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                                Maroh     9, 1967

          Honorable J. M. Falkner          Opinion No. M-39
          Commissioner of Banking
          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
                                                 deposits made, on the~other
          Dear Mr. Falkner:                      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 diaaolu-
tion   of an association,   the ahareholdera may not receive any
of the proceeds of liquldation     until “after debts of the asso-
clatlon   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 pro-
     portion 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 stock-
holder 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 llqul-
date 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 con-
tinue for three years,-durlng.whlch    time the Commissioner may,
act’on behalf of the credit union to pay the debts and to dls-
tribute   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 stock-
holders 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 stock-
     holder and a creditor of a corporation                 in respect
     to the same funds hazarded in the corporate                  enter-
     prise.       The two relations        are antlpodal.       This prln-
     clple 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 corpo-
     ration 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 ac-
     celjted prlnclplea           Vanden.Bcach v. Mlchlgan Trust Co.,
     35 F. (2d) 643 (C.i- .A.6) 7, and those who are to be
     asked to give credit mus? revise familiar                  standards
     of credit.         If the LeRlslature Intends such complete
     uPsettIng of known standards It may easily use ex-
     press. words to indicate such Intent.                 Th
     princlnle       of universal application.           \JZmp~~s’,~Edded.)
            ‘I
             ?he 1910 act gives no indication               of such revo-
     lutionary       legislative     intent.      It Is the source of new
     corporate bower.           It authorizes the conversion           of pre-
     ferred 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      ln-
     tended 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 1913)        where
     the court declared that the claimant "could noi, 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    under-
    going Involuntary      liquidation      from the rights of stockholders
    In a corporation     undergoing voluntary liquidation.            Moreover,
    It IS altogether     unlikely that the Legislature          would have ln-
    tended to permit the stockholders            to undergo a change in their
    relationships     with the corporation        some time during its transi-
    tion 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 provisions   of Section 4 authorizing
    the liquidator     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.   --by-
gaAt;;     Banking, Sec. 530; Galloway v. Mlchluan Savings and
          ., supra; 12 C.J.S. 538, &llding   and Loan Associations,
sec. 116.
                       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.




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