Strohen v. Franklin Saving Fund & Loan Ass'n ex rel. McKinley ( 1887 )

Mr. Justice Paxson

delivered the opinion of the court, February 21st, 1887.

This was a scire facias upon a building association mortgage. The court below gave judgment for the full face of the mortgage. and interest, notwithstanding the affidavit of defence. In other words, the defendant was treated as if he were a defaulting stockholder, whereas it was the association that was in default. The former had become insolvent and was in the hands of a receiver. It was, therefore, unable to keep its contract with the defendant. If the defendant be now required to keep his contract with the company precisely as if no default or insolvency had occurred, it is clear to my mind that very inequitable results must necessarily follow.

The defendant was the owner- of twenty-one shares in the association, of the par value of $200 each. He borrowed $4,200 of the company less the premium, which amounted to $2,268. • He received in actual cash $1,932, and gave therefor a mortgage of $4,200, and in addition pledged his twenty-one shares of stock as collateral. He paid the interest on the mortgage to December, 1880, and his monthlydues on his stock, fines, etc., to January 1885, which was about the time the company became disorganized and insolvent. The receiver was appointed in March, 1885.

It is clear that the business of the association ceased with the appointment of a receiver. Nothing remained but liquidation. The receiver had no authority to collect dues maturing after his appointment, for that would be to continue the association instead of winding it up.

Under such circumstances, was the company entitled to recover, in this suit, the full amount of the mortgage with interest? If so, the defendant will be placed in a much worse position than the non-borrowing stockholder. The latter loses only what he has paid in on the stock, while the defendant loses in addition the $2,268 which'he bid as the premium. In view of the failure of the company, the consideration or inducement for giving this large premium has failed, or at least has failed in part. That consideration was the mode of payment, being in small sums monthly, and his participation in the profits resulting from premiums, fines and other sources. It is plain to see that, if other members purchase loans at a premium, be the same large or small, he participates in those profits, in the event of the solvency of the company and its winding up in the usual manner, while he is deprived of such participation by insolvency and a failure to carry out the objects of its formation. The principal benefit of this system, and the chief inducement for poor men to invest their savings in such corporations, is a long' time to pay and small payments frequently repeated. If we strike this feature out of building associations there is nothing left of value, certainly nothing of sufficient value to compensate for the risk of the certain disaster which always results from the inability of the member to keep his engagements with the company. And, if equal disaster is to follow from the failure of the company, the condition of a member is hard indeed.

The insolvency of the company, as before observed, puts an end to its operations as a building association; to a certain extent, it also ends the contract between it and its members respectively, and nothing remains but to wind it up in. such a manner as to,do equity to creditors, and between the members themselves. As regards the latter, care should be taken to adjust the burdens equally, and not to throw upon either borrowers or non-borrowers more than their respective share. That result may be reached by requiring the borrower to repay what he actually received with interest. He would then be entitled, after the debts of the corporation are paid, to a fro rata dividend with the non-borrower for what he has paid upon his stock. Pie will thus be obliged to bear his proper share of the losses. To allow him to credit upon his mortgage his paj^ments on his stock would enable him to escape responsibility for his share of the losses, and throw them wholly upon the non-borrowers. In other words the borrower would escape without loss. It will not do to administer the affairs of an insolvent corporation in this manner.

In bis affidavit of defence, the defendant averred that his monthly payments on account of his stock were credited to the mortgage. He has, however, appended a copy of these credits, as contained in his pass-book, and it does not appear therefrom or thereby that any such credit was given,-or appropriation made. The credits are given generally. And the power Of an insolvent corporation to so credit payments, made on the stock, may well be doubted. It was held, in Quein v. Smith, 108 Penn., 325, that an officer of a building association, who knows that it is insolvent, cannot discharge his indebtedness to it with stock held by him.

Under our view of the case, the plaintiff was entitled to judgment, but not for the amount for which it was entered. The damages should be assessed by charging the defendant with the sum actually received on his mortgage, with interest for the same, and crediting him with all actual payments of interest. But bis payments upon his stock are not to be credited on the mortgage as payments of either principal or interest.

The judgment is reversed, and it is ordered that the record be remitted to the court below to enter a judgment for the plaintiff in accordance with the principles indicated in this opinion.