Summary
In New Jersey Bldg. Loan Inv. Co. v. McNulty, 71 A. 493, the court says that `these provisions as to the right to withdraw, and the terms upon which such withdrawals are to take place, are dependent upon the association being a going concern.
Summary of this case from Kansas Credit Union League v. RedmondOpinion
10-12-1908
NEW JERSEY BLDG., LOAN & INV. CO. v. McNULTY.
Barton B. Hutchinson, for complainant. Charles T. Cowenhoven, for defendant.
Suit by the New Jersey Building, Loan & Investment Company against Anthony McNulty to foreclose a mortgage. Decree of foreclosure.
The following is the opinion of Special Master Rellstab, appointed to report on exceptions to the master's report:
"The complainant is a building and loan association in the course of liquidation. The defendants are shareholders and borrowing members of said association. The association advanced them $2,000 on their shares of stock, and, to secure this loan, the defendants gave it their bond and mortgage for that amount, and, as additional collateral, assigned to it their shares in such association. The complainant is foreclosing said mortgage, and the master, to whom the case was referred with directions to ascertain the amount due upon said mortgage, reported that said defendants should, in addition to the principal and accrued interest of said loan, be charged $64 on account of operating expenses and $56.83 in reduction of the book value of the defendants' shares of stock, and that they should be credited with all payments made by them as dues, interest, and premiums (being all the payments made by them to said association on account of such shares and loan), and also with the sum of $52.64 dividends declared. The master found that there was due to the complainant on the date of his report the sum of $1,029.19. To this finding the defendant excepted.
"These exceptions, in terms, are as follows:
"'First Exception. For that the master having reported that the said defendants should be charged with the sura of $64 for expenses, in addition to legal interest on the said bond and mortgage, and that defendants insist that it is contrary both to law and equity to so charge them with such expenses.
"'Second Exception. For that the said master having reported that the said defendants should be charged with the sum of $56.83, as a reduction charge, in addition to legal interest. And said defendants insist that it is illegal to charge them with said sum, and that no such charge can be made in ascertaining the amount due on the said bond and mortgage.
"'Third Exception. For that the said master in his report has failed to credit the said defendants on the mortgage debt, with the value of the stock, the shares of which were assigned as collateral security to the mortgage debt, as set forth in the complainant's bill of complaint, as in equity said master should have done.
"'Fourth Exception. For that the value of said stock was not ascertained by sale and credited on the said bond and mortgage before the said master by his report ascertainedthe amount for which the mortgaged premises should be sold. And the said defendant claims the right to require that the said stock should be sold by the complainant, and the proceeds applied to the payment of the amount due on the said bond and mortgage, before recourse is had by the complainant to the said mortgaged premises.
"'Fifth Exception. For that the said master in his report should have credited on the said bond and mortgage only the interest that had been paid on the said bond and mortgage, and the premiums that had been paid at the rate of $10 paid monthly for 89 months, together with interest on said premiums so paid, and the said master erred in crediting the said bond and mortgage with the whole amount that had been paid for dues, interest, and premiums, and also a certain sum amounting to $52.04, stated to be for dividends allowed, and the said defendants claim that, on account of the matter mentioned in this exception, the said master has not reported properly in accordance with the principles of equity.'
"The master in his findings acted upon the theory that in this foreclosure all the rights of the parties, whether arising out of the defendants' relation to the association as shareholders or as borrowers, should be settled. The exceptions are predicted on a like theory; the exceptants contending, however, that the master erred in the application thereof to the defendants' prejudice. The first and second exceptions attack the debit side, and the remaining exceptions the credit side of the master's computation. I am of the opinion that the theory adopted by the master and approved by the exceptants is untenable as far as this foreclosure is concerned.
"As to the first and second exceptions, there is nothing in the bond and mortgage that requires the obligors to pay any portion of the running expenses of the association. This liability is created by article 18 of the association articles and by-laws, but it is expressly limited to the stock, and section 1, as amended, directs that five cents be deducted from the monthly installment on each share of such stock; and section 4 directs that one per cent. of the maturity par value shall be deducted from the first yearly payment. These shares of stock owned by the defendants are properly chargeable with their proportionate share of such expenses, but in this controversy, which relates only to the defendants' liability as borrowers, such expenses amounting to $04 may not be added to the loan. The reduction charge of $50.83, being a reduction of 14 1/2 per cent. in the book value of the shares, is untenable for the same reason. Both these expenses and reduction charges relate only to the value of the shares, and are not to be considered in a foreclosure suit, where the rights of the defendants as shareholders are not necessary to be adjudicated.
"The third and fourth exceptions charge that the master failed to credit the defendants' mortgage debt with the value of the stock which the complainant held as collateral security for the payment of such loan.
"The master credited such debt with 89 monthly payments of dues, interest, and premiums, which was all that they had paid into the association, either as borrowers or shareholders, also the whole of the dividends allotted on their shares. The value of the shares could be no more than had been paid on account thereof plus their share of the net earnings. If the defendants were entitled to a credit on their bond of the value of their shares, the master's allowance exceeded the value of such shares, for the evidence taken in this cause shows that the dividends declared were made on the supposition that the premiums paid by the borrowing members as well as the earnings therefrom were assets of the association to be distributed among the shareholders.
"In Harris v. Nevins, 68 N. J. Eq. 684, 63 Atl. 172, the Court of Errors and Appeals held that 'in the computation of the amount payable upon a mortgage made to a building and loan association by one of its members, and which has become due by reason of the insolvency of the association, the mortgagor is entitled to have credited upon the principal of the mortgage all sums paid by him as premiums for the loan.' It follows as a necessary deduction that, if the association had not considered the premiums paid by borrowers as assets of the association, the dividends allotted on the defendants' shares would have been considerably less than declared. By the assignment of the defendants' shares to the association as collateral security for the payment of said loan, indorsed on the defendants' said bond, the association was authorized to make sale or withdraw the same in case the defendants defaulted in payment of dues, interest, etc., and to apply the proceeds of such sale or withdrawal to payment of said loan. This authorization, as well as the obligation of the bond and mortgage of the defendants to pay dues and premiums, was of force only as long as the association was a going concern. In Weir v. Granite State Provident Association, 56 N. J. Eq. 234, 38 Atl. 643, approved in Nevins v. Harris, supra, it was considered as settled law that in case of bonds and mortgages given by borrowing members of such association which afterwards became insolvent that such insolvency worked a rescission of the contract, and that the sums borrowed became immediately due and payable, regardless of the terms of payment fixed by the contract. By the assignment to the association of such shares as additional collateral for the payment of the mortgage debt, such association had the right in case the loan became due to resort to either the mortgaged premises or such stock for the collection of such debt, or to bothif it became necessary so to do. In such case the defendant could not control the association as to which collateral should be first enforced. In what respect is their position superior now that the association is insolvent? There is nothing in the terms of their contracts, as borrowers or shareholders that entitles them to first have their shares of stock disposed of before the mortgaged premises are resorted to. Before insolvency, the association had the right to waive any default of the borrowing members and extend the time of payment. With the advent of insolvency, however, the duty to convert the assets into cash in order to liquidate its obligations became imperative. While the association was a going concern, the value of the outstanding shares was a mere matter of bookkeeping. The total of installments paid on the shares plus net earnings constituted the value of all the shares, and the value of any given number of shares was easily determined by computation. Insolvency, however, changed all this. Considerable of what were assets before are now liabilities. Before insolvency, all premiums paid by borrowers and the earnings therefrom belonged to the shareholders, and were so treated and formed a part of all dividends that had been declared on the stock. Not so after the advent of insolvency. From that time under the cases last cited, all premiums paid by borrowers with interest had to be credited on their loans. All previous declarations of dividends, which entered into the book values of the shares, are now proven to be erroneous. A new listing of assets and restatement of values must be made, and, as a closing up of the association's business is now the only thing left, such values cannot be determined till all the assets shall have been collected, the costs of liquidation paid, and the amount left for distribution among the shareholders ascertained.
"In Weir v. Granite, etc., Ass'n, supra, a similar claim was denied. In that case the insolvent association held the stock of the borrower as collateral security. The borrower sought credit for the dues paid by him on such stock. V. C. Reed held that the borrowing member was not entitled to credit on the mortgage debt for any of the dues paid on account of the shares of stock, and that the only equitable rule is to require such borrower to await the final distribution of the assets of the association, and then take what his shares are proved to be worth.
"In Hoagland v. Saul (N. J. Ch.) 53 Atl. 704, it was held: 'On foreclosure of a mortgage given to a building and loan association, the stock held by the mortgagor, and assigned as collateral to the mortgage, should be sold, and the proceeds credited on the mortgage debt, before recourse to the mortgaged premises.'
"This holding, and the reasoning of V. C. Gray in support thereof, to my understanding is contrary in principle to the holding and reasoning of V. C. Reed in Weir Case, supra. The facts in both cases were substantially alike. Both associations were insolvent; both defendants were borrowing members; both had paid dues, on account of the stock as well as interest and premium on the loan; each sought to obtain credit on the mortgage debt for such payment of dues. In both cases the right to credit the dues on such debt was denied, but in the Saul Case the learned Vice Chancellor practically allowed such credit by requiring the stock held as collateral to be sold, and the proceeds to be applied to such debt before the taking of final decree. In this latter case the learned Vice Chancellor sought to adjust the rights of the defendant as a shareholder as well as a borrower, seemingly overlooking the distinction between the two clearly pointed out in the Weir Case and the conclusion there reached that the borrowing members' rights as a shareholder were in no respect superior to those of a nonborrowing shareholder, and that the borrower must, like them, await the final wind-up of the insolvent association before obtaining the value of their shares of stock. By section 2, art. 14, of association's articles, it is provided that shareholders in good standing may withdraw amount paid in monthly installments on their stocks; and by section 3 of the same article it is provided that on such withdrawals members shall receive 6 per cent. interest per annum for the average time such payments have been made to the company. Manifestly these provisions as to the right to withdraw and the terms upon which such withdrawals are to take place are dependent upon the association being a going concern. They cannot apply during insolvency. Insolvency at once abrogates such provisions of the contract between the association and the shareholders. In addition to cases cited, see those noted in 6 Cyc. 130. The loan fund into which such installments of dues were paid, as well as other assets of the association, must be held till the losses of the association and the cost of liquidation have been ascertained.
"In the very nature of the case it cannot be otherwise. If the borrowing member could withdraw from the association and receive the so-called value of his shares, every other member (borrower or nonborrower) could do the same. Upon what basis could such values be determined? Certainly no rational basis is suggestible. At best, the amount fixed would be a guess, with a strong probability that either the withdrawing member or those who awaited the final accounting would suffer loss. To force a sale of the stock with the purpose of crediting the bond with the proceeds would necessarily entail a loss upon some one. Insolvency having abrogated the express contract between the parties, neither party should be permitted to force the sale of the stock, the value of which is not ascertainable tillthe final act of winding up the insolvent concern. There can be no final accounting till all the loans have been paid, and the borrowing member cannot prevent a decree for the amount due by him on his bond merely because, in the final wind-up, he may be entitled to receive something on the shares owned by him. The borrowing member occupies a dual relation. Some, but not all, of the terms of the contract with the association in both relations, are necessarily abrogated by the association's insolvency. With respect to his contract as a borrower, he, as a result of the abrogation, is treated as if he were not a shareholder at all. Under the decisions of the Court of Errors and Appeals, in the Nevins Case, supra, he is charged with the entire amount of the loan secured, with legal interest, and is credited with all payments made by him by reason of such loan. His payments as interest are credited as such, and his payments of premiums together with interest to be calculated thereon are credited to him as made on account of the principal of such loan. Assuredly insolvency has worked no harm to him as a borrower. With respect to his contract as a shareholder, he must be treated as if he were not a borrower, and take his stand with the nonborrowing members, and share with them in whatever hardships or losses are ultimately to be charged against the stock of the company. The learned Vice Chancellor in Hoagland v. Saul, supra, in support of his conclusion that the stock of the borrower held as collateral by the association, should be sold and the proceeds applied in reduction of the mortgage claim before final decree should be made, cited Ass'n v. Patterson, 27 N. J. Eq. 223. In this case, as well as Ass'n v. Conover, 14 N. J. Eq. 210 relied upon in the Patterson Case, the association was not insolvent. Furthermore, in both of these cases there were subsequent mortgages, and, as neither of these second mortgages had any lien upon the shares of stock which the mortgagors had assigned to the first mortgagee as collateral, a marshaling of the assets to preserve the equities of these subsequent incumbrances was necessary.
"In my opinion the cases of Weir v. Granite State Prov. Ass'n, and Hoagland v. Saul, supra, are not in harmony on this subject. If they were, I should be constrained to follow the latter without regard to my personal views. As I read them, however, they are irreconcilable on the right of the borrower to have his loan credited with the probable value of his shares of stock held by the association as collateral. With such a conflict of authority confronting me I am forced to adopt the case which appears to me to furnish the rule that best safeguards all the equities. In my judgment the reasons given by V. C. Reed in the Weir Case, and which were concurred in the Court of Errors and Appeals, furnish the true rule to be applied on this question. For the reasons given in support of the conclusions reached in such case, and those herein mentioned, I am of the opinion that the defendants in this case are not entitled to a credit upon this mortgage debt of the value of their shares of stock held by the association as collateral, and that the amount due by them to such association in this foreclosure suit is to be determined by the relation such defendants bear to said association as borrowers, and not as shareholders.
"As to the fifth exception: This challenges the principle adopted by the master in making his credits, and in effect charges that he erred in crediting the bond with the whole amount paid for dues and dividends declared, and further that he erred in not crediting such bond with interest on the paid premiums.
"I am of the opinion that this exception must be sustained. The case of Weir v. Granite State Provident Ass'n, supra, is directly in point. It expressly decides that such borrower is entitled to interest on premiums paid on account of loan, and that he is not entitled to any credit for dues paid on account of his stock; and inferentially such case decides that no profit (dividends) derived from the stock payments inure to the borrower as such, but only to him as a stockholder.
"Summarized, my conclusions are as follows:
"First. That the master whose findings are here under review on such exceptions erred in debiting the borrower with the expense and reduction charges, and in crediting them with the dues paid on the shares of stock, and the dividends allowed thereon before the association became insolvent and for failing to credit them with the interest on premiums paid.
"Second. That the borrower is to be debited only with the amount of his loan and the legal rate of Interest thereon, and is to be credited only with the interest and premiums paid, and interest on such premiums.
"Third. That, as these premiums were paid at intervals, the interest thereon be calculated by the application of the rule of average payments.
"Fourth. That the date of the report of the former master be taken by the witness who calculated the interest on such premiums as the date to which such interest was calculated, and, as this was acquiesced in by counsel for all parties, such date be adopted for the same purpose, and also because a ready comparison of the results here reached with those reported by the former master will thus be afforded.
"And I further report that the schedule hereto annexed, and making part hereof, contains a statement and account of the principal and interest money due to the coinplainanton its said mortgage found in accordance with my conclusions as aforesaid, and to which I, for greater certainty, refer."
| Schedule No. 1. | ||
| Dr. | ||
| Bond bearing date the 17th day of December, 1896, in the penal sum of $4,000, conditioned for the payment of $2,000, with interest thereon secured by the mortgage in the complainant's bill mentioned | $2,000 00 | |
| Interest thereon at 6 per cent. from December 17, 1896 to April 15, 1907—10 years, 3 months, and 28 days | 1,239 34 | |
| $3,239 34 | ||
| Cr. | ||
| By 89 monthly payments of $10 each, as interest | $ 890 00 | |
| By 89 monthly payments of $10 each as premiums on loan | 890 00 | |
| By legal interest on such monthly payments of premiums calculated on the rule of average payments, accepting 5 1/6 years as the average period | 275 90 | |
| $2,055 90 | $2,055 90 | |
| Amount due complainant the 15th day of April, 1907 | $1, 183 44 |
Barton B. Hutchinson, for complainant.
Charles T. Cowenhoven, for defendant.
WALKER V. C. This is a foreclosure case. The defendant Anthony McNulty applies by petition to open the final decree, to set aside the execution, and to set aside the master's report so far as it denies to the petitioner the right to have certain shares of stock in the complainant company, an insolvent corporation, sold before the mortgaged premises are sold. The matter is presented in this form because no exceptions were filed to the master's report, the excuse given being that counsel for the defendant was to have had actual notice, by arrangement of the parties, of the filing of the report, which notice he did not receive, and a final decree was entered ex parte upon the report in due course and an execution issued before he became aware of the situation.
For the purpose of deciding the question here presented I shall assume that the arrangement was as claimed on behalf of the defendant. The case then stands in the posture of an application to open a judgment by default, in order to accomplish which the party applying must show both surprise and merits.
Coming to the question of merits, I find that the petitioner is without them. The question presented on this application was fully tried out before the able master who made the report, and he supported his finding by the citation of authorities, and, in my judgment, his reasonings deduced from those authorities are correct, and were correctly applied to the facts of this case. The result is that the prayer of the petition must be denied.