PHILLIPS, Circuit Judge.
The Midland Company is a building and loan association organized under the laws of Colomd and dw;s teinoss in Colorad0) 0k_ lah Arkansas. ’
Dunmire was the owner of four gold bond investment certificates of the association, as f0llows: No. 360,321 dated December 1,191.4, for i0 shares; and No. 360,345 for 50 shares, No,_ 360;34g for 19 shaIeS; and No. 300,348 for ^ shareS) aU datod Jannary 3 1916.
The material po.rtio,ns o£ certificate No. 345 are set out in Note 1.
[250] The other certificates are substantially of the same tenor and effect as No. 345.
Until called foir retirement, the Midland Company semiannually paid Dunmire divi-¿lends on such certificates at the rate of 5% per annum.
In June, 1924, the Midland Company informed Dunmire that on December 1, 1924, certificate No. 321 would have been in force ten years, and would then he retired. In November, 1924, the Midland Company sent Dunmire three^ drafts, one for $361.99 and one for $82.99' in payment of extra dividends on certificate No. 321, and one for $1,000 to retire such certificate. Dunmire accepted those drafts and cashed them. On November 30, 1925, the Midland Company requested Dunmire to send in certificates Nos. 345, 346, f°r ™tirement. In January 1926, the Midland Company again requested Dun-mire to surrender such certificates for retire- , -,/* n, , . ,,, ment, and offered to pay him $7,088.61 on certificate No. 345', $2,693.72 on certificate No. 346, and $921.51 on certificate No. 348, Dun-mire refused to surrender such certificates, and brought this suit for au accounting of the earnings of the Midland Company, alleging that under the provisions of such cer-tilicates he is entitled to share in all of the net earnings of the Midland Company, in addition to the dividends of 5% and 3% declared on such certificates by its directors.
On January 1, 1926, the Midland Company had earned $431,85-9.71 over and above a* n ,• t ,-i dividends, operating, and other expenses paid, and losses charged off. This amount is reflected on its books as follows: Expense fund and undivided profits, $31,859.71, and contingent reserve fund, $400,000. Of such amounts $85',915.60 had accumulated prior' to the issuance and sale of certificate No. 321, t me 91Í7CC • 4. J.T- • ni and $95,ol7.55 prior to the issuance and sale of the other Dunmire certificates. __
A statement of the resources and. liabilities, reserve fund, and expense fund and undivided profits for each of the years 1915 to 1920 is set out in Note 2.
On January 1,1916, the Midland Company carried on its hooks four separate accounts of funds set aside from net profits, as follows:
Protection fund................ $ 2^873.14
Contingent reserve fund........ 70,887.38
Expense fund................. 13,012.36
Loss and gain................. 11,175.40
These accounts on January 1, 1926, were as follows:
. Protection fund............... $ 63,581.14
Contingent reserve fund....... 400,000.00
EsPense fund................ 25,323.61
Loss and gain................. 6,536.10
The tection fund was aceumulated to ^ certain outstandi stoek of tlle Mid. , n ~ m, .. , n land Company. The contingent fund was . ,. .. * ,. UP ** settmS aside ™ally_ a portion o£ tbe net “ a reserve a®amst losses-
percentage of net earnings set aside, [251] and the relative proportion of reserve to total assets, during each of the years 1910 to 1925 are set out in Note 3.
A large percentage of net earnings was set aside in 1925 in order to meet the requirements of the State Bank Commissioner of Oklahoma, one of the states in which the Midland Company was doing business.
R.ve per cent, of total assets is recognized as a proper reserve fund by most of the states having legislation on the subject.
In 1920 the Midland Company purchased ■ i pi "i • t'\ *4. „» ~-p a tract of land m Denver as a site for an oi-lice building, and paid therefor $132,500. About January 1, 1921, it depreciated the value thereof on its books and from that dato ■to December 21, 1926, carried it at $75,000. There was a one-story building located on this site. The return from rentals was between 4% and 5% of the purchase price. The Midland Company was declaring dividends at the rate of 8% on its stock, and in order to bring the earnings of the building site in line with the other earnings of the company, or to approximately 8%, it was carried at that book value.
There is no contention that the directors of the Midland Company acted fraudulently, arbitrarily, or in bad faith in declaring the amount of dividends which should be paid on stock, setting up reserves, or in determining the value at which physical assets should be carried on the books of the Midland Compa-
_ By stipulation the parties agreed, that the Midland Company, during the period in question, had the right to place in a surplus or reserve fund such amount of the profits for any year as its board of directors deemed advisable, but without prejudice to Dunmire s asserting in tins suit Ins claim to a snare of such fund on retirement of Ins certificates.
The Midland Company shortly after the filing of this suit tendered to Dunmire and paid into the registry of the court $7,088.01 on certificate No. 345> $2’,603.72 on certificate No. 346, and $92l.»l on certificate No. 348, being the principal of such cerfaficates together with 3% excess dividends thereon with compound interest. These amounts were paid over to Dunmire under stipulation of the parties,
The trial court found that 6% of the ailnual net earnings would have provided adequate additions to the reserve lurid; that the Midland Company had earned, during the period in question, $178,524.60 in excess of dividends paid and rcasonablo reserves,_ and Diat Dunmire was entitlod to participate fcl“ *> the extent of $3,959.74, and to recover interest on such sum from January 1, .... , « ~ the rate oi 8% to September 15, 1932’ Wegatmg $2,123.12.
A. decree was entered accordingly and both parties having appealed.
Dunmire contends that the court should have disallowed other reserves, while the Mid-land Company contends that Dunmire was only entitled to the face value of his certifieate, plus dividends.
Section 2799, Comp. L. Colo. 1921, pro-vides that building and loan associations shall kc managed and controlled by a board of directors.
Section 3 of the by-laws of the Midland Company provides that its members shall e]eet a board of directors which shall manage and exercise the general corporate powers of the company, elect its officers, prescribe their duties, all(j adopt, alter, or repeal its by-laws,
gociio.n ^ pr(>vidcs that every such association may issue and sell shares of stock with or without full participation in the earnings of such association, or partially £ll limited dividend-bearing stocks, as may be p,rovided by the laws of such association,
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PHILLIPS, Circuit Judge.
The Midland Company is a building and loan association organized under the laws of Colomd and dw;s teinoss in Colorad0) 0k_ lah Arkansas. ’
Dunmire was the owner of four gold bond investment certificates of the association, as f0llows: No. 360,321 dated December 1,191.4, for i0 shares; and No. 360,345 for 50 shares, No,_ 360;34g for 19 shaIeS; and No. 300,348 for ^ shareS) aU datod Jannary 3 1916.
The material po.rtio,ns o£ certificate No. 345 are set out in Note 1.
[250] The other certificates are substantially of the same tenor and effect as No. 345.
Until called foir retirement, the Midland Company semiannually paid Dunmire divi-¿lends on such certificates at the rate of 5% per annum.
In June, 1924, the Midland Company informed Dunmire that on December 1, 1924, certificate No. 321 would have been in force ten years, and would then he retired. In November, 1924, the Midland Company sent Dunmire three^ drafts, one for $361.99 and one for $82.99' in payment of extra dividends on certificate No. 321, and one for $1,000 to retire such certificate. Dunmire accepted those drafts and cashed them. On November 30, 1925, the Midland Company requested Dunmire to send in certificates Nos. 345, 346, f°r ™tirement. In January 1926, the Midland Company again requested Dun-mire to surrender such certificates for retire- , -,/* n, , . ,,, ment, and offered to pay him $7,088.61 on certificate No. 345', $2,693.72 on certificate No. 346, and $921.51 on certificate No. 348, Dun-mire refused to surrender such certificates, and brought this suit for au accounting of the earnings of the Midland Company, alleging that under the provisions of such cer-tilicates he is entitled to share in all of the net earnings of the Midland Company, in addition to the dividends of 5% and 3% declared on such certificates by its directors.
On January 1, 1926, the Midland Company had earned $431,85-9.71 over and above a* n ,• t ,-i dividends, operating, and other expenses paid, and losses charged off. This amount is reflected on its books as follows: Expense fund and undivided profits, $31,859.71, and contingent reserve fund, $400,000. Of such amounts $85',915.60 had accumulated prior' to the issuance and sale of certificate No. 321, t me 91Í7CC • 4. J.T- • ni and $95,ol7.55 prior to the issuance and sale of the other Dunmire certificates. __
A statement of the resources and. liabilities, reserve fund, and expense fund and undivided profits for each of the years 1915 to 1920 is set out in Note 2.
On January 1,1916, the Midland Company carried on its hooks four separate accounts of funds set aside from net profits, as follows:
Protection fund................ $ 2^873.14
Contingent reserve fund........ 70,887.38
Expense fund................. 13,012.36
Loss and gain................. 11,175.40
These accounts on January 1, 1926, were as follows:
. Protection fund............... $ 63,581.14
Contingent reserve fund....... 400,000.00
EsPense fund................ 25,323.61
Loss and gain................. 6,536.10
The tection fund was aceumulated to ^ certain outstandi stoek of tlle Mid. , n ~ m, .. , n land Company. The contingent fund was . ,. .. * ,. UP ** settmS aside ™ally_ a portion o£ tbe net “ a reserve a®amst losses-
percentage of net earnings set aside, [251] and the relative proportion of reserve to total assets, during each of the years 1910 to 1925 are set out in Note 3.
A large percentage of net earnings was set aside in 1925 in order to meet the requirements of the State Bank Commissioner of Oklahoma, one of the states in which the Midland Company was doing business.
R.ve per cent, of total assets is recognized as a proper reserve fund by most of the states having legislation on the subject.
In 1920 the Midland Company purchased ■ i pi "i • t'\ *4. „» ~-p a tract of land m Denver as a site for an oi-lice building, and paid therefor $132,500. About January 1, 1921, it depreciated the value thereof on its books and from that dato ■to December 21, 1926, carried it at $75,000. There was a one-story building located on this site. The return from rentals was between 4% and 5% of the purchase price. The Midland Company was declaring dividends at the rate of 8% on its stock, and in order to bring the earnings of the building site in line with the other earnings of the company, or to approximately 8%, it was carried at that book value.
There is no contention that the directors of the Midland Company acted fraudulently, arbitrarily, or in bad faith in declaring the amount of dividends which should be paid on stock, setting up reserves, or in determining the value at which physical assets should be carried on the books of the Midland Compa-
_ By stipulation the parties agreed, that the Midland Company, during the period in question, had the right to place in a surplus or reserve fund such amount of the profits for any year as its board of directors deemed advisable, but without prejudice to Dunmire s asserting in tins suit Ins claim to a snare of such fund on retirement of Ins certificates.
The Midland Company shortly after the filing of this suit tendered to Dunmire and paid into the registry of the court $7,088.01 on certificate No. 345> $2’,603.72 on certificate No. 346, and $92l.»l on certificate No. 348, being the principal of such cerfaficates together with 3% excess dividends thereon with compound interest. These amounts were paid over to Dunmire under stipulation of the parties,
The trial court found that 6% of the ailnual net earnings would have provided adequate additions to the reserve lurid; that the Midland Company had earned, during the period in question, $178,524.60 in excess of dividends paid and rcasonablo reserves,_ and Diat Dunmire was entitlod to participate fcl“ *> the extent of $3,959.74, and to recover interest on such sum from January 1, .... , « ~ the rate oi 8% to September 15, 1932’ Wegatmg $2,123.12.
A. decree was entered accordingly and both parties having appealed.
Dunmire contends that the court should have disallowed other reserves, while the Mid-land Company contends that Dunmire was only entitled to the face value of his certifieate, plus dividends.
Section 2799, Comp. L. Colo. 1921, pro-vides that building and loan associations shall kc managed and controlled by a board of directors.
Section 3 of the by-laws of the Midland Company provides that its members shall e]eet a board of directors which shall manage and exercise the general corporate powers of the company, elect its officers, prescribe their duties, all(j adopt, alter, or repeal its by-laws,
gociio.n ^ pr(>vidcs that every such association may issue and sell shares of stock with or without full participation in the earnings of such association, or partially £ll limited dividend-bearing stocks, as may be p,rovided by the laws of such association,
Tho gtaültos Cobrado make no provi. gion yvith respect t(> tll0 scliing up oE contin_ or resGrVe funds by building and loan associations
Section 26 of such by-laws provides:
«Eac}l ycar an aeeolmt of flt and logg ^ be takcn and tlle cxeoss eitIlcr way iioned to, tho shares in force at the timo accordi to tho termg o£ eertifleate y(1 by tb(¡ shareMders in the respcetivo classes of stock, as the Board of Directors may order; Provided, That such an amount from the profits any year shall be placed in a surplus or reservo xund as the Board of Directors may deem advisable.”
Section 24 of such by-laws provides that, whenever it sliall be for the best interests of the company, the directors may call any eertificate not borrowed on for payment at its r j , actual value and cancellation.
[252] The amounts to be set aside as reserves and the amounts to be paid as dividends by the Midland Company were matters of internal management and policy, the determination of which was vested in its directors.
In the absence of fraud, gross mismanagement, or ultra vires acts by those lawfully entrusted with the management of a corporation, neither a court of law nor equity has jurisdiction to interfere with, or control the internal affairs or policy of the corporation. Consolidated Cement Corp. v. Pratt (C. C. A. 10) 47 F.(2d) 90, 93; Bisbee v. Midland Linseed P. Co. (C. C. A. 8) 19 F.(2d) 24, 30.
The rule applies to the setting aside of reserve funds and the declaration of dividends, and courts will not interfere with the discretion of directors in such matters, unless they have acted fraudulently, capriciously or unreasonably. In re Brantman (C. C. A. 2) 244 F. 101, 103; Knapp v. S. Jarvis Adams Co. (C. C. A. 6) 135 F. 1008, 1011; Hall v. Woods, 325 Ill. 114, 156 N. E. 258, 267.
It also applies to the amounts at which the physical assets shall be carried on the books of the corporation.
It not only does not appear that in determining the amounts of dividends and reserves, and the values of physical assets the directors acted fraudulently, capriciously, or unreasonably, but, on the contrary, it does appear that in the light of subsequent economic changes they exercised a wise business judgment and foresight.
We conclude that under the facts here presented the trial court should not have substituted its judgment and discretion for that of the directors of the corporation with respeet to what was a reasonable reserve fund, and should not have directed the payment in dividends of what it deemed to be in excess of a reasonable reserve. •
We find nothing in the terms of the cer-tifieate which entitled Dunmire to more than the face thereof, together with the regular dividend of 5% per annum, and such extra dividends as the directors, acting honestly an^ reasonably and not fraudulently or ea-pneiously, declared.
There are practical reasons why a certificate-holder in a building and loan association, whose certificate is called, paid off, and canceled, should not have distributed to him a proportionate share of the reserve fund of the association. Such reserve fund is ereat-ed to take care of contingent liabilities and losses occurring in the future. To so deplete it would be manifestly unfair to certifieateholders whose certificates remain outstanding, and would deter further investments in the association’s certificates, which are essential to the successful carrying on of its plan of ot,era+jon ^
In our opinion the term, actual value, as used in by-law 24, when read in the light of the plan of operation of the Midland ComPany and the certificates themselves, means face value plus dividends.
We conclude that the Midland Company tendered all to which Dunmire was entitled. The decree is reversed and the cause remanded with instructions'to dismiss the bill at Dunmire’s cost.
..Btate of Colorado “Established 1891
"Number 360345 Par Value $5000.
“Tlle Midland Savings and Loan Company
“Authorized Capital $5,000,000.
“ ‘Gold Bond’ InTCStm0Ilt Certificate
“Cash Dividends Full Participating
“This certifies, that, m consideration of application made herefor, and the payment of the sum oi Five Thousand Dollars ($5,000), the receipt whereof is hereby acknowledged, Harry Dunmire, the Investor, is the owner of Fifty (50) Shares of the ‘Gold Bond’ claf o£ «J0 Capital Stock of the Midland Saymgs and Loan Company, subject to, and entitled to the benefits of the Laws of the State of Colorado, the Articles of Incorporation, By-Laws and Regulations of tbis Company and the Special Privileges an¿ provisions upon the back hereof, ail of which are hereby referred to and made a part of this con-
will be paid the investor by the Company in cash semiannually at the rate of Five per cont- p6r annum, upon the sum paid, in accordance wlth the coupons heret0 attached, and additional dividends will he paid out of the accumulated earnings, as further provided heroin.
“Any portion of the sum paid my bo withdrawn at any time after Six months from the date hereof, on the surrender of this certificate and the coupons attaohed; for canceiiation or reissue, in accordanee with the rules governing withdrawals. Should twenty-five per cent, or more of the sum paid horeon be Permitted to remain with the Company, the Investor by such withdrawal will not forfeit the benefits of the .Additional or; Excess Dividendolapportioned. This Certifícete is redeemable m Geld.
“Ill Witness Whereof, the said The Midland Savings and Loan Company, at its office in the City of Denver, Colorado, has caused this certificate to be signed by its President and Secretary, and its Corporate ®eal to bc attacllG<ttilis Third (3rd) day of January, A. D. One Thousand Nine hundred and SixtGen.
“[Signed] F. E. Carringer, President.
“[Signed] F. W. Carringer, Secretary.
“[Corporate Seal.]
“Special Privileges,
“Provisions
“ * 81 * (a) Excess Dividends. — The additional dividends out of the accumulated earnings as al[250] lowed over and above the dividends paid in cash semiannually, will be equitably apportioned and reserved upon the sum paid hereon, at the first of each year. Such excess dividends will be at the full rate declared by the Company less the rate of cash dividends paid, and will be compounded. When this certificate has been in force Five years, the Investor will be entitled to receive in cash one-half of the accumulated excess dividends, and when this certificate has been in force Ten years, he may withdraw in cash all of the accumulated excess dividends — in accordance with the provisions of the Board of Directors, and thereafter he may receive like settlements for the accumulated excess dividends biennially. * * *
“(c) Modifications. The Conditions, provisions or privileges of this certificate can only be waived or modified by action of the Board, of Directors. No agent or representative has power in behalf of the Company to make or modify this or any other contract, or to bind the Company by making any promises, or making or receiving any representation or information.”
January 1st, 1915 Reserve^una3 liablIities Expense fund and undivided profits 15,022.66
January 1st, 1916 Reserve fund 70Í887.38 Expense fund and undivided profits 24,268.70
^““RTsomee^Ind liabilities $1,608,397.71 Reserve fund * 83,ooo.oo Expense fund and undivided profits 23,179.75
January 1st, i9is Resources and liabilities $1,920,329.07 mud and undivided profits ¡Km
January 1st, 1919 Resources and liabilities $2,271,001.57 Expense fund and undivided profits 45Í323J9
January 1st, 1920 Resources and liabilities $2,832,503.78 Reserve fund 120 897.77 Expense fund and undivided profits 53,917.12
January 1st, 1921 Resources and liabilities $3,305,002.13 Reserve fund 125,000.00 Expense fund and undivided profits 29,245.86
January 1st, 1922 Resources and liabilities $3,860,553.09 Reserve fund 140,000.00 Expense fund and undivided profits 31,745.27.
January 1st, 1923 Resources and liabilities $5,043,242.38 Reserve fund 180,000.00 Expense fund and undivided profits 31,002.11
January 1st, 1924 Resources and liabilities $6,195,377.43 Reserve fund . ’ 220,000.00 Expense fund and undivided profits 29,720.34
January 1st, 1925 Resources and liabilities $7,483,666.47 Reserve fund 265,000.00 Expense fund and undivided profits 33,095.44
January 1st, 1926 Resources and liabilities $9,005,034.35 Reserve fund 400,000.00 Expense fund and undivided profits 31,859,71