
    Charles M. Preston, as Temporary Receiver of New York Building Loan Banking Company, Respondent, v. Charles G. Reinhart and Marin D. Reinhart, Appellants.
    Second Department,
    December, 1905.
    Building and loan corporation—-liability of members thereof is mutual —liability of member on mortgage when corporation insolvent.
    The Hew York Building-Loan Banking Company, organized under the Laws of 1851, chapter 122, as amended, although issuing so-called shares of stock, is not a stock corporation, but is a membership corporation within the meaning of the General Corporation Law (§ 3, subd. 2).
    As the purposes of said corporation were, first, to accumulate a fuud to aid members in the purchase of real estate, and, second, to accumulate a fund to be returned to members who were not borrowers from the corporation, such funds to be collected in the form of interest, premiums, forfeitures and fines of members, the obligation of the members to each other is mutual and requires from each a compliance with the obligations of his contract with the corporation, in reliance upon which contract the rights of other members are based. Hence, when such corporation has become insolvent and gone into the hands of a receiver, a borrowing member who has secured his loan by bond and mortgage on the real estate purchased for him by said corporation is liable in an action to foreclose such mortgage for sums due thereon up to the time of the said insolvency, and he should not be treated as a mere debtor to the corporation to the amount of money advanced less the premium and surplus interest paid thereon.
    When part of the indebtedness- of such borrowing member is founded on a payment by said corporation On an existing mortgage on the lauds purchased for the member, he is not entitled to a credit of the excess of interest paid on his own mortgage over the interest paid by the corporation on such existing mortgage.
    Appeal by the defendants, Charles G. Reinhart and another, from a judgment of the Supreme Court in favor of -the'plaintiff, entered in the office of the clerk of the county of Kings on the 25th day of May, 1905, upon the decision of the court rendered after a trial at the Kings County Special Term.
    
      William H. Hamilton, for the appellants.
    
      Charles W. Dayton [Joseph E. Bullen with him on the brief], for the respondent.
   Woodward, J.:

This case involves the same principles as those in the case of Preston v. Hockey (-App. Div. —-), argued at the same'term, as well .as the ease of Preston v. Willieh (—- id.-), submitted at the October term. It has undergone exhaxxstive examination and presentation on the part of learned counsel, but without establishing to our satisfaction that the decisions as made upon the opinion of Gaynor, J., in Preston v. Lamano (46 Misc. Rep. 304), ad'opted in the Willieh case, are wrong. There is no dispute as to the facts ; the questions presented relate to the liability of the defendants under their bond and mortgage to the plaintiff as receiver of .the New York Building-Loaxx Banking Company.. The learned - court below has held that the defendants were liable under their bond a.nd mortgage, for all that was due according to the terms of these instruments up to the date of the receivership, being relieved of further obligatioxxs after that time, while the. defendants contend that, as tile company failed to complete its contract, they are t.o be treated merely-, as borrowers, and are to be Credited with all that they may have paid as interest and premiums over and above the amount actually advanced by the corporation.

, While the facts -differ in amount, and slightly as' to details, the questions of law are not different in any of these cases,, and we will consider the facts in the. Reinhart case. ■ The New York BxiildingLoan Banking Company was ox’ganized in' 1890,' under the provisions of chapter 122 of the Laws of 1851, as amended, and did business at No. Ill Fifth avenue in the borough of Manhattan, with a branch office in Brooklyn; In January, 1903, proceedings were instituted by the Attorney-General for the dissolution of the corporation for insolvency, fesxilting in the appointment of the plaintiff as permanent receiver on or about the 24th day of February, 1904. The objects for which the corporation Was formed, as set forth in' its articles of association, were, a'mong other things, - “ The accumxtlatibn of a fiind for the purchase of real estate, the erection of bixildtirgs, making any other improvements on lands and paying off incumbrances thereon, or to aid its; members in acquiring real estate, making improvements thex-eon, and removing incumbrances therefrom; and the 'accumulation of a fund to be returned to its members who do not obtain advances on their shares, when the funds of the Corporation to the Credit of such share sh.all amount to one hundred dollars a share, which is the full or par Value of a share, and for the traiisaction of the general business' of a Building, Mutual Loan and Accumulating Fund Association.” (Art. 2.) It is provided that any person subscribing for or in any way becoming the owner of one or more shares of the capital stock of this corporation, shall become a member thereof, and as such shall become entitled to all the benefits and privileges and subject to all the liabilities ánd duties of membership. (Art. 3.)

It seems clear that the Few York Building-Loan Banking Company is not a stock corporation in the proper use of that terna, but is a membership corporation (see Gen. Corp. Law [Laws of 1892, .chap. 687], § 3, subd. 2, asvamd. by Laws of 1895, chap. 672) in . which the corporate entity discharges its duties by acting as trustee for funds contributed by its members to mature or bring to par the so-called shares of stock. 'When any share of stock of a particular class has reached the value of $100 the membership based upon such share comes to an end by the corporation paying over the $100 to the subscriber, or by transferring the property which has been purchased through the advances made by the corporation; there is no authority for continuing the investment and increasing the value of the share; there is no authority for declaring dividends out of the surplus profits. All that the .corporation has to do with the transaction is to husband the funds and accumulate the contributions, whether in the form of interest, premiums,, forfeitures or fines, and to pay them over whenever the shares have become of the value of $100, so that in dealing with the equities in these cases, in an action for the foreclosure of the mortgage given by the defendants, we are not to consider the corporation as a business corporation, in the sense that it is entitled to the privileges of a stock corporation like those of a bank or trust company. Thé corporation, as a corporation, has, in theory at least, no interest in the funds in its control; it is created purely for the purpose of transacting the business of a large group of people, and enabling them, through mutual contributions, to accomplish results which in their individual capacities they would . be unable to accomplish. On the one hand the corporation says to the man who wants a home that if he will give a certain premium for the privilege the corporation will advance the money necessary to place him in possession of the home; it will give him the present utility value of his investment, and will enable him, through a series of small payments, to mature the stock which will'pay the obligation, including the premium; while to the man who -is seeling an investment.it says that.it will undertake'to collect all. premiums, interest, fines, etc., placing them in a common fund for the purpose of bringing the value of his shares up to $100 at the earliest possible moíneñt; an.d this is the inducement for the non-borrówing member to contribute his money to be presently used by the borrowing member.. The latter, while in fact a borrower, is at the same time an investor; lie is Contributing his money, whether in dues upon his shares, in premiums or' interest, to the maturing of his shares and'the payment of his indebtedness, and he is. doing this upon the implied promise of each member that he will live up. to the requirements of his contract: The corporation is" not there for the purpose of earning dividends upon shares of stock, but for. the purpose of seeing that the moneys contributed' by the members, under the.'terms of their mutual agreements, are properly used in maturing the shares; and if the. questions presented upon this appeal are considered from this standpoint, it is plain that the demands "of equity cam be satisfied only by holding each member to his Contract, not so much with the corporation as with the individual members. The funds have all been contributed by the members directly or indirectly; the corporation has no equities in the funds in its control, and the obligation of each member to every other member demands that there should be a carrying out of the contract up to the time that the corporation ceased to do business.. All the cases agree that the affairs of the corporation must be. adjusted as of the date of the receivership (Roberts v. Cronk, 94 App. Div. 171, 175, and authority cited), and to say . that the defendants may absolve themselves from the obligations of membership,.and treat themselves as mere borrowers, to be credited with all premiums, etc., in excess of the-lógal rate of interest upon the advances madefiy the corporation, is for the court to invade the rights.of non-borrowing members and to make for the defendants a better contract than they contemplated when they entered into the corporation as members, i It is true, as suggested, by Mr. Justice Williams in Hall v. Stowell (75 App. Div. 21, 22), that the premiums, bid and exacted in these -cases Constitute an exorbitant compensation agreed to be paid for the use df the money, considering all" the payments to^be made by the defendant, but the Legislature has legalized such agreements, and if parties will enter into them they must take the consequences.” However, there is in these exorbitant charges for premiums, etc., an element of advantage to the borrower in his relation as an investor; he is contributing his proportion-to the earlier maturing of his stock, which is to' pay his indebtedness; the more he pays in premiums, fines and penalties, the less he will be required to pay in interest; for the term of his interest payments depends upon the time that the stock shall be matured, and while experience has demonstrated in not a few cases that the burden is out of all proportion to the benefits derived, it is a contract which is not lacking in elements of mutuality, and there is no reason in law or in equity why one who has entered into a contract of membership in one of thése associations should not be required to conform to the letter of his contract up to the time that the corporation is unable to perform its obligations; that is the only way in which each member can be placed upon an exact equality in accord with his implied agreement with every other, member.

In the case at bar the defendants’ assignors, parties named White, had applied to the corporation for an advance to enable them to acquire a house and lot on Forty-first street, Brooklyn, and had subscribed for forty-five and one-third class A shares in the company, and the corporation had issued to them the usual certificate for forty-five and one-third class A shares and the usual passbook in which the monthly payments to be made were to be entered. The corporation purchased the premises for the Whites and transferred the property to them, rebeiving back the usual bond and mortgage. The transaction was carried on in the usual manner until 1897, when the defendants took the place of the Whites, the certificate and passbook and the property being transferred to them and a new bond and mortgage executed by them in all respects similar to the bond and mortgage executed by the Whites. This bond and mortgage was for the sum of $4,533, the par value of the stock, the amount being obtained as follows: Gash paid by the corporation, $1,100; underlying mortgages, $3,100; premium charged on loan, $733; making a total of $4,933, from which, was deducted $400 paid by the member, leaving the amount of the bond and mortgage $4,533 as above stated. Subsequently the corporation paid $400 on the prior mortgages, making the net cash advance $1,100, and •the amount .of the prior mortgages $2,700. On becoming members of tlie corporation the defendants’ assignors agreed to. abide by the by-laws and articles of association, and to make monthly payments, which should include the dues oh the shares subscribed for and the interest charges until said shares should mature. The bond and mortgage,'conditioned upon the by-laws and articles-of association, required, the-defendants to pay interest and dues as follows: Interest monthly at the rate of six per cent per annum on $4,533, which, as has already been pointed out, included' the ad vances, the amount of the underlying mortgages and the premium bid for the present possession of the funds and credit, amounting to $22.67; dues monthly on forty-five and one-third shares at. the rate of twenty-five cents per share, which included shares issued to cover the. premium of $733, amounting to $11.33, or a total of $34 per month. The contract as thus expressed was carried out by both parties up' to the 1st of September^ 1903,- when the defendants neglected to make the payments then due, and on the thirteenth day of September of the same year the corporation'ceased to manage its own busin'essj the temporary receiver going into possession on the following day, and the court below has held, following the decision, in Preston v. Lamcmo (46 Misc. Rep. 304), that the defendants must' settle according to the. letter of their'contract as of the 13th. day of September, 1903. ‘

When it is remembered that the defendants, in common with others, had entered into these contracts under" the authority of the Legislature, each having agreed to. pay a. premium, with fines and penalties under the conditions named in the contract, why should any one of them be permitted to renounce the duties and obligations of membership under the plea of an equitable adjustment! Every member, who has been contributing his payments has been doing so upon the assurance that every other member was to do the same thing, under penalty of foreclosure, the imposition of fines, or other, conditions named in the agreement, and it would be a strange perversion of the jurisdiction of a court-of equity to permit these defendants to avoid their obligations, deliberately entered into, by treating them merely.as-debtors for the amount of money advanced by the, corporation, and crediting them with all that has been paid in as premium, interest, etc., in excess of the legal rate of interest upon such actual advances. This was not the contract; this was not within the contemplation of the parties at the time the agreement was entered into, and it would deprive the non-borrowing members of their right to share in the earnings of the corporation in the maturing of their shares. The defendants have had the advantage, presumably, of the payments made on account of the premiums in the work of maturing their shares; all of the income of the corporation, in excess of expenses, in theory at least, has been devoted to the maturing of the various classes of stock, and the amount which the defendants have contributed in excess of' the interest on the advancement has, if it has been properly disposed of, gone to increase the value of the shares which represent the defendants’ interest in the corporation. As investors they have had the benefit of their payments, and they are asking to avoid. the obligations under which they have had these benefits* and to deprive the non-borrowing members of their right to share in the profits which they had a right to expect from the premiums and other sources of revenue of the corporation, which was pledged to devote these to the maturing of the shares.

We are equally persuaded that the defendants are not entitled to any credit on the score of the excess on interest paid on the underlying mortgages. If the underlying mortgages commanded but five per cent interest, while the defendants paid six per cent on the com tract, that was an advantage to the corporation, representing the members of the corporation "generally, and the excess would simply go to the fund devoted to the maturing of the shares.

The cases of Riggs v. Carter (77 App. Div. 580) and Roberts v. Cronk (supra; affd. on opinion below, 182 N. Y. 546) afford authority for the decisions already rendered, and we should have been content to rest our determination upon the opinion of Mr. Justice Gaynor had it not been for the urgency with which the •appellants have contended that there was error in that decision.

The judgment appealed from should be affirmed, with costs.

Hirschberg, P. J., Bartlett, Jenks and Hooker, JJ., concurred.

Judgment affirmed, with costs.  