IN RE: PACIFIC COAST BUILDING–LOAN ASS'N OF LOS ANGELES.* DRAPEAU et al. v. CUSTODIANS OF TELLURIDE ASS'N (TELLURIDE ASS'N et al., Interveners).
The Building and Loan Commissioner of California took possession of the business and assets of Pacific Coast Building–Loan Association on January 11, 1932, and the superior court confirmed this action on July 11, 1932. The commissioner thereupon began to liquidate the assets of the association. On March 25, 1937, the commissioner filed a petition in the superior court asking for directions with reference to the disbursement of assets, particularly on the question of the payment of interest to the holders of investment certificates. During the period of liquidation the commissioner had paid the principal sums due the general claimants and the holders of the investment certificates without paying interest during the period of liquidation up to the date of the payments of the sum due as principal. Upon the hearing the court ordered “that no interest is payable or shall be paid by the liquidator upon claims of the general creditors or of the investment certificate holders for any period since the commencement of liquidation until the principal of the claims of the membership shareholders shall have been paid; that if any sum shall remain after the payment in full of the principal of the claims of the general creditors and of the investment certificate holders, the same shall be disbursed and distributed in payment of the principal of the claims of membership shareholders, and if the sum so remaining be insufficient to pay such claims in full the same shall be paid ratably”. The appeal is taken by holders of investment certificates from this order.
Pacific Coast Building–Loan Association was incorporated May 20, 1925, under the provisions of title XVI, part IV, division 1, section 633 et seq., of the Civil Code, as in force on that date, and thereafter carried on a building and loan business in the city of Los Angeles. The association was originally formed with guarantee capital stock of which there were 1000 shares of the par value of $100. In 1927 the amount of the guarantee capital stock was increased, and on the date upon which the commissioner took over the management of the association there had been subscribed and paid in for guarantee capital stock the sum of $275,500. From time to time the association issued membership shares withdrawable on notice and under certain restrictions. These were of three classes, known as instalment membership shares, prepaid membership shares and full paid membership shares, all of the par value of $100. Upon the instalment shares dues were payable at the rate of 50 cents per month per share. The total amount paid in as dues on the three classes of shares, plus the earnings credited to them as of the date when the commissioner took possession of the association, was $3,420,563.07. Part of this amount was represented by shares pledged as security for loans and the unpledged shares amounted to $2,306,693.15. The association also issued six classes of investment certificates paying interest at various rates, 5 per cent, 6 per cent, or 7 per cent. When the commissioner took over the affairs of the association the total amount represented by all investment certificates then issued and outstanding, including interest then accrued and unpaid, was $3,556,897.35. This amount has been paid by the commissioner. Approximately $500,000 has accrued as interest on the unpaid balances from January 11, 1932, to the dates when the payments were made. Funds are available to pay this interest.
The guarantee capital stock was not withdrawable and loans could not be made by the association upon the pledge of this kind of stock. It was provided in the by-laws that at least five of the nine directors of the association must be holders of guarantee capital stock. There were only 50 different owners of the guarantee capital stock, of which number 29 were also holders of membership shares. The by-laws also provided that the holders of membership shares were entitled to one vote for each membership share and that the holders of guarantee capital stock also had one vote for each share of guarantee capital stock. The holders of membership shares were not entitled to receive interest but were entitled to dividends at the same rate as was allowed the holders of guarantee capital stock. The holders of guarantee stock were, however, entitled to certain additional payments from a reserve fund which was set up and the amount of which was determined by the amount of loans outstanding. Dividends were paid to the holders of membership shares and the holders of guarantee capital stock at the rate of 9 per cent per annum for the years 1926, 1927 and 1928. Dividends at the rate of 8 per cent per annum were paid to the holders of these classes of stock for the years 1929 and 1930. On July 10, 1931, the board of directors authorized an assessment of 3.83 per cent against the guarantee capital stock and membership shares. Holders of membership shares had the right to borrow from the association by giving their shares in pledge. They had the right to attend and be heard at the meetings of the association. Special meetings could be called upon request of ten or more “shareholders or members”. No membership shares were issued calling for a fixed dividend rate. It was provided in the by-laws: “Holders of all forms of membership shares are members of the corporation, with all the rights, powers and privileges incident thereto, including a right to vote at all meetings of the shareholders and members—one vote for each share—and are subject to the same restrictions and liabilities.” At the time of the formation of the association section 634 of the Civil Code, as amended by St.1925, p. 167, provided in part: “The capital shall consist of the accumulated dues together with the apportioned profits of the corporation, and shall be accumulated by the issuance of shares in ‘installment’ form and, where the by-laws shall so provide, in any or all of the following forms, viz.: ‘full paid,’ ‘passbook,’ and ‘guarantee.’ ”
Holders of investment certificates paid money into the association and received certificates each of which contained the following provision: “For value received, Pacific Coast Building–Loan Association of Los Angeles, California, will pay the legal holder hereof, as shown on its books, the full value of this certificate at any time after _ years from its issue, upon receiving thirty days' written notice from the registered owner, *” etc. Upon each certificate there was printed a form of blank assignment and on each there was attached interest coupons payable to bearer. The holders of these certificates had no voice in the management of the association and were not entitled to dividends. They were in position to demand only payment from the association in accordance with the terms of their written contracts. The by-laws provided: “Holders of either form of these investment certificates are not members of the corporation and have none of the rights, powers and liabilities incident thereto.”
It cannot be doubted that the holders of the investment certificates must be classified as creditors and as to them the association was in the position of a borrower. It is argued that the money paid by the certificate holders was not borrowed since the statute authorized the association to “receive” money and give its investment certificates therefor. This is indeed a distinction without a difference. On each of the certificates this provision is printed: “This certificate does not make its holder a member of the Association nor subject to any liability. It is non-assessable, non-forfeitable and is guaranteed by the guarantee capital stock and all of the assets of the association.” Holders of membership shares are in a far different position. They were expressly made members of the corporation by the by-laws, entitled to share in its management and in its profits and subject to its liabilities. The fact that they could borrow from the association money on the pledge of their shares does not destroy their position as stockholders. They did not become creditors by virtue of having subscribed for stock with withdrawal privileges which terminated upon the insolvency of the association. Their position is manifestly subordinate to that of the holders of investment certificates.
Legislative enactments clearly indicate the subordinate position of the holders of membership shares. Before the year 1931 statutes covering the liquidation of building and loan associations provided that “the commissioner shall first pay all approved claims other than to stockholders, shareholders and members”. St.1911, Ex.Sess. p. 9, § 9. In 1931, St.1931, p. 483, the legislature made comprehensive changes on the subject of building and loan associations but the laws as then enacted contained a provision substantially the same as the one just quoted.
The view that holders of investment certificates should be paid in full before payment is made to shareholders finds ample support in the authorities, among them cases from our own jurisdiction. In Groover v. Pacific Coast Sav. Society, 164 Cal. 67, 127 P. 495, 43 L.R.A., N.S., 874, Ann.Cas.1914B, 1261, the court considered the rights of a stockholder in a building and loan association who in consideration of a loan gave a promissory note to the association, secured by a pledge of his stock in the association. In ruling that he was not entitled, upon the insolvency of the corporation, to have credited on his mortgage indebtedness the amount of instalments paid by him on account of the purchase price of stock, the court held that the stockholder was not a creditor of the association. The court said [page 501]: “What he has paid in on his stock, in common with what has been paid in by the other members, with such other sources of revenue, have gone to make up the capital stock of the association which is a trust fund for the benefit of the creditors thereof. From this fund the debts of the association must be paid. * Whatever losses are sustained must be borne by all the stockholders, both borrowing and nonborrowing members.” See, also, Pacific Coast Sav. Soc. v. Sturdevant, 165 Cal. 687, 133 P. 485, 49 L.R.A., N.S., 1142; Fidelity Savings & Loan Ass'n v. Burnet, 62 App.D.C. 131, 65 F.2d 477; Harry E. Jones, Inc., v. Kemp, 9 Cir., 74 F.2d 623.
It is the duty of the commissioner to pay all approved claims. This does not mean that he should pay merely a part of the claims. Interest was as much a part of the debt owed to the holders of investment certificates as was the principal sum thereof. Wells, Fargo & Co. v. Enright, 127 Cal. 669, 60 P. 439, 49 L.R.A. 647. The general rule that if the property of an insolvent is in custodia legis interest thereafter accruing will not be allowed, is not applicable where the assets of the debtor are sufficient to pay the claims with interest. It was so held in Greva v. Rainey, 2 Cal.2d 338, 41 P.2d 328, where the authorities are reviewed and a number of cases cited. The Greva v. Rainey Case was decided under the Bank Act which, like the building and loan laws, is silent on the subject of interest.
A question arises concerning the rate of interest which may be demanded by the holders of investment certificates, some of which were so executed as to draw interest at the rate of 5 per cent and others at the rates of 6 per cent and 7 per cent. The appellants, considering it their obligation to present the argument that the statutory rate should be allowed, with commendable frankness state “that such a rule in this case might not be entirely equitable”. They state that they will not be heard to complain if they receive the rate of interest called for in their contracts. It doubtless would be inequitable to allow these claimants to collect a greater rate of interest than that which the association agreed to pay. It is provided in section 3289 of the Civil Code: “Any legal rate of interest stipulated by a contract remains chargeable after a breach thereof, as before, until the contract is superseded by a verdict or other new obligation.” Here we have no verdict, and no “other new obligation”. The rate of interest stipulated in the contracts remains chargeable against the association. Puppo v. Larosa, 194 Cal. 717, 230 P. 439.
The order appealed from is reversed.
I concur: McCOMB, J. CRAIL, P.J., did not participate.