
    The People of the State of New York, Respondent, v. Republic Savings and Loan Association, Appellant.
    
      Dissolution of a savings and loan association—action hy the Attorney-General under the Banking Law—scaling down of the hook values of the sitares—when ineffective —form of complaint.
    
    In an action brought by the Attorney- General, in behalf of the People, under section 18 of the Banking Law (Laws of 1893, chap. 689), to procure the dissolution of a mutual savings and loan association organized under chapter 133 of the Laws of 1851, it appeared from the report of the bank examiner who examined the defendant’s affairs, used ou the application at Special Term for the appointment of recei vers of the association, that on March 24, 1900, there was a deficit in the assets of the association of §219,420.21 which the examiner stated would increase if the defendant continued business. On June 26, 1900, the directors of the association, after learning that this deficiency had been reported to the Superintendent of Banks, adopted a resolution scaling down the liabilities of the association by reducing, pro rata, the book values of the shares, charging off in this way the entire deficiency. The consents of the stockholders to this reduction were conditioned upon the assets of the association being actually less than the liabilities, but the directors, in the preamble to the resolution authorizing the reduction of book values, declared that the alleged deficiency of assets reported by the Superintendent of Banks was absolutely false, and made the further declaration that they knew the company to be solvent and that its assets were in excess of its liabilities.
    
      Held, that the condition did not exist which was necessary to make the consents of the shareholders effective;
    That, considering the indications of mismanagement disclosed, on the part of the officers of the association, the receivership should be continued;
    That section 18 of the Banking Law applied to such an association.
    Allegations in the complaint, as to the liabilities of the association being in excess of its assets, which will sustain such an action, considered.
    Appeal by the defendant, the Republic Savings and Loan Association, from an order of the Supreme Court, made at the Kings County Special Term and entered in the office of the clerk of the county of Kings on the 29th day of June, 1900, appointing temporary receivers of the property of the defendant.
    
      Hector M. Hitchings, for the appellant.
    
      Edward P, Ooyne, for the respondent.
   Willard Bartlett, J.:

The defendant is a domestic corporation organized under chapter 122 of the Laws of 1851, which was entitled: “ An act for the incorporation of building, mutual loan and accumulating fund associations.” That statute was repealed when the existing Banking Law was enacted (Laws of 1892, chap. 689, § 215), and associations of this character are now chiefly controlled and regulated by the provisions of the Banking Law.

The present suit has been instituted by the Attorney-General to procure a dissolution of the defendant, on the ground that it is unsafe and inexpedient for such corporation to continue business. It is manifest that the action is based on section 18 of the Banking Law, which provides, among other things, that whenever it shall appear to the Superintendent of Banks that it is unsafe and inexpedient for a corporation or banker subject to the provisions of that statute to continue business, “ he shall communicate the facts to the attorney-general, who shall thereupon institute such proceedings against the corporation or banker as are authorized in the case of insolvent corporations, or such other proceedings as the nature of the case may require.”

The form of the complaint is justly subject to criticism. Instead of alleging directly that the liabilities of the defendant exceed its assets, and that the defendant is insolvent and is violating the various provisions of its by-laws and charter, and conducting its business in •an unsafe and unauthorized manner, it avers that, from examination made, by and under the direction of the Superintendent of Banks of the State of New York, of the books and papers of the said defendant corporation in and about the month of July, 1899, to March, 1900, inclusive, the fact appeared that the liabilities of said defendant exceeded its assets, and that said defendant was insolvent and unable to pay its debts, charges and obligations, and that said defendant had violated various provisions of its by-laws and charter and of the laws of the State of New York, binding upon it, and was conducting its business in an unsafe and unauthorized manner,” etc. If the question were a new one, I should hesitate to hold that an allegation in this form was a sufficient statement of the facts to constitute a cause of action. There is no substantial difference, however, between the complaint in this case and that which was upheld by my associates in People v. Empire Loan Investment Co. (15 App. Div. 69). The form of the complaint was not deemed fatal to the temporary receivership in that case, and, therefore, I do not see how we can interfere with the order now under review on account of any alleged insufficiency in the complaint in this action.

But irrespective of this question of form, it is argued in behalf Of the appellant that the complaint wholly fails to state any cause of action, inasmuch as neither section 17 nor 18 of the Banking Law applies to building and loan investment companies like the defendant, organized under the act of 1851. Upon this point it is sufficient to refer to the decision just rendered by the Appellate Division in the first department (July 17, 1900) in the case of People v. Mercantile Co-operative Bank (53 App. Div. 295). The defendant in that litigation, although nominally a bank, was really a corporation of the same character as the defendant in the case at bar, having been organized under the authority of chapter 122 of the Laws of 1851. The effect of the decision is to hold that the term “ such corporation or banker” in the 2d paragraph of section IS of the Banking Law, embraces a building and mutual loan corporation or association; and Mr. Justice Rumsey, who writes the opinion of the court, points out that section 18 of'the Banking Law should he read in connection with section 1785 of the Code of Civil Procedure, that section being referred to not as the source of the power of the Attorney-General, but as prescribing the course to be pursued when the necessary facts required by section 18 of the Banking Law are made to appear. “ The result of the two statutes,” he says, “ is as though there had been added to section 1785 a new subdivision prescribing that an action to dissolve a corporation should be brought whenever it should appear to the Superintendent of Banks that it was unsafe and inexpedient for a corporation to which the Banking Law was applicable to continue in business, and he should communicate the facts to the Attorney-General.”

It thus appears that there are authoritative decisions adverse to the appellant in respect to the form of the complaint and the scope and operation of section 18 of the Banking Law. The only other question necessary to consider is whether the proof before the Special Term was clear enough to justify the court in appointing temporary receivers. Did the facts set out in the papers make out aprima facie case warranting the conclusion that it was unsafe and inexpedient for the defendant corporation to continue business ? In answering this question regard must be had not only to the contents of the affidavits in support of the application, but to the facts set out in the verified report of the bank examiner by whom the affairs of the defendant were investigated. (Banking Law, § 24; People v. Mercantile Co-operative Bank, supra.) According to that report on March 24, 1900, there was a deficit of $219,420.21 in the assets of the association, and the examiner expresses the opinion that this deficit will constantly increase if the association is permitted to continue business. It appears that after learning that this deficiency had been reported, the directors of the defendant corporation adopted a resolution on June 26, 1900, by which they scaled down the liabilities of the association or reduced the book value of all the shares jpro rata by charging off said alleged deficiency of $219,420.21, thereby reducing the liability of the association to that extent. This resolution recites that the shareholders have expressed their willingness to have the book values of their shares reduced, and declares that it is adopted in accordance with said written request of our shareholders.” The evidence of this written request is contained in an affidavit by Mrs. Sarah Ü. Rogers, which declares that if it be true that the assets of the corporation are to any extent less than the amount of the liabilities, deponent stands ready and willing to have her interest in the corporation reduced proportionately to such reduction in the assets. Following this affidavit is a statement in the appeal book to the effect that affidavits in exactly the same form have been made by other shareholders 2’epresenting in the aggregate neai’ly $100,000 out of about $600,000. It will be observed that the consent in the affidavit of Mrs. Rogers, adopted by these other sliareholdei’s, was conditional upon its being true that the assets were actually less than the liabilities. When, however, we examine the resolution of the directoi’s, we find in the preamble a declaration that the alleged deficiency of assets repoi'ted by the Superintendent of Banks is absolutely false, and a further declaration by the directors that they know the company to be absolutely solvent, and that its assets are absolutely equal to and in excess of its liabilities. It thus appears from the statement of the dii’ectoi’s themselves that the condition did not exist which was necessary to make the consent of the shai’eholdei’s effective. The shareholders were willing that the value of their holdings should be scaled down if there actually was a deficiency, but it is absurd to suppose that they intended to empower the directors to scale them down unless the directoi-s believed that such a deficiency existed. The directoi-s of a corporation cannot charge a sum against its stock as representing a loss when they in the same breath deny that thei-e has been any loss whatever. No authority to do this can be found in the defendant’s articles of association or in any judicial decision. The loss under consideration in the case of People v. Bankers' Loan, etc., Co. (13 Misc. Rep. 221) was undisputed.

Under the conditions which existed, the defendant corporation was not aided by the attempt of the directors to scale down the value of the shares. When we consider the practice of the defendant corporation in regard to the payment of withdrawal certificates — involving a liability of $95,141.31 — the apparent wastefulness of the agency contract and the other indications of mismanagement disclosed by the bank examiner’s report, I am compelled to conclude, contrary to my first impression, that the receivership which has been ordered is probably conducive to the best interests of all the subscribers who have invested their money in this enterprise.

For these reasons I think we should affirm the order appealed from.

All concurred.

Order affirmed, with ten dollars costs and disbursements.  