Opinion
Decided April 30th, 1937.
1. Defendant society loaned $5,000 of its assets of $5,648.22 held in trust for complainants, a branch organization, to officers of the society who were of no financial responsibility, without proper security. When the branch membership protested and called on the society repeatedly to collect the loans, the society made no serious attempt to do so. Held, there had been gross mismanagement of the financial affairs of the society, justifying the branch membership in terminating its relations and in setting up an independent organization.
2. The society wishes to continue and the branch desires to function under its new organization. Both should be permitted to exist and a dissolution of the society and the appointment of a receiver to take possession of its assets is deemed inadvisable. On a division of asssets, each organization may take its share and use it for the benefit of, or divide its portion among its membership.
3. The branch membership is entitled to have paid to it a just proportion of the assets which it had helped create. The division should be made as of the date the branch separated from the society, the society and the branch having been in existence practically the same number of years; and it appearing that as to individual years of membership and individual contributions, the membership of the two bodies was probably on a par, a fair division of the assets of the society as of the date of the separation would be at the ratio that the membership of each body bore to the total membership. The branch is entitled to have its share paid to it by the society in cash, leaving it to the society to realize on the loans which formed part of the assets and which were improperly made.
On appeal from a decree of the court of chancery advised by Vice-Chancellor Fielder, who filed the following opinion:
"The defendant, hereinafter called the Society, was incorporated in 1913 under the Non-Pecuniary Association act, as a social and benefit association with its principal place of business at Perth Amboy. A few months thereafter a branch was established at New Brunswick of which complainants, one hundred and six in number, were members. The complainants will hereafter be called the Branch. The Society operated under a constitution and by-laws and elected its officers by vote of the Perth Amboy membership, the members of the Branch having no voice therein or in the management of the affairs of the Society. Meetings of the Society were held monthly and the Branch was entitled to send representatives to semi-annual meetings of the Society only. The Branch was not an incorporated organization and elected its officers from its own membership. Under the constitution and by-laws of the Society, all members were subject to assessment of fifty cents a month for sick benefit dues; $1 each upon the death of a member and fifty cents upon the death of the husband of a member. The financial secretary of the Branch collected dues and assessments from its members and sent the same to the Society and all benefits for members of the Society and the Branch were paid out by the Society. In January, 1933, representatives of the Branch present at a semi-annual meeting of the Society learned that the financial affairs of the Society had been mismanaged in that nearly all of the surplus funds of the Society had been loaned to Society officers, whereupon the representatives made protest to the Society, whose officers promised to refrain from renewing the loans and to collect and account therefor but they failed to do so and in September, 1934, the Branch seceded from the Society and on December 12th, 1934, the complainants filed their bill of complaint in this cause praying a receiver for the assets of the Society who should divide such assets among all the members thereof.
"The cause was heard November 7th, 1935, and the evidence showed that in 1929, when the total assets of the Society were $5,648.22, the Society made the following loans: to Mrs. Faubel, its president, $2,000 on her endorsed note; to Mrs. Gaydos, its financial secretary, $1,000 on her endorsed note; to Mrs. Pavel, its recording secretary, $1,000 on her note secured by second mortgage on property owned by herself and husband; to Mrs. Gecze, its treasurer, $1,000 on her note. That said loans had been made was known to the members of the Society because a record thereof appears in the minutes of its meetings but the fact was not made known to the members of the Branch and no mention of loans was made in the Society's annual financial statements, wherein the assets of the Society were shown as cash on hand. It was not until January, 1933, that representatives of the Branch, attending a meeting of the Society, learned of the loans of Society's fund and they made protest at that meeting and urged that the loans be collected forthwith. Up to that time nothing had been repaid the Society on the loans and on some, if not all, interest was in arrear. At that meeting it was agreed that no further time for payment should be given the debtors and that steps to collect the loans would be taken immediately. The representatives of the Branch reported to their officers what they had learned at the Society meeting but the facts were not reported to the Branch members, because the Branch was then contemplating a membership drive and it was hoped that the Society would proceed promptly to collect the loans. However, the facts were made known to the members of the Branch in December, 1933, and at a meeting of the Society in January, 1934, representatives of the Branch inquired about the loans and were informed that nothing had been collected and that time for payment had been extended to some of the debtors. The representatives of the Branch again protested the loans and the members of the Society again agreed to see that they were paid and not renewed. Representatives of the Branch attended each monthly meeting of the Society thereafter up to July, 1934, and urged collection but nothing was collected. They were then denied the right to appear at any meetings of the Society except semi-annual ones, whereupon and because the loans had been made and the Society had neglected to take action to collect on them, the Branch, in August 1934, refused to pay further dues or assessments to the Society and the following month the members of the Branch formed an independent organization. As stated in the Society's answer filed herein, the members of the Branch were expelled from membership in the Society and their privileges, rights and benefits therein were declared forfeited.
"Thereafter suit was brought by the Society against Mrs. Faubel and the endorsers on her note, which suit the endorsers contested, but judgment was recovered against them for the full amount of principal and interest, which judgment was subsequently satisfied and the Society paid $650 collection fees to its attorney. Neither principal nor interest had been collected on the Gaydos note up to the time this cause was heard. On the Pavel note secured by second mortgage, the debtor commenced monthly payment of $10 January, 1935, and at the time of the hearing $900 was still due from her. Taxes on the property covered by her mortgage were two and a half years in arrear and no payments on her first installment mortgage had been made since 1932. Suit was commenced on the Gecze note and prior to the hearing $650 had been collected from her endorsers at an expense of $50 for attorney's fees and the suit was discontinued on the debtor's promise to pay the balance in installments.
"At the conclusion of the hearing it was my opinion (and still is) that there had been gross mismanagement of the financial affairs of the Society, in that $5,000 of its assets of $5,648.22 held in trust for members of the Branch, had been loaned to Society officers who were of no financial responsibility, without proper security and that when the Branch membership had protested and called on the Society repeatedly to collect its loans and the Society had made no serious attempt to do so, the Branch membership was justified in terminating its relations with the Society and in setting up an independent organization and was entitled to have paid to it a just proportion of the assets which it had helped create and I so stated to counsel for the parties. I requested suggestions from them as to how the assets should be divided. Counsel for complainants proposed no plan which could be justified on the evidence taken before me, while counsel for defendant offered no suggestion and urged that the Branch should receive nothing. I then requested counsel to produce evidence on which I could make a finding for what I might consider a proper apportionment of assets but it was not until about a month ago that counsel filed a stipulation wherein certain facts are agreed to and although the stipulated facts are meager, those facts and the evidence produced at the hearing must be the basis for my decision on apportionment.
"The members of the Society and the members of the Branch are the ones concerned in the assets in question. I did not (and do not) deem it advisable to order dissolution of the Society and appoint a receiver to take possession of the assets and leave it to him to take testimony to ascertain each member's proportion thereof, based on years of membership and the amount each member has contributed to the Society either directly or through the Branch. The Society wishes to continue and the Branch desires to function under its new organization and both should be permitted to exist. On a division of assets each organization may take its share and use it for the benefit of, or divide its portion among its members.
"I think the division should be made as of September, 1934, the date the Branch separated from the Society. The stipulation shows that on that date the assets of the Society consisted of $5,000 in notes held as evidence of loans; $757 cash on hand and in possession of the Society and $430.50 cash in possession of the Branch. The three items total $6,187.50 which sum I think should be the total assets subject to division. (The stipulation shows another item of `$750, value of flags, c.,' as an asset of the Society but I have nothing before me to show what the item means and I disregard it.) The Society and the Branch have been in existence practically the same number of years and it is stipulated that in September, 1934, the Society had one hundred and thirty-five members and the Branch had one hundred and thirty-one members. While there is nothing to show the fact, it is probable that as to individual years of membership and individual contributions, the members of the two bodies were on a par. I think a fair division of assets would be at the ratio of the membership of each body bore to the total membership, that is, that the Branch should have 131/266 of the total assets of $6,187.50 or $3,047.20, and since it has possession of $430.50 of the total assets, it is entitled to have $2,616.70 ordered paid to it by the Society in cash, leaving it to the Society to realize on the evidence of loans it made improperly."
Mr. Lewis S. Jacobson, for the defendant-appellant.
Mr. Edmund A. Hayes, for the complainant-respondent.
The decree appealed from will be affirmed, for the reasons stated in the opinion filed in the court of chancery by Vice-Chancellor Fielder.
For affirmance — THE CHIEF-JUSTICE, TRENCHARD, LLOYD, CASE, BODINE, DONGES, PERSKIE, HETFIELD, DEAR, WELLS, WOLFSKEIL, RAFFERTY, COLE, JJ. 13.
For reversal — PARKER, HEHER, JJ. 2.