Southwest Washington Production Credit Ass'n v. Fender , 21 Wash. 2d 349 ( 1944 )

¹ Reported in 150 P.2d 983. Respondent brought this action seeking foreclosure of a real estate mortgage and a chattel mortgage securing crop production loans made to defendants Fender. Appellants are holders of a mortgage on the same property, the lien of which was, by agreement, subordinated to the lien of respondent's mortgages.

The principal contention made by appellants is that the action should have been dismissed, as respondent did not allege or prove compliance with the provisions of Laws of 1937, chapter 70, p. 245, § 12, Rem. Rev. Stat. (Sup.), § 3836-12 [P.C. § 4656-62], requiring plaintiff corporations to allege and prove payment of state corporate license fees. The attorney general has filed a brief as amicus curiae, strongly supporting this contention.

Respondent is a corporation organized under the farm credit act of 1933 (12 U.S.C.A. § 1131 et seq.). The act provides for the establishment, in each of the twelve farm credit districts of the United States, of a production credit corporation, of which the directors of the local Federal land bank shall be ex-officio directors. All of the stock of these twelve corporations is owned by the United States government. The act also authorizes the governor of the farm credit administration to organize, and charter, "Production Credit Associations." These associations may be organized by ten or more farmers desiring to borrow money under the provisions of the act. By-laws may be adopted, but are subject to approval by the governor of the farm credit administration.

The stock of each such association is divided into two classes, Class A and Class B. Class A shares are subscribed for by the production credit corporation, and may be purchased by investors. Class B shares may be purchased only by borrowers and individuals entitled to become borrowers. Class B stock only is entitled to voting rights. Each holder of such stock is entitled to no more than one vote. Each holder of Class B stock, within two years after he ceases to be a borrower, must exchange his Class B stock for Class A stock, or may transfer it to another borrower or person eligible to become a borrower. All stock shares in dividend distributions without preference, but Class A stock is preferred as to assets on liquidation.

During the time the production credit corporation is a holder of any stock in the association, the appointment or election of directors, the secretary-treasurer, and the loan committee of the association is subject to approval by the president of the production credit corporation, and, during such time, any such director, secretary-treasurer, or other officer of the association may, at any time, be removed by the president of the production credit corporation.

It is provided that each association shall, under the rules and regulations prescribed by the production credit corporation, with the approval of the governor of the farm credit administration, make loans to farmers for general agricultural purposes. Such loans must be made on such terms and conditions, at such rates of interest, and with such security as shall be prescribed by the production credit corporation. Borrowers are required to own, at the time the loan is made, Class B stock in an amount equal to five dollars per one hundred dollars of the amount of the loan.

The association may borrow from, and rediscount paper with, the Federal intermediate credit bank, and, except with the approval of the farm credit administration, may not borrow money or rediscount paper with any other bank or agency. Federal intermediate credit banks are authorized, subject to such restrictions, limitations, and conditions as may be imposed by the farm credit administration, to discount for, or purchase from, production credit associations, notes, bills of exchange, and other obligations presented by production credit associations, and to make loans to them secured by such collateral as may be approved by the governor of the farm credit administration.

They are also authorized, subject to the approval of the farm credit administration, to borrow money and to issue and sell collateral trust debentures and other similar obligations. All debentures issued by Federal intermediate credit banks are lawful investments and may be accepted as security for all fiduciary, trust, or public funds, the investment or deposit of which is under the authority or control of the United States or any officer or officers thereof. The capital stock of the intermediate credit banks is subscribed for by the secretary of the United States treasury.

The farm credit act of 1933 (12 U.S.C.A. § 1138c) provides that:

"The Central Bank for Cooperatives, and the Production Credit Corporations, Production Credit Associations, and Banks for Cooperatives, organized under this chapter, and their obligations, shall be deemed to be instrumentalities of the United States, and as such, any and all notes, debentures, bonds and other such obligations issued by such banks, associations, or corporations shall be exempt both as to principal and interest from all taxation (except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority. Such banks, associations, and corporations, their property, their franchises, capital, reserves, surplus, and other funds, and their income, shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority; except that any real property and any tangible personal property of such banks, associations, and corporations shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed. The exemption provided herein shall not apply with respect to any Production Credit Association or its property or income after the stock held in it by the Production Credit Corporation has been retired, or with respect to the Central Bank for Cooperatives, or any Production Credit Corporation or Bank for Cooperatives, or its property or income after the stock held in it by the United States has been retired. (June 16, 1933, c. 98, § 63, 48 Stat. 267.)" (Italics ours.)

At the time of the institution of this suit, the issued and outstanding Class A stock of respondent amounted to $231,900, of which the Production Credit Corporation of Spokane was the owner and holder of stock amounting to $230,000, and the issued and outstanding Class B stock amounted to $29,853, all of which shares were held by borrowers from the institution. It is true that all funds of the Federal intermediate credit banks are funds obtained by sale of debenture bonds, and that none of such funds are funds of the United States government. However, the stock of the twelve production credit corporations, which organize the production credit associations and subscribe for their Class A stock, is owned by the United States.

"The capital stock of each Production Credit Corporation shall be in such amount as the governor determines is required for the purpose of meeting the credit needs of the district to be served by such corporation, and such amount may be increased or decreased from time to time by the governor in accordance with such credit needs. Such capital stock shall be divided into shares of $100 each. The initial capital stock of each such corporation shall be $7,500,000, which shall be subscribed for by the governor and held by him on behalf of the United States. . . ." 12 U.S.C.A. § 1131b.

[1] To contend that this action should have been dismissed because the plaintiff did not allege and prove the payment of state corporate license fees is, of course, to admit that the plaintiff is a corporation. If so, it must be one organized and existing under and by virtue of the laws of the United States, hereinabove quoted in part. Is a production credit association an instrumentality of the United States? As we have already seen, such associations are expressly declared to be so in the statute itself. It is said:

"The Central Bank for Cooperatives, and the Production Credit Corporations, Production Credit Associations, and . . . shall be deemed to be instrumentalities of the United States, . . ." 12 U.S.C.A. § 1138c. (Italics ours.)

It was held, as early as 1819, in the celebrated case ofMcCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579, that the states have no power to tax, impede, or control in any way the operation of laws constitutionally enacted by Congress to carry out the power vested in the national government. This proposition is so familiar that, when it was contended, in FirstNat. Bank of Tonasket v. Slagle, 165 Wn. 435, 5 P.2d 1013, that the plaintiff national bank should have alleged and proved that it had paid its annual license fee, we said, in rejecting that contention and without deeming it necessary to cite sustaining authority:

"In any event, the legislature has no power to so limit corporations organized under Federal laws and exercising powers granted by the Federal government."

There is but one way in which the appellants can sustain the contention made, and that is by demonstrating that the act creating production credit associations is unconstitutional. Nowhere in either the brief of the appellants or in that ofamicus curiae do we find any contention — at least a direct contention — supported by argument and citation, that the act is unconstitutional. It is said, in the brief ofamicus curiae:

"We are willing to grant that instrumentalities of the United States government, in their sovereign capacity, cannot be subjected to state laws, but it is our contention that when the United States steps down from its plane of sovereignty and enters the domain of business and commerce, such as operating merchant vessels by shipping boards, running railroads, going into the insurance business, or presumably making loans to private associations, it may well be granted that it has abandoned its sovereignty and submitted itself to the same laws as govern individuals engaged in that particular business. As stated in 61 A.L.R., on page 406:

"``When the government abandons its sovereign capacity and seeks to avail itself of its legal rights as a body politic or artificial person, as fixed by local laws, its rights and remedies are the same as those of the individual.'"

The quotation is accurately made from page 406, 61 A.L.R., but, upon examination, it will be at once seen that it is merely an excerpt from that publication's digest of the contentions of the losing party in the case of United States v. Miller,28 F.2d 846, 61 A.L.R. 405, in which the action was for the value of timber removed from government lands. It was held that the contention was inapplicable, since the government was exercising its sovereign power to protect the public domain, held in trust for the people of the United States.

In Federal Land Bank v. Bismarck Lbr. Co., 314 U.S. 95, 102,86 L.Ed. 65, 62 S.Ct. 1, it is said:

"The federal government is one of delegated powers, and from that it necessarily follows that any constitutional exercise of its delegated powers is governmental. Graves v. New York ex rel.O'Keefe, 306 U.S. 466, 477. It also follows that, when Congressconstitutionally creates a corporation through which the federalgovernment lawfully acts, the activities of such corporation aregovernmental. Pittman v. Home Owners' Loan Corp., 308 U.S. 21,32; Graves v. New York ex rel. O'Keefe, supra, 477." (Italics ours.)

Hence, the only constitutional question in this case, assuming that the appellants are in a position to raise it, is whether or not the Federal government has the constitutional power to set up a farm credit system. That question is not discussed in the briefs of the appellants, or in that of amicuscuriae; nor could any expression as to the existence or nonexistence of that power be wrung from counsel for the appellants by persistent questions from the bench during the oral argument. If Congress had the constitutional power to create afarm credit system, that is the end of the matter. If we should hold that it did not, on the ground suggested, to wit, that the loans provided for by the farm credit act to promote agriculture are but mere private commercial transactions, and that, in providing for them, the government steps down from its plane of sovereignty and enters the domain of ordinary commercial business, we would, by so holding, impliedly condemn as unconstitutional many classes of loans authorized by Congress in recent years, such as, for example, the vast loans made through the Reconstruction Finance Corporation to promote industry; for, obviously, there can be no distinction in nature and character between loans to promote industry and loans to promote agriculture.

It is, however, strongly insisted on behalf of appellants that the Southwest Washington Production Credit Association is a local corporation, competing in the same field with local credit corporations, and, therefore, subject to the taxing power of the state. But, if the Federal government has the power to furnish easy and convenient credit to farmers, it has the power to create agencies to carry that power into execution, and the only limitations on its power to create such agencies were long ago stated in the far-reaching opinion of the supreme court of the United States in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316,4 L.Ed. 579, decided in 1819. We quote from 4 Wheat., at page 421:

"But we think the sound construction of the constitution must allow to the national legislature that discretion, with respect to the means by which the powers it confers are to be carried into execution, which will enable that body to perform the high duties assigned to it, in the manner most beneficial to the people. Let the end be legitimate, let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the constitution, are constitutional."

For current application of these principles, see Pittman v.Home Owners' Loan Corp., 308 U.S. 21, 84 L.Ed. 11, 60 S.Ct. 15, 124 A.L.R. 1263.

We again quote from McCulloch v. Maryland, 4 Wheat., at page 409:

"The government which has a right to do an act, and has imposed on it, the duty of performing that act, must, according to the dictates of reason, be allowed to select the means; and those who contend that it may not select any appropriate means, that one particular mode of effecting the object is excepted, take upon themselves the burden of establishing that exception."

The appellants have not met that burden. They have not shown that the production credit corporations are not adapted to the end sought, or that they are in any way prohibited. At the most, they have merely insisted that the farm credit act permits local citizens to create a corporation to compete with local corporations in the same business. But this is inexact. It is the Federal government which created the production credit corporations for the purpose of carrying out a Federal object. The fact that it, in part, used local persons in organizing its agents and instrumentalities is, from a legal point of view, wholly immaterial. From a policy standpoint, we might well sympathize with the position taken by the appellants; but the question as to whether or not the means selected to carry out the governmental power are the wisest that could have been adopted is wholly legislative.

We repeat that we think that the exercise of the Federal power does not become converted into a local activity because local citizens are made use of in exercising it. They are citizens, or at least residents, of the United States, as well as the state. Besides, this point has, in effect, been repeatedly decided. Farm loan associations are also organized by ten or more local persons. As we read the statutes involved, farm loan associations bear substantially the same relationship to the farm loan banks as production credit associations bear to the production credit corporations.

Farm loan associations were provided for in an act passed by Congress in 1916. Upon an examination of this legislation, 12 U.S.C.A. §§ 711-745 (see, particularly, §§ 716, 717-721, 723, and 731 et seq.), it is at once apparent that, in providing production credit associations in 1933, Congress followed the same general plan that had been used in setting up the farm loan associations seventeen years before. Both farm loan associations and production credit associations were created by Congress for the same general purpose; that is, to afford credit to agricultural producers. If the farm loan association is a constitutional Federal instrumentality, the production credit association is also, and not merely the farm loan banks, but also the farm loan associations, have been repeatedly held lawful instrumentalities of the Federal government. A few citations should suffice. See Smith v. Kansas City Title Trust Co.,255 U.S. 180, 65 L.Ed. 577, 41 S.Ct. 243; Federal Land Bank v.Crosland, 261 U.S. 374, 67 L.Ed. 703, 43 S.Ct. 385, 29 A.L.R. 1;Federal Land Bank v. Gaines, 290 U.S. 247, 78 L.Ed. 298,54 S.Ct. 168; Federal Land Bank v. Priddy, 295 U.S. 229,79 L.Ed. 1408, 55 S.Ct. 705; Knox Nat. Farm Loan Ass'n v. Phillips,300 U.S. 194, 202, 81 L.Ed. 599, 57 S.Ct. 418, 108 A.L.R. 738;Federal Land Bank v. Bismarck Lbr. Co., supra.

Moreover, it has been held, by the only court that as far as we know has had the question directly before it, that a production credit association is a Federal agency, and, as such, entitled to the rights, privileges, and immunities thereof. HartfordProduction Credit Ass'n v. Clark, 118 Conn. 341, 172 A. 266. Speaking of such an association as the respondent, that court said:

"It is, and could be, created only under the Federal Act and is expressly declared therein to be an instrumentality of the United States; its operations are supervised and regulated in all material respects by other federal agencies and by federal officials, and the funds with which it may make loans are derived from federal sources and obtained through other instrumentalities of the United States."

We have ourselves held that farm loan banks are constitutional instrumentalities of the Federal government. Federal Land Bankof Spokane v. Statelen, 191 Wn. 155, 70 P.2d 1053, and we agree with the Connecticut court that a production credit association, such as the respondent, is such an instrumentality. Its franchise is, by the express provisions of the farm credit act, exempt from state taxation and all state tax burdens other than as to its real property and tangible personal property, so long as any of its stock is held by the production credit corporation. 12 U.S.C.A. § 1138c. One of the facts in this case is that, at the time of the institution of this suit, the production credit corporation owned $230,000 of the $231,900 of Class A stock of the respondent issued and outstanding. It, therefore, follows that the respondent was not required, as appellants contend, to allege and prove the payment of state corporate license fees. It was exempt from that by the provisions of the statute under which it was created.

[2] Appellants further contend that the action should have been dismissed on the ground that the respondent did not show that it was authorized to bring the suit. The evidence shows that the notes representing the loans were discounted by respondent with the Federal Intermediate Credit Bank of Spokane, but were thereafter reassigned to respondent, and belonged to respondent. The complaint was verified by the secretary-treasurer of respondent, and officers of respondent testified at the trial on its behalf. There was sufficient showing that respondent was authorized to institute the suit. Pacific Sav. Loan Ass'n v.Corbett, 155 Wn. 45, 283 P. 479.

Some contention is made that the judgment was excessive in amount. Appellants do not contend that the judgment was for more than the amount due from the Fenders, but appear to contend that the money was not disbursed in the manner directed by the subordination agreement. Appellants, in their brief, merely state that:

"The cost for picking the crop amounted to the sum of $1,100.00 and that the entire crop picked after it was sold to only $1658.56. In other words the cost of picking this crop was nearly the entire cost of the sale of it. We submit from the foregoing facts that the moneys were not used for the benefit of and for said purpose as mentioned in the subrogation agreement but were dissipated and in fact was a constructive fraud upon these appellants."

There is no evidence whatever in the record that the cost of picking was excessive. The relatively high cost of picking may be, for aught that is shown, the necessary consequence of a thin crop. We have examined the oral evidence and the very complete documentary evidence pertinent to this final contention, and all things appear to have been done in strict pursuance of the subordination agreement. We find no merit in the contention.

The judgment of the trial court is affirmed.

BEALS, BLAKE, JEFFERS, MALLERY, and GRADY, JJ., concur.