Coggeshall v. Sussman

The Mutual Benefit Loan & Building Company was a building loan association incorporated under article 5, c. 689, p. 1913, of the Laws of 1892, which more than a year ago became insolvent, and passed into the plaintiff’s hands as receiver. In 1893

It is claimed on behalf of the defendant that no recovery can be had, as the loan association was without power or authority to loan its money on a note secured by an assignment of its shares of stock, and, not having this power, the loan became, like other loans, subject to the usury laws, so; that the provision for more than 6 per cent, interest, to wit, the additional 3 per cent, premium, renders the note void.

As before stated, the association was incorporated under article 5, c. 689, p. 1913, of the Laws of 1892. The purpose of such a corporation, as specified in section 170, is, no doubt, to help or assist its shareholders or members to procure and pay for homes or real property, by loaning to them money to be repaid in small periodical payments or installments; but the only restriction which the act places upon the company’s loan of funds is contained in section 171, which reads, “No loan made by such corporation to' any of its members shall exceed in amount the par value of the capital stock for which such member or stockholder may have subscribed.” Unless it is implied from the purpose and object of such an association as this, there seems to be no. direction in the act as to the kind of security that shall be taken from members for loans, unless subdivision 16 of section 170, specifying what the certificate of incorporation shall contain, means that only mortgage security shall be taken. That subdivision is in these words: “The mortgage security to be taken on such advances and how the same may be changed.” With this exception, and that of section 171, above quoted, there is no specification or limitation in this act of 1892 as to the sécurity upon which the companies may make loans. Unless so restricted or limited, I am inclined to believe that a building loan association might loan out its' money upon any good and proper security, like any other corporation, for, although most of the cases which I have examined show that loans were made upon real estate security, yet the opinion in some indicate that this could legally be done. Union Building Loan Ass’n v. Masonic Hall Ass’n, 29 N. J. Eq. 389 ; Massey v. Building Ass’n, 22 Kan. 624 . Thornton & Blackridge on Building Loan Associations, 280, say that a loan on shares of stock, accompanied by no other security, is usually unauthorized, which means that statute law

But the defendant insists that the Laws of 1895, p. 748, c. 929, and the Laws of 1896, p. 409, c. 452, prohibited corporations "like this-from loaning on its stock, even if chapter 689, p. 1913, of the Laws of 1892, did not. Chapter 929, p. 748, of the Laws of 1895, adds to section 25 of the banking law subdivision 5, which reads:'

“No such corporation shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in" good faith; and stock so purchased or acquired, shall within six months from the time of its purchase be sold or disposed of at public or private sale. Every person or corporation violating the provisions of this subdivision shall forfeit to the people of the state twice the nominal amount of such stock.”

It is quite apparent that this general provision referring to various companies does not- apply to building loan associations and their peculiar share stock, but to the capital stock of banks, trust companies, and the like.

It has always been the practice for the borrower to assign his shares of stock to the company upon procuring a loan, even when giving mortgage security; and, moreover, chapter 705, p. 1760, of the Laws of 1894, which specifically applies to building loan companies, was in force when the general law of 1895 was passed, and still is the law, and thereby loans upon shares of stock held by the borrower may be made even in- some cases without other security. Clearly this provision of the law of 1895 is not meant to apply to building loan associations. But even if it d_id, the-penalty of making a loan on its stock is a forfeit by the company to. the state of twice the nominal amount of such stock, and not the avoidance of the loan. That would still stand as valid, otherwise the forfeit might be thrice the value of the stock. Again, it cannot be said .the loan was upon the stock, although an assignment-of it was taken, as it appears that the defendant’s promissory note was given as security and the suit here is upon that. This action is not brought to determine the right of either party to the stock.

As the plaintiff’s company did not reincorporate under chapter 705, p. 1760, of the Laws of 1894, its provisions, limitations, and restrictions pertaining to loans do not apply to it, so that the defendant’s claim amounts to this: That either by the law of its incorporation, or else by the law of 1895, p. 748, c. 929, the loan association was prohibited from loaning money on a note secured by assignment of its share stock, and a note so "taken is therefore void.

Although I may have intimated my opinion of the company’s powers under its charter, it is unnecessary, in deciding the case, to pass definitely upon the point, for, even conceding that the company exceeded its powers in loaning money on security other than real estate, the validity of the act, although -ultra vires, could not be questioned by the defendant in order to keep the money paid out to him. He was a shareholder, a member of the association, and, as such, presumed to know its charter and by-laws. Having borrowed the company’s money, he cannot keep it on the plea that it had no legal right to loan it. He cannot raise the question of ultra vires when the contract or agreement has been executed by the company. To permit him to do so would work a great injustice to the other shareholders. See Pfister, Adm’r, v. Gerwig, 122 Ind. 567 , 23 N. E. 1041 ; Central Building & Loan Ass’n v. Lampson, 60 Minn. 422 , 62 N. W. 544 ; Whitney Arms Co. v. Barlow, 63 N. Y. 62 , 20 Am. Rep. 504 . By section 173, c. 689, p. 1915, of the Laws of 1892, it is not usurious for a corporation created thereunder to charge premium as well as interest on loans, and it has been so held in the case of Mutual Benefit Loan & Building Co. v. Lynch, 54 App. Div. 559 , 67 N. Y. Supp. 6 .

Even if the company exceeded its powers, in not taking all the required security, nevertheless it would be protected by the provisions of the act if the loan was made in good faith in the ordinary course of business, and not simply in the form of a building association loan, as a cover for a usurious contract. The mere fact that the defendant had been a shareholder in the company for over seven years before applying for a loan indicates that there was no intention to evade the usury laws by resort to building loan formalities.

For these reasons, I give judgment for the plaintiff in the sum of $900 and interest, less $226.99, advance dividend

Judgment accordingly.