~wwomIB (3. MAmrm Auaauu. ‘F-b 787811 

--v’ 

Maroh 9, 1967 

Honorable J. M. Falkner 

Commissioner of Banking 

Opinion No. M-39 

John H. Reagan Building 

Austin, Texas Re:’ In the involuntary dlssolu- 

‘tlon of a Credit Union under 

ktlcle 2483, V.C..S., what 

difference, if any, would 

there be In the classification 

and treatment of claims based 

on moneys paid ln for shares 

on the one hand, and based on 

Dear Mr. Falkner: 

deposits made, on the~other 

hand, and related questlone. 

In you& request for an oplnlon on the questions ‘set out 

above, you ptate that a credit union ia facing invpluntary 

llquiaationunaer the provisions of.Section 4 of Article 2&83, 

Vernon’s Civil Statutes, and that the claims agalnst it which 

you are concerned with grow out of loans from other credit 

unions, evidenced by installment promissory notes, as well as 

money received fsom Its depositors and stockholders. 

You ask: 

“(1) What difference, ‘if any would there be 

in the; classification and treatment of claims based 

on moriies pald in for shares, on the one hand, and 

based on deposits made, on the other hand? (It has 

been suggested that the Legislature intended that 

they should be treated equally in all respects by 

virtue.of the first sentence of Section 1, Article 

2462, V.T.C.S. : I A credit tinion may receive the 

savings of its members in payment for shares or as 

depbslts.‘) 

“(2) What dlfferenc,e, if any, would there be 

In the claeslfication and treatment of claims based 

on the, money borrowed from other credit unions, on 

the one hand, and those claims based on shares and 

deposits, on the other hand;” 

- 184 T 
Honorable J. M. Falkner, page 2 (M- 39) 

We do not conclude that deposits with the credit union 

and shares in the ownershlp ln the union “should be treated 

equally in all respects”, as suggested in your query. This 

would be a departure from well established legal concepts, 

which will be discussed below, and It ia Incompatible with 

the protislona of the statute Itself. Section 1 of Article 

2483 makes It clear that In the case of voluntary diaaolution of an association, the ahareholdera may not receive any 

of the proceeds of liquldation until “after debts of the assoclatlon have been pald”. This provision of the statute merely 

follows the well established principle, stated in Humble 011 

g Reflnlng~Comnany v. Blankenburg, 149 Tex. 498, 235 S.W.2d 

891, 893 (1951), aa followa: 

“When &..corporation Is dissolved, Its property 

becomes the property of Its stockholders In proportion to thelr respective shares, subject, however, 

to the rights of the creditors of the corporation 

whose debts must be satisfied out of the corporation 

property. ” 

The question then arises: .Are the rights of the stockholder in cases of involuntary dlsaolutlon different from those 

prescribed by statute in cases of voluntary liquidation of the 

credit union? Section 4, paragraphs (4) and (5) of Article 

2483 plainly authorize the llq~ldatlng agent to take possession 

of the books, records and assets of the credit union, to llquldate the assets, to pass uptn all claims, including claims of 

members owning shares, and to make distribution and payment 

to creditors! and members aa their Interest .may appear 

phasla added.) Xt further authorizes th 11 quldator t; k% 

notices to creditors and members concern&g their rights to 

present their claims, and then authorizes him to, 

from time to time make a ratable 

dlvidend’on all such claims and, after the 

assets of such credit union ha;e’been liquidated, 

make further dividends on,;all claims previously 

proved or adjusted, . . . 

Section 4, paragraph 6 of the Article provides that upon 

completion of the llquldat.l.on, whether voluntary or.involuntary, 

the Corhmissioner shall cancel the charter of the credit union; 

but that the corporate existence of the credit union shall continue for three years,-durlng.whlch time the Commissioner may, 

act’on behalf of the credit union to pay the debts and to dlstribute the assets. 

- 185 - 
Honorable J. M. Falkner, page 3 (M- 39) 

The language of Section & presents a serious question. 

It is susceptible of being construed to mean that stockholders 

are to ahare ln the assets on a parity with the aredltors. 

For the reasons set out below we construe the phrase “as their 

interests may appear” to mean “as their reapectlve interest 

may appear”, so that each category of claim may be paid at the 

time and in- the manner provided by law. 

It has been held that the word “ratable” means pro rata, 

as distinguished from equality or equal dlvlalone, and that 

it Implies an unequal division between different persons. 

Chenoweth v. Nordan and Moms 171 S.W.2d 386, (Tex. Civ. 

3ipp. 1947, error ref. w.~T~Y~T’ 

If the language contained in Section 4 were to be construed 

to mean that upon the InvoluntaFy liquidation of a credit 

union a stockholder may assert a’clalm In the assets of a 

corporation on a parity with depositors and other creditors, 

it would mean that in the case of an involuntary liquidation 

the stockholders could assert the same rights as a creditor; 

whereaa, In a voluntary liquidation under Section 1, the stockholders get nothing until the creditors are paid. Furthermore, 

such a construction of Section 4 would be a complete departure 

from the basic legal concept of the relationship of StOckhOlderS 

to the corporation. The ultimate control (and ownership) of 

the corporation is in the stookholdera, and to permit them to 

effect a change in their relationship with the corporation 

so as to assert their ownershlp interest as a claim against 

the corporation in fhe form of a debt would make possible the 

use, by majority of the stockholders, of their control of the 

corporation, to divert or misapply its assets and then assert 

their full~claim to the assets of the corporation on an equal 

footlng with the creditors upon involuntary dissolution. 

A problem aimllar to that involved in your question was 

involved in the case of In Re Phoenix Hotel Company of Lexln - 

83 F.2d 724,(C.C.A. bth 1936, certlorarl denied 299 U 8 

A Kentucky statute authorized corporations to permit’& 

con&ion of stocks Into bonds and bonds into stocks. In a 

bankruptcy’proceedlng, a dispute arose over the prloritlea 

of the claims asserted by holders of corporate bonds. This 

Involved an interpretation of the statute. As the Court 

construed the statute, a conversion of sharea,into bonds would 

not amount to a transformation of a stockholder to the position 

of ‘a credttor. The Court said: 

- 186 - 
Honorable 3. M. Falkner, page 4 (M-39) 

"It 1s a fundamental ruse of corporation law 

that one cannot be at the same time both a stockholder and a creditor of a corporation in respect 

to the same funds hazarded in the corporate enterprise. The two relations are antlpodal. This prlnclple is not only rooted in sound public policy, but 

grows out of the very nature of corporations. The 

assets represented by corporate stock are the baals 

of Its credit, and provide a fund for the payment of 

Its debts. 30 part of them may be wlthdrann for the 

purpose of retiring shares until debts are paid. 

Hamlin v. Toledo Railroad Co ., 78 F. 664, 36 L.R.A. 

826 (C.c.A.6). It ‘may be granted that the state may 

authorize the creation of securities which though 

denomlnated preferred shares are debts of the corporation and to glve such debts priority over other 

debts, since nomenclature Is not conclusive as to the 

essential character of an Instrument.. Matheivs v. 

Bradford, 70 F. (2d) 77, 78 (C.C.A.6). But to do 

thls,ls to work a revolutlgnary change In long acceljted prlnclplea 

35 F. (2d) 643 (C. iVanden.Bcach v. Mlchlgan Trust 

.A.6) 7, and those who are to be 

Co., 

asked to give credit mus? revise familiar standards 

of credit. If the LeRlslature Intends such complete 

uPsettIng of known standards It may easily use express. words to indicate such Intent. Th 

princlnle of universal application. \JZmp~~s’,~ Edded.) 

‘I 

?he 1910 act gives no indication of such revolutionary legislative intent. It Is the source of new 

corporate bower. It authorizes the conversion of preferred stock into bonds and bonds into stock, but 

ne%ther expressly nor by necessary lmpllcati?n does 

It give to such bonds priority over debts accruing 

prior to conversion . . . . 

I, 

. Without express or more clearly implied 

purpose ie’cannot impute to the Legislature an intent 

to overturn a doctrine In respect to corporate capital 

so long and so universally recognized, to Permit 

corporate debts parading as stock to escepe the burden 

of its revenue acts, or the condemnation of ita usury 

laws, or to Impair if not wholly destroy corporate 

credit. All of these aonsequences must follow If we 

accept the construction urged upon us. If corporate 

capital in trust for creditors may at will be translated 

- 187 - 
. 

Honorable J. M. Falkner, page' 5 (M-39) 

to corporate liability whenever clouds appear In the 

financial heavens, then the asserted purpose of the 

statute la defeated rather than effectuated, as soon 

as Ita lmpllcatlons are understood.". 

In Vaden Bosch v. Michigan Trust Comoany, 35 F. (2d) 

643, 645 (C C A 6 1929) ( 'it d In the foregoing quotation) 

the court h;ld <h&t a sta&eeauthorlelng corporations to make 

the redemption of preferred stock obllgatory did not create a 

debtor-creditor relationship. The court declared that such a 

conatructlon of the statute would work a revolutionary change 

In long-accepted principles and that If the Legislature lntended such a complete.upsett%ng of known atandards, It could 

easily have used express words. See also Mathews v. Bradford, 

70 F. (2d) 77 (C.C.A.6, 1934); and Galloway v. Michigan Savings 

and Loan Aa&&&&n, 206 F, 241, 246 (C C A 6 191 

the court declared that the claimant "could noi, 

3) where 

at tLe same 

time and for the same money, become a general creditor and a 

certificate holder, so that he would be entitled to pursue and 

enforce both positions." 

Apply&g these considerations to your question, it appears 

certain that the Legislature did not Intend to create totally 

different rights for the stockholders of a corporation undergoing Involuntary liquidation from the rights of stockholders 

In a corporation undergoing voluntary liquidation. Moreover, 

It IS altogether unlikely that the Legislature would have lntended to permit the stockholders to undergo a change in their 

relationships with the corporation some time during its transition from solvency to Insolvency, In other words, there is no 

basis to assume that the Legislature Intended the stockholders 

to be transformed Into creditors of the corporation by virtue 

of Its financial deterioration.., 

Inotir oplqlon, 

the liquidator 

the provisions of Section 4 authorizing 

to make distribution and payment to creditors 

and to membera as their interest may appear' must be construed, 

to'mean that the members receive the assets of the corporation 

at such time and In such amounts as their legal rights may 

justify, after the debts of the corporation are paid. 

The remaining question Is whether there is any difference, 

from the standpoint of priorities, between the claims of the 

depositors and the claims of the other creditors. We hold that 

In the absence of valid contractual provisions to the contrary 

such claims are on a parity and that the depositor 1s a credito: 

of the credit union In the same way that the depositor of a ban' 

- 188 - 
Honorable 3. M. Falkner, page 6 (M-39) 

or savings and loan association becomes Its creditor, and as such 

la not entitled to any preference over other creditors. Re nolds 

y. W&&~Q,& 149 S.W.2d 780, 782 (KY. App. 1941); 9 C.S.S. --bygaAt;; Banking, Sec. 530; Galloway v. Mlchluan Savings and 

sec. 116. 

., supra; 12 C.J.S. 538, &llding and Loan Associations, 

SUMMARY 

In an Involuntary llquldatlon of a credit 

union, general creditors and depositors would be 

on a parity and would receive their clalma in 

full prior to any distribution to stockholders. 

Prepared by Ralph R. Rash 

and J. T. Walker 

Assistant Attorneys General 

APPROVED: 

OPINION COMMITTEE 

Hawthorne~ Phillips, Chairman 

W. V. Geppert, Co-Chairman 

Ray McGregor 

Fielding Early 

Malcolm Quick 

W. 0. Shultz 

STAFF ~GATI ASSISTANT 

A. J. Carubbl, Jr. 

- 189.-