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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
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, I 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 gal 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 conposed 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.)
WATER SUPPLY CO. et al.
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, haying 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
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.
1 Conflicts of jurisdiction between federal and state courts, see note to Louisville Trust Co. v. City of Cincinnati, 22 C. C. A. 356.
Before WOODS and GROSSCUP, Circuit Judges, and BUNN, District Judge.
BUNN, District Judge. This is a suit in equity to compel redemption of a waterworks plant in the city of Oconto, Wis., from sale under several mortgages foreclosed in the state court by the appellees Andrews & Whitcomb, purchased and bid in by them upon sale under the foreclosure for some $64,000, moneys loaned and advanced by them and used in the erection and construction of the plant, and afterwards sold by Andrews & Whitcomb to the appellee, the Oconto City Water Supply Company, and since owned, occupied, and operated by said company. The subject has been in litigation for several years both in this court and the state courts, and the matters involved in this suit, if not stare decisis or res adjudicata, in view of the decisions already made in the state and federal courts, there is in the judgment of the court, upon a careful study of these cases and of the record, but little ground for the appellant to stand upon. Almost any person or party less heroic in contested and stubborn litigation, and not so skilled in shifting attitudes and raising new points, would have been reasonably satisfied, in view of the decision of this court in a former suit involving the same subject and title, and reported as Andrew's v. Pipe Works, 22 C. C. A. 110, 76 Fed. 166, 46 U. S. App. 281; City of Oconto v. National Foundry & Pipe Works, Id.; Chapman Valve Mfg. Co. v. Oconto Water Co., 89 Wis. 264, 60 N. W. 1004, 46 Am. St. Rep. 830; and National Foundry & Pipe Works v. Oconto City Water Supply Co., 105 Wis. 48, 81 N. W. 125,—to have given up the struggle without further effort at litigation. The opinion of the district judge who heard this case, which is printed in the record, seems to be entirely satisfactory, and places the decision dismissing the bill upon solid ground. The facts are not fully stated in that opinion, but they have been so many times stated in the cases referred to, both in the state and federal courts, and the history of the litigation so fully given, that it seems almost a needless labor to go over the work again. But perhaps a brief statement will be prudent, if not necessary to the proper understanding of the questions involved.
The foundation of the appellant's claim against the property in the various forms in which it has been successively made is the furnishing to the Oconto Water Company, a corporation organized to construct a system of waterworks in the city of Oconto, a quantity of pipe sold to the water company between September 8 and November 24, 1890, amounting to the sum of $25,637.32, and used by that company in the construction of the plant. On September 13. 1890, the water company mortgaged its plant and franchises to Andrews & Whitcomb, citizens of Maine, who advanced and loaned to the company money to the amount of $64,000, and which was used in the construction of the plant. On January 30, 1891, the appellant began suit in the court below against the Oconto Water Company to enforce a mechanic's lien on the company's water plant, and on October 3, 1892, obtained a decree for such lien in the sum of $24,250.04. It also obtained a judgment at law in the same court for the amount of its claim. On June 17, 1891, Andrews & Whitcomb commenced an action in the state court to enforce their mortgages, and obtained a judginent of foreclosure and sale in due form of law on August 13, 1891 ; and under this judgment a sale of the property and franchises was made to the mortgagees, Andrews & Whitcomb, which sale was duly confirmed by the court, and a deed and conveyance of the plant and franchises and all the property appurtenant thereto or connected there with was made to Andrews & Whitcomb. After the title was thus vested in Andrews & Whitcomb, on July 12, 1892, they transferred the property to the Oconto Water Supply Company, a corporation organized for the purpose of purchasing the same and operating the plant to supply the city and the citizens thereof with water. On July 11, 1892, appellant commenced a creditors' suit in the United States circuit court for the Eastern district of Wisconsin supplemental to and in aid of its judgment at law, one of the purposes of which was to obtain a decree of priority of its lien claim upon the plant and property over the title of Andrews & Whitcomb under the mortgage foreclosure proceedings and deed of conveyance. In this action the rights of the parties to that suit, including the right of the appellant to a lien under the mechanic's lien laws of Wisconsin, as against Andrews & Whitcomb, were presented for adjudication. The claim on the part of Andrews & Whitcomb was that they were not bound by the lien judgment, because not made parties to the suit to enforce it, and that the waterworks were not subject to the laws of Wisconsin respecting mechanics' and material men's liens. On the part of the appellant, the National Foundry & Pipe Works, the validity of the mortgages under which Andrews & Whitcomb claimed title was attacked, and it was claimed that its lien was a first claim against the water company's property, and should be so adjudged. The decree of the circuit court gave the appellant all it asked, and made its claim a first lien, and ordered a sale of the plant and franchises of the water company to satisfy the lien. The case was appealed to this court. Before a hearing could be had here, however, the supreme court of Wisconsin, in Chapman Valve Mfg. Co. v. Oconto Water Co., 89 Wis. 264, 60 N. W. 1004, 46 Am. St. Rep. 830, had, upon full consideration, decided that a water plant provided by a city, by contract with a private corporation, for the protection and convenience of its citizens, is not, under the laws of Wisconsin, subject to lien claims under chapter 143, Rev. St. 1878. The circuit court had entered a decree in the suit sustaining the lien judgment, and adjudging that it was binding upon Andrews & Whitcomb as privies of the water company; the theory being based on the fact that they were owners of the stock of the water company when the indebtedness accrued for which the lien was claimed. This decree as to Andrews & Whitcomb was reversed by this court, and the bill dismissed. See 22 C. C. A. 110, 76 Fed. 166, 46 U. S. App. 284. The issues in that case were much broader than in the case at bar,—broad enough, probably, to have included the issue made here upon the right of the appellant to redeem from the sale under the mortgage foreclosure, if such a claim had been made and such relief asked for. But in that case appellant did not ask to redeem as though it were a junior incumbrancer,