all the characteristics of a debt for which ex æquo et bono he is responsible. He hopes to pay this perhaps by the maturity of his stock at the usual period of similar companies. The insolvency of the company defeats this hope; insolvency brought about by causes which could not be prevented, or perhaps caused by the negligence, fraud, or incapacity of the agents of the stockholders. But this, of itself, cannot release him from his contract, or free him from his responsibility as a stockholder, or cancel his stock. The disappointment which he suffers is common with every stockholder in the association. Every stockholder-each one-has paid his subscription, either in cash or in installments by way of dues, expecting profit at the maturity of the stock in the hoped-for time. The money of each of them has gone into the common fund, and he has used a part of it. The insolvency of the association frees him from the payment of any other dues. But to the extent of the dues paid he is and he remains a stockholder, with all the rights and subject to all the responsibilities of a stockholder. This is according to the law merchant, and no statute of Maryland has altered this law. So the stockholder who has had an "advance" or "loan," whichever term is used, occupies a twofold relation to the company. He is, first of all, a stockholder, bound by his contract of subscription, and enjoying the advantages and suffering the responsibilities of a stockholder. He afterward becomes a debtor, subject to the terms of his contract as borrower, a contract wholly distinct from that he assumed as stockholder. The one contract comes under the law merchant; the other contract is controlled by the local law. Holders of paid-up stock; are they creditors of the association? In his very able report the special master discusses and exhausts this question. He holds that they remain stockholders, and are not entitled to stand as creditors. "There is nothing in any of the by-laws of the corporation which as much as suggests that the holders of paid-up stock are anything other than stockholders. They were allowed a vote at stockholders' meetings, and many of them, including the petitioners intervening in this cause, did vote at least by proxy. They were eligible to office, and were so elected. It is true that they received a definite dividend on their stock, and would not have been entitled to any more, no matter how great the profits of the corporation might have turned out to be. But such a contract is not uncommon between corporations and holders of certain classes of stock." And then he quotes I Cook, Stock, Stockh. & Corp. Law, § 269; Hamlin v. Railroad Co., 24 C. C. A. 271, 78 Fed. 664, 36 L. R. A. 826; Mercantile Trust Co. v. Baltimore & O. R. Co. (C. C.) 82 Fed. 365. These cases sustain him. The case last quoted was decided by the circuit court of the United States for the district of Maryland. In that case the circuit court (a full bench) says: "There is a legal inference that the claim of a stockholder, with a voice in the management of the corporation, is subordinate to debts due to creditors. That this inference is a well-recognized rule of law, and that to rebut it the expression of a contrary intent, in clear and unambiguous language, is required, is shown by the following citations." Then follows a long list of authorities. If this be the status of this paid-up stock, the holder of it comes within the rule of law which governs other stockholders. They cannot share the assets until all debts are paid. Plimpton v. Bigelow, 93 N. Y. 592; Fisher v. President, etc., 5 Gray, 373; Gibbons v. Mahon, 136 U. S. 557, 10 Sup. Ct. 1057, 34 L. Ed. 525. And so they are neither more nor less than stockholders. The Maryland courts adopt this view also. Tax Cases, 50 Md. 321. We concur with the court below in overruling the exception to the report on this point, and in adopting the conclusion of the special master. Are stockholders who have given notice of withdrawal creditors? The special master finds as a fact that, under the by-laws of the association as amended, it is expressly declared that a withdrawal notice does not constitute a withdrawal or terminate the membership, or give to the person filing such notice the status of a creditor, or create any rights of action, legal or equitable, against the association, or in any manner alter or disturb the rights or duties as a member. This ends the case so far as those are concerned who acquired their stock after May, 1899, the date of the amend ment. The master also finds as a fact that, under the by-laws of 1891, 30 days' notice was required before the stock could be withdrawn or reduced. In fact no notice of a desire to withdraw was given 30 days before the appointment of a receiver in any claim proved in this case. The master discusses the question at some length, and reviews the authorities. He shows that there is a conflict of authorities upon the question whether a stockholder who has exercised his right to withdraw, and has given the notice required, and such notice has matured, can rank as a creditor. But all authorities agree that he cannot be recognized as a creditor if such notice has not matured. And this is based on reason. The condition precedent to a right to withdraw is notice for 30 days. This condition has not been fulfilled. The insolvency of the association forbids and prevents its fulfillment. This insolvency puts an end to all business of the association, and destroys its vitality as a going concern. What are the rights of stockholders who have had advances? It is contended by this class of stockholders, and the contention is sustained by the circuit court, that in the administration of the assets of this insolvent corporation they are to be charged with the sum actually advanced to them, with lawful interest at 6 per cent. per annum, and they are to be credited with all payments made by them by way of dues, premium, and interest, with interest at the same rate, upon the principle of partial payments. Is this the law? It will be noted that they are stockholders, and that by subscription to the stock they have become bound, as all other stockholders are, to pay this subscription; that by the by-laws it is expressly declared that the losses, if they exceed the undivided profits, shall be charged pro rata against the several shares; that there are other stockholders who have faithfully fulfilled their contracts of subscription; that by the insolvency of the corporation each of them has been disappointed in the expectation upon which their payments were made; yet, by the conclusion reached by the court below, each stockholder who has had an advance gets back every dollar he has paid into the association, not only upon the contract for usurious interest, but for the sums paid upon his subscription to the stock, whilst every other stockholder who made the same stock contract as he did, upon precisely the same expectation, but who has not enjoyed any advance, is remitted to his pro rata of the depleted assets. Surely this establishes an inequality which is not equity, and throws upon a part of the stockholders all the losses which by the by-laws must be borne by all. This conclusion confuses the obligation of two entirely distinct contracts. In subscribing to the stock, the shareholder binds himself to pay the subscription, either in cash at once or in installments, called dues. This is a perfectly legal contract, if the corporation be a legal one, as the one in question undoubtedly is. Having become a stockholder, he then gets an advance from the common fund. This is another and an entirely distinct contract, based upon an entirely distinct consideration. When one subscribed for stock and paid for it by a mortgage payable at times mutually agreed upon between the parties, this was merely a mode of payment. He stands in two capacities,—one as debtor to the association, the other as stockholder in it. These capacities are independent of each other. Payments on stock are not payments on the mortgage debt, and do not ipso facto work an extinguishment of so much of the mortgage. The payment on one is not necessarily a payment on the other. Ely v. Sprague, Clark, Ch. 351; Southern Building & Loan Ass'n v. Anniston Loan & Trust Co., 101 Ala. 582, 15 South. 123, 29 L. R. A. 120, 46 Am. St. Rep. 138; Wilson v. Martinez, 47 C. C. A. 591, 108 Fed. 705. The conclusion reached by the court below gives to the advanced stockholder the benefit of all payments made upon this independent contract, and also aids them with payments made on the other contract, wholly distinct from it. The contract made by a stockholder subscribing to stock in a business corporation is regulated by the general law common to all such corporations. He binds himself to pay his subscriptions. He shares in the profits of the corporation so long as it is a paying, going concern, and when its career ceases he gets his share of its assets after payment of all the debts. Gibbons v. Mahon, 136 U. S. 557, 10 Sup. Ct. 1057, 34 L. Ed. 525. When he borrows funds of the corporation, he assumes a different relation. Its obligations are determined by the local law. If the loan be usurious, it is not relieved of this taint simply because it is a transaction between the stockholders and the corporation. In adjusting the debt, the local law must be followed. So, in the case at bar, inasmuch as the Maryland statutes make usurious the demand of a fixed premium, and the payment of interest on the whole sum borrowed despite the premium, the stockholder who has borrowed is only accountable for the exact sum received, with interest, and is credited with all sums improperly paid, either as premium or interest. But this adjustment cannot affect his responsibility upon his contract of subscription, and cannot equitably be held to have canceled that obligation. Under the by-laws of this corporation he does not cease to be a stockholder when he becomes a borrower. It is supposed that when a stockholder borrows money from the association the consideration influencing him is the ability to repay it in several periodical payments spread over a number of years; that by the insolvency of the corporation this consideration is lost, and the borrowing stockholder released from much of his obligation. But how is his case different in this respect from every other stockholder? A building and loan association is a business enterprise, entered into in the hope of profit. Every stockholder partakes of the adventure, and hopes to share the profit. He cannot escape a share in the losses, limited if it be incorporated, general if it be unincorporated. Each hopes and expects that, with a period approximately definite, the corporation will mature and the profit be realized, the paid-up stockholder getting his fixed dividend, in the meanwhile expecting full return of the cash paid in; the nonborrowing stockholder paying his dues in several increments, spread over a number of years, and hoping when the maturity is reached that he will get back all he has paid in and a reasonable profit besides. The borrowing stockholder gets the hoped-for profits in advance, and expects at maturity to get back his securities canceled. Each has the same expectation. Each meets with the same disappointment. Yet the conclusion reached by the court below compensates the borrowing stockholder for his disappointment at the expense of every other class. There is another point of view. A stockholder in a corporation, by reason of his ownership of shares, has the right to participate according to the amount of his stock in the surplus profits of the corporation on a division, and ultimately, on its dissolution, in the assets remaining after payment of its debts. Plimpton v. Bigelow, 93 N. Y. 592; Gibbons v. Mahon, 136 U. S. 549, 10 Sup. Ct. 1057, 34 L. Ed. 525; Fisher v. President, etc., 5 Gray, 373. So, upon the dissolution of the corporation, after the debts are paid, the stockholders rank as creditors, and have a legal claim on so much of the capital stock as remains. The rule in the United States is that the capital stock of a corporation is impressed with a trust for the payment of the creditors of the corporation. Wood v. Dummer, 3 Mason, 308, Fed. Cas. No. 17,944; Sawyer v. Hoag, 17 Wall. 610, 21 L. Ed. 731. Especially is this the case with insolvent corporations. The capital stock of a building and loan association is composed of the subscriptions to it, either by cash or by dues. If any part of these dues is diverted from the claims of creditors generally, and is used for the benefit of a single stockholder by way of credit on a debt due by him to the corporation, it is a misuse of trust funds, and so unlawful. In our opinion, the debt due to the association by the borrowing stockholder should be adjusted by charging him with the sum really advanced, with interest thereon at 6 per cent., and by crediting him with all sums paid by way of premiums and interest, upon the principle of partial payments, the remainder thus ascertained to be part of the assets of the association; that on the debt account he receive no credit for dues paid by him; and that in the final distribution of the assets he share in them in proportion to the amount paid in by him as dues upon his stock, with interest thereon for the average time prior to March, 21, 1890, according to the rule recommended by the special master in his report on the Blake intervention. (113 Fed. 793.) NATIONAL FOUNDRY & PIPE WORKS, Limited, v. OCONTO CITY (Circuit Court of Appeals, Seventh Circuit. February 1, 1902.) 1. MORTGAGE-SUIT TO REDEEM FROM SALE RES JUDICATA. Complainant brought suit in a federal court to establish a mechanic's lien upon the property of a water company for supplies furnished in the construction of its plant, and obtained a decree establishing its lien, and also a judgment against the company. Pending such suit a mortgage upon the plant of the company was foreclosed in a state court, and the property was sold and purchased by the mortgagees, who were not parties to the suit in the federal court. Thereafter complainant brought a creditors' suit in the federal court in aid of its judgment, one of the purposes of which was to obtain a decree of priority of its lien claim over the mortgage, and the title acquired by the mortgagees thereunder. It obtained such decree, but on appeal its bill was dismissed by the circuit court of appeals, following a decision that had in the meantime been rendered by the supreme court of the state, holding that, under the state statute, waterworks property was not subject to a mechanic's lien. Held, that such judgment was a conclusive adjudication of the invalidity of complainant's lien as between it and the mortgagees, and that, having only the status of an unsecured creditor, it could not maintain a suit against such mortgagees and their grantee to redeem from the mortgage sale. 2. COURTS-JURISDICTION OF SUBJECT-MATTER-PENDENCY OF SUIT IN ANOTHER COURT. The pendency of a suit in a federal court to obtain a judgment and a decree establishing a mechanic's lien, in which the court does not take possession of the property which remains in the defendant, does not affect the jurisdiction of a state court to entertain a suit for the foreclosure of a mortgage on the property; nor does the decree in the lien suit bind the mortgagee, who is not a party thereto, or affect the rights of a purchaser at the foreclosure sale.1 3. LIS PENDENS-OPERATION AND EFFECT-PERSONS BOUND BY DECREE. The doctrine of lis pendens affects only intermediate purchasers who voluntarily acquire rights from one of the parties pending the suit. It has no application to a case where, pending a suit to establish a lien upon property, a mortgage thereon antedating the lien suit is foreclosed in another court, so as to render the decree in the lien suit binding on the purchaser at the foreclosure sale, whose title relates back to the date of the mortgage. Appeal from the Circuit Court of the United States for the Eastern District of Wisconsin. George H. Noyes, for appellant. George G. Green and W. H. Webster, for appellees. 1 Conflicts of jurisdiction between federal and state courts, see note to Louisville Trust Co. v. City of Cincinnati, 22 C. C. A. 356. 51 C.C.A.-30 |