~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 andtreatment of claims based on moneyspaid ln for shares on the one hand, and based on Dear Mr. Falkner: deposits made, on the~other hand, andrelated questlone. In you&request for anoplnlon on the questions ‘set out above, you ptate that a credit union ia facing invpluntary llquiaationunaer the provisions of.Section 4of Article 2&83, Vernon’s Civil Statutes, andthat 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 moneyreceived fsom Its depositors andstockholders. You ask:

“(1) Whatdifference, ‘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 mayreceive the savings of its membersin payment for shares or as depbslts.‘)

“(2) Whatdlfferenc,e, **if** any, would there be In the claeslfication and treatment of claims based on the, moneyborrowed from other credit unions, on the one hand, andthose claims based on shares and deposits, on the other hand;”

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

Wedo 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, andIt 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 maynot 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 Humble011 g Reflnlng~Comnany v. Blankenburg, 149Tex. 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. ” Thequestion 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 andassets of the credit union, to llquldate the assets, to pass uptn all claims, including claims of members owning shares, and to makedistribution and payment to creditors! andmembersaa their Interest .may appear phasla added.) Xt further authorizes th 11quldator t; k% notices to creditors andmembersconcern&g their rights to present their claims, andthen authorizes himto,

from time to time makea ratable dlvidend’on all such claims and, after the assets of such credit union ha;e’been liquidated, makefurther 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)

Thelanguage of Section &presents a serious question. It is susceptible of being construed to meanthat stockholders are to ahare ln the assets on a parity with the aredltors. For the reasons set out below weconstrue the phrase “as their interests mayappear” to mean“as their reapectlve interest mayappear”, so that each category of claim maybe paid at the time and in-the mannerprovided by law. It has been held that the word “ratable” means pro rata, as distinguished from equality or equal dlvlalone, and that it Implies anunequal division between different persons. Chenowethv. NordanandMoms 171 S.W.2d 386, (Tex. Civ. 3ipp. 1947, error ref. w.~T~Y~T’ If the language contained in Section 4were to be construed to meanthat upon the InvoluntaFy liquidation of a credit union a stockholder mayassert a’clalm In the assets of a corporation on aparity with depositors and other creditors, it would meanthat in the case of an involuntary liquidation the stockholders could assert the samerights 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 4would be a complete departure from the basic legal concept of the relationship of StOckhOlderS to the corporation. Theultimate control (and ownership) of the corporation is in the stookholdera, and to permit themto 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 makepossible 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 RePhoenix Hotel Companyof Lexln - 83F.2d 724,(C.C.A. bth 1936, certlorarl denied 299 U8 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 aninterpretation of the statute. As the Court construed the statute, a conversion of sharea,into bonds would not amountto a transformation of a stockholder to the position of‘a credttor. TheCourt said:

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

"It 1s a fundamental ruse of corporation law that one cannot be at the sametime both a stockholder and a creditor of a corporation in respect to the same funds hazarded in the corporate enterprise. Thetworelations are antlpodal. This prlnclple is not only rooted in sound public policy, but 

### growsout of the very nature of corporations. The assets represented by corporate stock are the baals of Its credit, andprovide a fund for the payment of Its debts. 30 part of themmaybe 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 ‘maybe granted that the state may authorize the creation of securities which though denomlnated preferred shares are debts of the corporation andto glve such debts priority over other debts, since nomenclature Is not conclusive as to the essential character of an Instrument.. Matheivsv. 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 whoare to beCo., asked to give credit mus?revise familiar standards of credit. If the LeRlslature Intends such complete uPsettIng of knownstandards It mayeasily use express. words to indicate such Intent. Th princlnle of universal application. \JZmp~~s’,~ Edded.)

‘I ?he 1910 act gives noindication of such revolutionary legislative intent. It Is the source of new corporate bower. It authorizes the conversion of preferred stock into bonds andbonds 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 andso 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 VadenBosch v. Michigan Trust Comoany, 35 F. (2d) 643, 645 (C CA6 1929) ( 'it dIn the foregoing quotation) the court h;ld <h&ta sta&eeauthorlelng corporations to make the redemption of preferred stock obllgatory did not create a debtor-creditor relationship. Thecourt declared that such a conatructlon of the statute would work a revolutionary change In long-accepted principles andthat If the Legislature lntended such a complete.upsett%ng of knownatandards, 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, 206F, 241, 246 (C CA6 191 the court declared that the claimant "could noi, 3) where at tLe same time and for the samemoney, become a general creditor and a certificate holder, so that hewould 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 sometime 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 makedistribution and payment to creditors and to memberaas their interest may appear' must be construed, to'mean that the membersreceive the assets of the corporation at such time andIn 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. Wehold 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 samewaythat the depositor of aban'

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

or savings and loan association becomes Its creditor, and as such la not entitled to anypreference over other creditors. Renolds 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; 12C.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 andwould receive their clalma in full prior to anydistribution to stockholders.

Prepared 

### byRalph R. Rash and J. T. Walker Assistant Attorneys General APPROVED: OPINIONCOMMITTEE Hawthorne~Phillips, Chairman W.V. Geppert, Co-Chairman RayMcGregor Fielding Early Malcolm Quick W.0. Shultz STAFF~GATIASSISTANT A. J. Carubbl, Jr.

- 189.-