Court Opinion

ID: 3229043
Source: CourtListenerOpinion
Date Created: 2016-07-05 16:05:03.072803+00
Date Added: 2024-06-11T14:01:10.736856
License: Public Domain

This opinion is an amplification of Justice BOULDIN's opinion. The facts may be stated as follows:
(1) The Woodlawn Savings Bank ceased business and its affairs were turned over to the Superintendent of Banks to be liquidated on July 6th, 1929. Since that time the said bank has been in the process of liquidation by the Superintendent of Banks.
(2) That at such time the Woodlawn Building  Loan Association had a general, dividend, expense and a trustee account, aggregating $12,401.25.
(3) That during liquidation the Superintendent of Banks paid a series of dividends to the depositors in said bank, and paid the Woodlawn Building and Loan Association its pro rata of the dividend so disbursed in the aggregate amount of $2054.36 to the four general accounts.
(4) That prior to the date of July 6, 1929, the Bank loaned Roy G. Hershey the sum of $3,070, evidenced by note due June 24, 1929, to which was pledged as collateral security seventy shares of the capital stock of the Woodlawn Building and Loan Association.
(5) That prior to July 6, 1929, the bank loaned to one William Richards various sums in the amount of five thousand dollars, taking his promissory notes therefor, and as collateral security a pledge of one hundred shares of the capital stock of the Woodlawn Building  Loan Association, evidenced by a stock certificate (No. 95) dated January 1st, 1927. These notes were not due when the estate went into the *Page 455 
hands of the Superintendent of Banks for liquidation.
The foregoing collateral, securing said notes as reissued on and after July 24, 1936, under the action of the Board of Directors in conformity with the Act of Congress, carried a future withdrawal right when the contract matured, and when redemption was duly demanded of that association by the owner of such legal title thereto.
(6) It is averred in the 8th paragraph of the bill as follows: "When the assets of the Woodlawn Bank were turned over to the Superintendent of Banks, on, towit, July 6th, 1929, the Hershey notes, the Richards Notes, together with the collateral as aforesaid, came into the possession of the Superintendent of Banks as an asset of the Woodlawn Savings Bank, and, being then due, the Superintendent of Banks made continuous effort to get the makers of said notes to pay the said several debts then due the bank, being unable to do so, the Superintendent of Banks did, on, towit, the 24th day of October, 1932, foreclose, sell and buy in said collateral after giving notice of the intention so to do by advertising said sale in a newspaper, under the provision of Section 6746 of the Code of Alabama 1923."
(7) That after the foreclosure of the Richards and Hershey notes, the Superintendent of Banks tendered to the Woodlawn Building and Loan Association the Hershey certificate for reissue in the name of Woodlawn Savings Bank in Liquidation. On the 8th day of November, 1932, the building and loan association issued to the Woodlawn Savings Bank certificate No. 286 for 70 shares of capital stock of the building and loan association, and no restriction of the transfer of the said shares is stated in or upon the certificates in any manner.
(8) After such foreclosure, Mrs. L. M. Richards, mother of William Richards, filed her suit against the Superintendent of Banks, claiming the William Richards stock (100 shares of building and loan association stock). The Superintendent of Banks successfully defended this suit, the judgment being affirmed by the Supreme Court in Richards v. Montgomery, Sup't of Banks, 230 Ala. 307, 160 So. 706.
(9) That on June 3rd, 1936, the stockholders of the building and loan association approved a plan of conversion which had been approved by the Federal Home Loan Bank and the Board of Directors of the Woodlawn Building  Loan Association, providing for the conversion of the building and loan association into a Federal Savings  Loan Association, which plan was completed on July 24th, 1936.
(10) It is further averred that J. H. Williams, as Commissioner of the Building and Loan Department of the State of Alabama, duly issued his certificate of conversion; that under the plan of conversion, the Federal Savings  Loan Association agreed to, as a part of the plan, reissue shares of stock in the Woodlawn Federal Savings  Loan Association for the stock in the Woodlawn Building  Loan Association.
(11) That on January 18th, 1937, the Liquidating Agent for the Woodlawn Savings Bank filed a written application for the repurchase of shares of stock held by the Woodlawn Savings Bank in liquidation, in the name of the Superintendent of Banks with the Woodlawn Federal Savings  Loan Association.
(12) That on January 19th, 1937, the Woodlawn Federal Savings  Loan Association (received by the Superintendent of Banks on January 22, 1937) notified and informed the Superintendent of Banks that the Woodlawn Bank was indebted to the Woodlawn Building  Loan Association, and demanded that said indebtedness be paid in full and further notified the Superintendent of Banks that unless the demand for payment was complied with, the Woodlawn Federal Building  Loan Association would sell at public auction the stock in the Woodlawn Building  Loan Association held by the Superintendent of Banks, towit, the stock represented by Certificate No. 95 for one hundred shares in the name of William Richards, and Certificate No. 286 for seventy shares issued as aforesaid.
(13) It is further averred that Woodlawn Savings Bank cannot and will never be able to pay the depositors of said bank in full, and that the Woodlawn Federal Building  Loan Association will, unless restrained, sell said stock, thereby depriving the Woodlawn Savings Bank and the depositors of said Bank of the sum of $8,500.
(14) The Woodlawn Federal Building  Loan Association will not repurchase said stock unless required to do so by this court. *Page 456 
The foregoing facts may be analyzed and stated as follows: That prior to insolvency Hershey and Richards became indebted to the Woodlawn Savings Bank, and hypothecated stock of the Woodlawn Building and Loan Association as collateral security for their respective notes.
The bank came into the hands of the superintendent of banks before the maturity of the Richards and Hershey obligations. At that time the Building and Loan Association had on deposit $12,401.25.
Richards and Hershey defaulted on the said notes after the bank's assets and estate were taken over and the pledge of collateral stock was foreclosed and the assets of the bank were increased by this Building and Loan Association stock so brought into the assets of the bank by the foreclosure. Said assets went into the corpus of the whole trust estate, and of necessity had to be distributed ratably among all creditors.
It should be noted further that a number of dividends were paid on the $12,401.25 indebtedness to the Building and Loan Association before the bill was filed eight years later, or on February 6, 1937. These dividends, according to the averments of the bill, amounted to $2,054.36.
The question then for decision is: Can the liability on the stock be set-off against the Building  Loan Association's balance of $12,401.25?
At this point it should be noted that the owner of the stock of the Building and Loan Association had the right or option to withdraw the face value thereof with interest as a stockholder and not as a creditor, and that there was no right of set-off unless the bank as owner of the stock had prior to insolvency exercised its election or option in that regard and had changed the status of that company from stockholder to creditor.
My answer to the foregoing interrogatory as to right of set-off is stated as follows:
When the insolvent bank closed, the building and loan association had on deposit $12,401.25 and the bank accordingly owed the building and loan association that sum. At that time, the said association owed the bank nothing. The bank merely held in pledge stock in the building and loan association, title to which was in third parties, towit, Richards and Hershey. Assuming the stock to be withdrawable at any time, at the option of the owner, it has been decided by this court that "even after notice of withdrawal, he is a stockholder, not a creditor * * *," and whether he be a "creditor or not" the "want of a matured claim * * * was sufficient to defeat the set-off." Clardy v. Jefferson County Bldg.  Loan Association, 234 Ala. 658, 176 So. 368, 369.
In the present case, at the time the insolvent bank was taken over by the superintendent of banks as statutory receiver, it did not own the stock of the building and loan association, but merely held it in pledge with the title thereto vested in the pledgors, and with the duty to return the stock to the pledgors upon payment of their notes respectively secured thereby. The bank as pledgor could not, before default in payment of the secured notes, exercise the option or election of the pledgor-stockholders, if they had such option or election, to change the status of the pledgor from stockholders to creditors and so to mature their claim to be paid in money. Nor did the bank or the superintendent undertake to mature such claim until some nine years after the statutory receivership. At the time of the receivership the bank merely held the stock in pledge and subject to the rights of pledgors to pay their notes and have their stock returned to them. After the receivership the bank had no right or power to convert the stock into an obligation to pay money. Its rights passed to the superintendent of banks as trustee for the benefit of all creditors and were held by the superintendent in the capacity of trustee for all creditors to be disbursed ratably among all creditors.
It seems clear, both on principle and on authority, that the right of set-off must be determined as of the date the insolvent bank went into the hands of the superintendent of banks as statutory receiver. As to this, it is said in Dakin v. Bayly, 290 U.S. 143, 54 S. Ct. 113, 115, 78 L. Ed. 229, 90 A.L.R. 999, as follows: "As respects the set-off of cross-demands, the rights of the parties became fixed at the moment of the insolvency of the St. Petersburg bank and consequent suspension of payment, Scott v. Armstrong,146 U.S. 499, 511, 13 S. Ct. 148, 36 L. Ed. 1059; Davis v. Elmira Savings Bank, 161 U.S. 275, 290, 16 S. Ct. 502, 40 L. Ed. 700; and the right to set off is governed by the state of things existing at the moment of insolvency, not by conditions thereafter arising, Yardley v. *Page 457 
Philler, 167 U.S. 344, 360, 17 S. Ct. 835, 42 L. Ed. 192, or by any subsequent action taken by any party to the transaction, Evansville Bank v. German-American Bank, 155 U.S. 556,15 S. Ct. 221, 39 L. Ed. 259."
The state of things existing at the moment of insolvency and at the time the bank went into the hands of the superintendent of banks was that the Building and Loan Association did not owe the bank one cent which could be applied to reduce the indebtedness of the bank to said building and loan association as a depositor. The bank merely held the stock of that association in pledge and not as owner. The loan association could not, thereafter, become indebted to the insolvent bank, though the superintendent of banks, as trustee, might thereafter acquire ownership of this stock, and might, as such owner, have the privilege of converting it into money. Any subsequent action taken in the matter by any party in interest could not, under the above authority, confer the right of set-off, if such right did not exist at the time of the statutory receivership; and manifestly it did not exist.
In this connection, we wish only to refer to Fletcher on Corporations, the leading work on this subject where it is stated that a mere pledge of stock does not vest the pledgee with any rights with respect to the stock. Section 5644 of Fletcher on Corporations states as follows: "The pledgor continues to be the owner of the stock, notwithstanding the pledge, or as is often said, the general property in the stock remains in him, subject to the pledgee's lien, and until the stock is sold under foreclosure by the pledgee; * * *."
From Thompson on Corporations, Third Edition, 6, § 4249, p. 114, we quote the following: "In speaking of the distinction between a pledge and a mortgage the Supreme Court of Alabama said: 'A pledge is, when a thing is deposited as a security, to be returned to the pledgor when he has redeemed it. In this the title is retained, although the possession is parted with. In a mortgage, the title is conveyed, subject to be divested if the condition of the mortgage is performed.' " Sims v. Canfield,2 Ala. 555; Oden v. Vaughn, 204 Ala. 445, 449, 85 So. 779.
This is what was decided in Payne v. Kendall et al.,221 Ala. 478, 129 So. 40, 41, the Court saying: "The pledgee of stock has a lien. 6 Thompson on Corps. 110; Noles v. Marable,50 Ala. 366; American Pig Iron Storage Warrant Co. v. German;126 Ala. 194, 28 So. 603, 85 Am. St. Rep. 21. A pledge does not vest title in the pledgee — he has a special property; but, if not redeemed, the pledge is still a pledge. 6 Thompson, 113; National Commercial Bank v. McDonnell, 92 Ala. 387, 9 So. 149." To like effect is Smith v. Maya Corp., 227 Ala. 6, 148 So. 621.
A careful analysis of the rights given to a pledgee of stock shows that such pledgee merely has a lien on the stock. This lien is not sufficient to be considered an inchoate right or interest at a future date that may be said to have given rise to a debt ab initio and the right of set off. It follows that the acquisition of an obligation of the loan association to pay money by "subsequent action" of the superintendent of banks conferred no right of set-off which did not exist at the time of the insolvency of the bank, whether that obligation was acquired as the result of a pledge, or whether it was acquired through settlement with some debtor.
The rule permitting a set-off of mutual debts existing at the time of insolvency is an equitable one which, in effect, treats an indebtedness owing by the depositor as payment on account of what the bank owes him. For instance, if depositor had, as in this case, $12,401.25 on deposit and at the same time owed the bank $8,500 on his note or other obligation, the $8,500 is treated as a payment, leaving balance of $3,910.25 due. But where bonds, negotiable paper or stock of the character here involved is issued by the depositor and is owned by a third party and pledged to secure his debt, the indebtedness of the depositor to the bank is in no wise reduced by the fact that the bank holds such securities in pledge. These securities are assets held in trust by the statutory receiver for the benefit of all creditors and should not be devoted to one creditor by application of the doctrine of set-off. A depositor whose negotiable warehouse receipts for cotton are pledged by third parties could not claim the right to set-off the value of the cotton. There is no more reason or justice in permitting a depositor to set-off the face value of stock of the creditor here involved, or to set off the value of bonds or the face value of negotiable instruments made by the depositor and pledged by third persons. In each such instance the third party has pledged his personal property to secure his debt. The obligor *Page 458 
in these instruments owes the pledgor, not the pledgee, and the pledgee simply holds assets which it may subsequently subject to the payment of the debts for which they are pledged. When the superintendent of banks acquires these assets by foreclosure, he acquires them for the benefit of all creditors and should not be compelled, nor allowed, to devote them to the benefit of one creditor by setting them off against the deposit of such creditor or permitting the creditor to do so.
Assuming the depositor to be solvent his obligations so acquired by the superintendent as an asset for the common benefit of the creditors is worth dollar for dollar, — in this instance $8,500. On the other hand, the obligation of the bank to its creditors, after payment of a sixteen per cent dividend, is, or may be, practically worthless. To apply the $8500 asset to the practically worthless $12,401.25 liability is in effect to give the building and loan association $8,500 of assets held by the superintendent of banks for the benefit of all creditors and in addition to give the association $1359.86 in dividends which it was not entitled to receive if its deposit be treated as paid to the extent of $8,500.
The majority opinion ignores the essential fact that at the time the bank went into the hands of the superintendent of banks, as statutory receiver, the building and loan association owed the bank no debt which could be set-off against its deposit. It ignores the fact that the rights of creditors of the bank became fixed as of the date the bank went into the hands of the statutory receiver, and the further fact that to permit the set-off arising by "subsequent action" of the superintendent of banks, in foreclosing the pledge and electing to have the stock paid in cash, operates to prefer one creditor to the detriment of others contrary to the principle that equality is equity.
The Woodlawn Building  Loan Association, therefore, was not entitled to any set-off or recoupment on account of its deposit in the defunct Woodlawn Savings Bank.
ANDERSON, C. J., and GARDNER, BOULDIN, and BROWN, JJ., concur.
FOSTER and KNIGHT, JJ., dissent.