Fort Smith Building Ass'n v. Cohn

87 S.W. 1172, 75 Ark. 497, 1905 Ark. LEXIS 620

• Court: Supreme Court of Arkansas
• Decided: May 27, 1905
• Status: Published

Opinion

Wood, J.,

(after stating the facts.) The court erred in rendering judgment for appellees as if they were creditors of the Association. The proof shows that the Association was insolvent at the time the notice of withdrawal was given, and continued so down to the time of the execution of the notes, which are the basis of appellees’ claims.

The proof tends to show that appellees suspected that the Association was in a critical financial situation. But, even if it be conceded that they did not know that the Association was insolvent, still, that would not affect the result here. For the indebtedness of the Association to them, evidenced by the notes, grows out of their relation to the Association as members. Conceding, without deciding, that the president and secretary had authority to issue such evidences of indebtedness under the bylaws, still these rules were prescribed for the conduct of the business of the Association in the regular course of a solvent institution. When insolvency takes place, whether the members are aware of it or not, no rule or by-law that was made' for the internal regulation of -the affairs of the organization can be used to enable one member to reap an advantage over another. All by-laws are suspended ipso facto by reason of insolvency, and the distribution of assets among members by the courts must be governed by the supreme rule of equality and mutuality.

While appellees made an honest effort to withdraw, and thought they had withdrawn, and were treated, after expiration of their notice, as if they had withdrawn, so far as the payment of dues, etc., was concerned, yet, as a matter of fact, actual withdrawal had not been consummated. For that could only take place by the payment for their stock. Such payment could only be made out of the funds of the Association set apart for such purpose, and, before such payment was made in fact, all the assets of the institution are brought into ■ court for distribution. After they reach the court the claims of appellees are presented, evidenced by notes, but really' bottomed on claims for the value of stock which they had in the insolvent concern. The fact that the claims were reduced to notes does not change their real character, and appellees in the distribution of the assets must be treated as other members who hold stock in the Association.

We are aware that there is conflict in the authorities upon this subject, but “the true rule,” says Mr. Endlich, in his excellent work on. Building Associations, “is undoubtedly that laid down by the Supreme Court of Pennsylvania, as follows: ' “When a building association has failed to fulfill the object of its creation, and has become hopelessly insolvent, after expenses incident to the administration of its assets, are deducted, the general creditors, if any, should be first- paid in full, and the residue of the fund should be distributed pro rata among those whose claims are based upon stock of the association, whether they have withdrawn and hold orders for the withdrawal value thereof or not. Both classes are equally meritorious, and in marshaling the assets neither is entitled to priority over the other. The claims of each are like based upon their relation to the Association as members thereof.” Endlich, Building Associations, § § 514, 515; Appeal of Christian, 102 Penn St. 184; Chapman v. Young, 65 Ill. App. 131; Walker v. Terry, 35 So. Rep. 466; Hohenshell v. Home Sav. & L. Assn. 140 Mo. 566; Rabbitt v. Wilcoxen, 103 Ia. 35; Heinbokel v. Nat. Sav & L. Assn., 25 L. R. A. 215. But see Thornton and Blacklege, Building and Loan Associations, § 329, where English cases are cited holding contrary doctrine.

The decree is reversed, with directions to proceed in accordance with this opinion.