assignee claims is that the purchase of these notes did not carry with it the stock. He further claims that appellant is barred by the laches of his testator and that to now compel him to pay an amount largely in excess of funds in his hands as assignee, he having paid out the 18 per cent dividend on the allowed claims, stock and otherwise, would be inequitable.

"While the important point for consideration here is whether the stock certificates evidencing membership in the- company, pledged as collateral to the notes, passed to Mr. McCormack by purchase of those notes, there are other questions presented which demand some attention. Thus, lack of diligence o.n the part of Mr. McCormack in presenting his claim; failure to take any ex- *223 eeption or appeal from the action of the assignee in excluding these claims from his report (see sections 447, 448, R. S. 1889; 918, 919, R. S. 1909) or to the order of the court for payment of dividends, from which order the makers of the notes which he bought were excluded. A defect of parties is also urged, it being claimed by the assignee that to reopen the order for payment of the 18 per cent dividend would .require either that the assignee pay claimant out of his own funds, or that those who had been paid the 18 per cent dividend under order of court would be required to refund, as, with the McCormack claim included, 18 per cent could not be paid.

It is urged by counsel for appellant that this is purely a statutory proceeding and not in equity,-and that it does not involve marshaling of assets or the adjustment of the claims of creditors. Two decisions are relied upon for this. One is Universal Lock & Stopper Co., Bowman, Assignee, v. Blake & Johnson, 84 Mo. App. 478 . In that case, it is true, this court treats a proceeding under section 356, R. S. 1899, now section 929, R. S. 1909, as entirely statutory. It is to be said of that case, however, that the company involved was not one of these building and-loan companies, and hence that decision is hardly controlling here. We may concede, although not deciding, that the proposition is correct in ordinary assignments made by individuals or business corporations, but hold that it does not apply here, to the exclusion of equitable defenses. In the other case (In re Heath’s Assignment, 136 Mo. App. 347, 1 . c. 352, 117 S. W. 125 ), the Kansas City Court of Appeals held that the proceeding was purely statutory and not equitable. The ease there under consideration, however, was the assignment of an individual, and what we have just said of the Universal Lock & Stopper Company case applies to it.

The latter court in Sappington v. Aetna Loan. Co., 76 Mo. App. 242 , had itself held that the law merchant *224 does not apply to these companies. Even in the administration of statutory provisions, equitable rules of procedure are often followed, as- for example in divorce proceedings. We remark that even under our statute, and before the amendment by the Act of 1901, which prohibited assignments, the spirit of our law, as shown by the decisions of our own courts and by the courts of other jurisdictions and by an accepted text-writer on the subject, always has been to treat these incorporated building and loan associations more in the nature of partnerships, and in their settlement when bankrupt, either through an assignee or a receiver, to apply the principles of equity pertaining to partnerships, and to settle their affairs according to equity. This is notably so in Pennsylvania, as see Christian’s Appeal, 102 Pa.' St. 184,1. c. 188. Such is the rule in Massachusetts. Referring to a co-operative bank, an institution which has many of the elements of building and loan associations, when the latter are incorporated under our laws, as is the one here, it is said by the Supreme Judicial Court of Massachusetts, in Atwood v. Dumas, 149 Mass. 167 , l. c. 169, that these co,-operative institutions seem at first to have appeared as voluntary unincorporated associations and that the incorporation of them “simply facilitates carrying out the purposes for which they are formed: on the one hand, of advancing the funds contributed by the members to such of them as make the best offers; and-on the other, of dividing the profits, if any, among the shares.” That is very much the character of our incorporated building and loan associations. See also for a description of these associations, Lovelace v. Pratt, 163 Mo. 70 , l. c. 75, 63 S. W. 383 , quoting approvingly State of Minnesota v. Redwood Palls Building & Loan Association, 45 Minn. 154 .

In Endlieh on Building Associations (2 Ed.), sec. 364, the author cites Hammerslough v. Kansas City Building, Loan & Savings Association, 79 Mo. 80 , as a case,which, while not expressly touching upon the ques *225 tion as to whether these associations are to he treated as copartnerships, yet as tending to apply to- them the character of copartnerships. That author says (section 365) that an examination of the decisions which he has cited would seem to justify the conclusion “that the clear weight of judicial authority declines to look upon the transaction between a building association and its advanced member as constituting a loan pure and simple.” At section 366 he says that when the question of the character of loans made between the association and its members comes up, and where the contract of loan is a valid contract, “it is invariably made up of those two essential and nicely balanced elements, that of a loan, and that of á venture with partnership funds, the outcome of which is indeterminate at the time of its inception.” Since the decision in the Hammer-slough case, supra, our courts have, as we think, fallen in line with what Mr. Endlich holds to be the weight of authority on this question.

Our own court in Reitz v. Hayward, 100 Mo. App. 216 , l. c. 226, 73 S. W. 374, has said, quoting authorities in support of it, “the underlying idea of building and loan associations is mutuality of losses and pro'fits by all shareholders, who are, in a sense, partners, as has been many times decided. ’ ’ So also it is held in Brown v. Arches, 62 Mo. App. 277 , l. c. 292, and Woerheide v. Johnston, 81 Mo. App. 193 , l. c. 197. In this latter case our court adopts the opinion of Judge Gantt in the same case, rendered in the Supreme. Court before it had been called to the attention of that court that it was a case not within its jurisdiction. In the opinion of Judge Gantt is this (1. c. 198): “A building and loan association while peculiar in its features is nevertheless a business corporation and when its affairs become so tangled that it can no longer subserve the purposes of its incorporation its affairs may be wound up by a court of equity and its assets marshaled and distri *226 Tbuted, but no good reason appears to us why it may not also make an assignment of its assets and under the direction of the court have its assets distributed by an assignee.” That is the rule announced by the Supreme Court of Pennsylvania in Christian’s Appeal, supra, 1. c. 189, where it is said that while the usual method of administering the assets of an insolvent association is through the instrumentality of a receiver, an assignment is equally efficacious. So it is held in the Massachusetts case of Atwood v. Dumas, supra.

The rule that we gather' from these decisions is that while under our law as it stood prior to 1901, an assignment by these associations might be made, when the courts undertake to settle questions arising between the note-making member and the company or its assignee, they apply to those questions equitable principles, and practically treat the assignee as a receiver appointed by a court of equity, and determine all matters affecting the member and the corporation not strictly as a statutory proceeding under the assignment law, but as one to which equitable principles are to be applied. So that when, under the provisions of the act of March 6, 1901, assignments by these companies was prohibited and their affairs required to be wound up by a supervisor under direction of the court, it really did no more than to enact into law what had been before then adopted by the courts as the rule even under assignments; that is, recognize the application of equitable rules to the adjustment of their affairs. The appellant himself recognized this in the circuit court, having by his own motion had the cause changed from the law docket of the circuit court to the equity docket.

Considering the defense of laches, we hold appellant’s testator was guilty of such laches in the presentation and prosecution of his claim and the omission to promptly take necessary steps to bring it to the attention of the court, as to debar him from now assert *227 ing a claim to participation in any declared dividend. He permitted this assignee to distribute the bulk of this assigned estate to those to whom he had allowed claims and who were recognized as entitled to it by the court and those to whom the court ordered it to be distributed. To charge back to the assignee' or to the stockholders, who have received more than they otherwise would have received, under the circumstances of the case, would be grossly inequitable as to the assignee, and if we are to attempt to charge it back to those who received their dividends and call on them to refund, it is a sufficient answer to say that they are not before the court.

Turning to the most important point in this case, which is whether with the sale of the notes any right or interest in the stock membership or stock certificates passed to the purchaser, we hold it did not. As stated in the cases before referred to, these building and loan associations are peculiar. They are conducted entirely on the mutual plan. The stockholders are members, not only in the usual sense of stockholders, but are partners with each other; the corporation is in the nature of a co-operative association. Mr. McCormack purchased the notes of certain members, to which the stock of those members was pledged as collateral. It is said that certain real estate, also up as collateral, went with the sale of the notes, and the court ordered a sale of this along with the notes. No question is here made as to the propriety of that order, although it is rather curious, for neither the corporation nor its assignee owned the real estate but merely held and owned unforeclosed mortgages or deeds of trust on the real estate, although it was the real estate covered by the deeds of trust and the shares of stock which were pledged as collateral to the notes. These pieces of real estate, however, that is, the assignee’s interest in them, were offered for sale, separate and apart from ■the notes. The notes were first offered and McCor *228 mack bid one hundred dollars for each of them. His bid was not accepted. Then the real estate, not the deeds of trust, was offered and McCormack bid a specific amount for each piece. This bid was not accepted. Thereupon the notes and real estate were offered together and in a lump, and Mr. McCormack’s bid for all of the notes and real estate, being slightly higher than his separate- bids, was accepted. It does not seem to be claimed here that if any one, other than Mr. McCormack, had bid more than he for the real estate, that McCormack, purchasing the notes, was entitled to the real estate. To the contrary, the action of the parties and of the court seems, to show that no one considered that title to the real estate under mortgage, the mortgages also covering the stock, all pledged as. collateral to the notes, passed with the sale of the notes. Why then, in the absence of any representations to the effect, and none is pretended, should it be assumed that the sale of the notes carried with it sale of or title to the stock certificates any more than to the real estate1? The acts of the parties are pretty clear indications of their understanding.

It is true that under the'law merchant, the purchase of a note carries with it its collateral. That law is always applied to negotiable notes as well as nonnegotiable. But we do not think that it applies to the notes of these building and loan companies. These notes, if correctly called so, are nbn-negotiable. It will be remembered that among other provisions in them is the promise to carry .the stock until the loan is fully paid, “with all the penalties on said stock, according to the by-laws and prospectus of said company.” Under the decision of our Supreme Court in First National Bank of Trenton v. Gay et al., 63 Mo. 33 , l. c. 37, like words in a note were held to destroy its character as a negotiable instrument, referring to Ayrey v. Fearnsides, 4 M. & W. 168, where the words employed were to pay “all fines according to rule.” Other de *229 cisions of our Supreme Court are to the same effect. See, inter alia, First National Bank of Carthage v. Marlow, 71 Mo. 618 , where it is held that a stipulation to pay attorney’s fees rendered the instrument neither a bond, bill of exchange nor promissory note; see also McCoy v. Creen, 83 Mo. 626 , l. c. 633.

The statute itself regulating these companies, when providing in what is now section 3392., R. S.. 1909, that they are non-negotiable, does no more, than put into the statute a construction that had long before been applied by the courts, in holding that notes, given to these companies, are not -commercial paper. [See Sappington v. Aetna Loan Co., supra.] By the statute it is provided, that “for every loan or advance made as aforesaid, a non-negotiable note or a'bond secured by first mortgage or deed of trust on real estate shall be given, accompanied by a transfer and pledge of the shares of stock of the member or members so obtaining a loan or advance. Said shares, so transferred and. pledged shall be held by (the) corporation as additional or collateral security for the performance of the agreements, covenants and conditions of said note or bond and mortgage or deed of trust. ” As we construe this term “non-negotiable,” as applied to those building and loan companies, it means non-assignable.

It has always been held by our courts, that these notes themselves, in the hands of the company itself, then a going concern, are not assignable by the corporation. [Lovelace v. Pratt, supra, l. c. 76.] In Cobe v. Lovan, 193 Mo. 235 , l. c. 242, et seq., 92 S. W. 93 , it appears that such a company, then in articulo mortis, attempted to sell the notes of its members to another corporation, and our Supreme Court held that it could not do that, although in Pennsylvania it was held that in winding up its affairs, title to the notes and their collateral passed to the assignee. [Early & Lane’s Appeal, 89 Pa. St. 411, l. c. 416.] Hence we hold, following what we understand to be the spirit of our stat *230 ute and decisions, that save in the event of the liquidation of one of these companies., when the notes go to the official liquidator or assignee, these notes are not assignable and the assignee had no power to sell them.

It is clear, when we consider the organization of these associations, their purposes, and the whole scheme, that appellant’s testator by purchase of these instruments, call them notes for brevity, did not acquire the stock, did not become a stockholder in the defunct corporation and was not entitled to participate in any dividend going to stockholders. On his own theory .that he had title to the notes, he took after maturity of these notes and after default, so that even conceding for argument that he could become owner by purchase, he took subject to all equities and could obtain no higher or better rights than the maker of the instrument. It is admitted in the agreed statement that as to none of the makers of the notes, if claiming dividends, would those makers be entitled to a dividend if the notes had not been sold. This admission would seem, of itself, to put appellant out of court.

On all these considerations we hold that the judgment of the circuit court in overruling the motion of appellant’s intestate was proper, and that judgment is affirmed.

Nortoni and Caulfield, JJ.,- concur, the former in the result.