Decided June 12, 1935.
Corporations — Quo warranto — Bond investment or investment guaranty company — Doing business on service dividend plan — Section 697 et seq., General Code — Exchange of endowment certificates for assets of building and loan associations — Contracts provide a private dissolution and liquidation.
IN QUO WARRANTO.
This is an original quo warranto action instituted in this court by the relator as assistant director of commerce and as supervisor of bond investment companies in the state of Ohio. He asks that the respondent be adjudged to have forfeited its corporate franchise and be ousted therefrom, or from the franchise unlawfully assumed and abused by it.
In substance the relator alleges that the respondent corporation is a bond investment company within the meaning of Sections 697 to 709, both inclusive, of the General Code of Ohio, for the reason that it is not incorporated under the building and loan statutes of Ohio; that it is an investment guaranty company doing business on the service dividend plan and engages in the business of placing or selling certificates, bonds, debentures and other investment securities on the partial payment or installment plan; that since January 10, 1932, the respondent has conducted its business unlawfully (1) by operating without the certificate of authority required by Section 702 of the General Code, (2) by operating its business after its license had been revoked, and (3) by failure to comply with the requirements of Sections 697 to 709, General Code, relating to bond investment companies; that the affairs of the respondent are being improperly managed (1) by operating through agents not licensed as required by Sections 697 et seq. of the General Code, (2) by entering into contracts to liquidate the assets of building and loan associations, which acts are beyond the powers granted by its charter or articles of incorporation, and (3) by entering into unauthorized contracts with building and loan associations to exchange the respondent's endowment certificates for the assets of such associations; that by reason of its violations of law and the misuse of its charter the respondent has forfeited its corporate franchise; and that on June 30, 1932, the relator served notice upon the respondent as required by Section 707, General Code.
To this petition the respondent filed a forty page answer alleging three defenses. The first part of the answer reads as follows:
"Now comes the respondent and by way of answer to the petition herein admits that John W. Powers is Assistant Director of Commerce, but denies that he is Supervisor of Bond Investment Companies of the State of Ohio and denies that this action was instituted by virtue of any authority imposed upon him by law.
"The respondent admits that it is authorized by its articles of incorporation to engage in the business of a bond investment company within the meaning of Sections 697-709, inclusive, of the General Code of Ohio, and of an investment guaranty company on the service dividend plan.
"The respondent denies that it now is or at any time during the year 1933 was engaged in the business of placing or selling certificates, bonds, debentures or other investment securities on the partial payment or installment plan, or that it is doing business on the service dividend plan. The respondent denies that it now is or at any time since January 10, 1932, has been carrying on business not in accordance with law. The respondent denies that its affairs are being improperly managed, and denies that it has improperly transacted any business through agents not licensed by virtue of Sections 697 et seq. of the General Code. The respondent admits that its board of directors has authorized its officers to enter into contracts with building and loan associations, and admits that its officers have entered into contracts with building and loan associations, true and correct copies of which contracts are hereinafter set forth. The respondent denies that said contracts are contracts to liquidate assets of building and loan associations, and denies that such contracts are beyond the powers granted to respondent by its articles of incorporation.
"The respondent admits that it has entered into contracts with one or more building and loan associations to exchange its endowment certificates for assets in such building and loan association or associations, but denies that such exchange was without authority of law or license so to do. Respondent says that each of such exchanges was under and pursuant to the agreements hereinafter set forth and not otherwise.
"The respondent denies that it has misused its charter or violated any law, and denies that it has forfeited its corporate franchise.
"The respondent admits that it received a notice signed by John W. Powers, Assistant Director of Commerce, more than ten (10) days prior to the institution of this suit, but denies that said notice was in the manner, form and tenor contemplated and required by Section 707 of the General Code.
"Further answering the respondent denies each and every allegation in the petition contained save and except such as are herein admitted to be true.
"Respondent says that it has at all times endeavored to comply with the laws of the State of Ohio and that it desires to and will immediately cease and desist from any of the transactions of its business which are held to be a violation of law."FIRST DEFENSE
"Respondent says that its articles of incorporation were filed with the Secretary of State of Ohio on October 24, 1922, at which time there was in force and effect Section 696 of the General Code of Ohio, which designated the Chief Deputy Supervisor of Building and Loan Associations to be the Supervisor of Bond Investment Companies; that said Section 696 was repealed, 110 Ohio Laws 627 , Section 3; that the respondent commenced business on February 28, 1924; that prior to that time and on or about February 18, 1924, the respondent deposited with the Treasurer of State of Ohio securities in pursuance of the provisions of Section 698 of the General Code of Ohio, and filed with the Director of the Department of Commerce of the State of Ohio certified copies of its articles of incorporation, constitution and by-laws, sworn statement by its managing officers of its business for the preceding year, instrument agreeing that summons may be issued against it from any county in the state, directed by the sheriff of the county in which the office of the supervisor is situated, commanding the sheriff to serve such summons by certified copy, personally upon the supervisor or leaving a copy thereof at his office, in the form prescribed by Section 701 of the General Code, and the Director of Commerce acting as Supervisor of Bond Investment Companies of the State of Ohio issued to respondent a purported certificate of authority contemplated by Section 702 of the General Code of Ohio; that thereafter for the years 1925 to 1932, inclusive, purported renewal certificate was issued by the Director of Commerce or Assistant Director of Commerce acting as Supervisor of Bond Investment Companies; that on or about May 18, 1932, the relator refused to issue licenses to agents of respondent in pursuance of application filed by respondent, on the ground that the Bond Investment Act, so-called, Sections 697 et seq. was repealed by implication by virtue of the passage of the Ohio Securities Act, so-called, Sections 8624-1 et seq. of the General Code of Ohio; that on or about January 10, 1933, respondent filed with the relator, under oath of its president and in form theretofore used, statement of its business for the twelve months next preceding December 31, 1932, and tendered the filing fee of $25.00 and the fee for renewal certificate of $50.00, but the relator, acting as Supervisor of Bond Investment Companies, held that the Bond Investment Act, so-called, Sections 697-907 , inclusive, had been repealed by implication by virtue of the passage of the Ohio Securities Act, so-called, Sections 8624-1 et seq. of the General Code of Ohio, and refused to issue to respondent a renewal of its certificate of authority to do business as contemplated by the provisions of Section 702 of the General Code."
The second defense sets forth the purpose clause of the respondent corporation, and also three separate contracts entered into allegedly for the purchase of the assets of The Beachcliff Savings and Loan Company on November 5, 1931, The Columbia Savings Association on June 1, 1933, and The Depositors Savings and Loan Company on September 20, 1933.
The third defense contains the following language:
"Respondent further says that the relator contends and claims that the contract between respondent and The Columbia Savings Association and the contract between respondent and The Depositors Savings and Loan Company, each hereinbefore set forth, are unlawful on account of the provisions of Sections 687, 687-1-23, inclusive, of the General Code of Ohio and therefore said contracts have been entered into by respondent without authority of law and that by virtue of the making by said respondent of said contracts it has violated its charter and violated the law and has forfeited its corporate franchise. Respondent says that if the provisions of Sections 687- 687-1-23, inclusive, are held to render unlawful the aforesaid agreements, said sections of the General Code are in violation of rights granted to respondent by the provisions of the Constitution of the United States, in that the provisions of said sections would be taking from respondent its rights under and pursuant to the aforesaid agreements, in contravention of and contrary to Section 1 of Article XIV of the Amendments to the Constitution of the United States and of Section 10 of Article I of the Constitution of the United States, and the respondent, if said contracts are held to be in violation of said Sections 687, 687-1-23, will be deprived of its right of possession of the property and the rents, incomes and profits thereof acquired by it pursuant to the terms of said contracts."
The case was heard upon these pleadings and upon the following agreed statement of facts:
"It is mutually agreed and stipulated by and between the parties hereto:
"1. That John W. Powers, prior to the date of the filing of the relator's petition, had been designated and appointed by the Director of Commerce of Ohio, as the Supervisor of Bond Investment Companies of Ohio; and that the relator was at the times complained of in relator's petition, acting as such supervisor pursuant to such alleged appointment.
"2. That by reason of the purpose clause as contained in its articles of incorporation, the respondent has among other corporate powers, the corporate power to engage in the business of a bond investment company and of an investment guaranty company as defined in Sections 697 to 709, inclusive, of the General Code.
"3. In 1924, a certificate of authority to do business in Ohio, as prescribed by Section 702 of the General Code, was issued to respondent by the Assistant Director of Commerce acting as Supervisor of Bond Investment Companies, and that thereafter, up to and including 1927, respondent upon the filing of its annual statement, received a renewal of such certificate by the Assistant Director of Commerce acting as the Supervisor of Bond Investment Companies; that in the years 1928 to 1932, inclusive, purported renewal certificates were issued by John W. Powers, acting as Supervisor of Bond Investment Companies in pursuance of the alleged appointment shown in paragraph 1 hereof.
"4. Since December 31, 1932, the respondent has not sold any new certificates, bonds, debentures or other investment securities of any kind on the partial payment or installment plan; and has after such date, until the date of the filing of the petition in this cause, received the sum of $4,938.28 on contracts of such type upon contracts entered into or sold prior to January 1, 1933. The respondent has not sold or placed or issued any contracts or agreements whatsoever on the service dividend plan unless the contracts set forth in respondent's answer are such type of contracts within the meaning of the Ohio statutes, or unless the contracts agreed therein to be issued are such type of contracts.
"5. That the respondent tendered to relator its filing fee of $25.00 and its fee of $50.00, together with a statement under oath of the business done by the respondent during the year 1932, as shown in Exhibit 4 and Exhibit 4-a, and respondent replied thereto in writing, a copy of which is hereto attached, marked 'Exhibit 1', and made a part hereof.
"6. That the purpose clause of respondent's articles of incorporation reads as follows:
" 'First, To raise by solicitation, or receive from advertising, publication, contribution or otherwise, money or property of any kind or character as an endowment to be used for the maintenance and benefit of any designated institution, organization, corporation, partnership, individual, society or association.
" 'Second, To enter into contract or agreement with any religious or fraternal organization, benevolent or educational institution, corporation, partnership, individual or association, to receive property of any kind or character, or money either as a single sum or in stipulated payments, for the purpose of creating a fund, separate and distinct from the general resources of the corporation, to be held, used, invested and reinvested, improved and disbursed in the interest of the beneficiary as provided therein.
" 'Third, To purchase and sell mortgage securities either on real estate or personalty, all forms of commercial negotiable paper, evidence of indebtedness, trade acceptances or long and short time promissory notes.
" 'Fourth, To act as agent in securing insurance on the life of any person or persons in connection with the creation of any fund as provided in Item Second, and to act as trustee in the handling of any such fund and any money received from any insurance policy secured on the life of any person in connection therewith.
" 'Fifth, To do any and all things which at any time appear conducive or expedient in carrying out any or all of the purposes above enumerated and protective of the business established thereunder; and any other corporate purposes authorized by the statutes of the State of Ohio.'
"7. That the respondent has during the year 1933, entered into agreements for the acquisition of the assets of certain building and loan associations, as alleged in respondent's answer.
"8. That upon application of agents appointed by respondent to transact business for the respondent in this state for a certificate of authority pursuant to Section 709 of the General Code, the relator wrote a letter, a copy of which is hereto attached, marked 'Exhibit 2', and made a part hereof.
"9. That in December, 1931, and September, 1932, relator caused examinations to be made of the books of the respondent; that no examination has been made by the relator of the books of the respondent since September, 1932.
"10. That the relator wrote letters to respondent, copies of which are hereto attached, respectively marked 'Exhibit 3', 'Exhibit 5' and 'Exhibit 6', and made apart hereof.
"1. That Exhibit 4 together with Exhibit 4-a are copies of letter and statement forwarded by respondent to relator on or about January 9, 1933, and are referred to in Exhibit 1, as 'application for renewal of certificate of authority.' "
Mr. John W. Bricker, attorney general, Mr. Perry L. Graham, Mr. William. S. Evatt and Mr. Charles H. Jones, for relator.
Messrs. Bulkley, Hauxhurst, Inglis Sharp, Mr. C.C. Crabbe and Mr. George W. Ritter, for respondent.
Is the respondent engaged in the business of a bond investment company within the purview of Sections 697 to 709, General Code? The first of these sections consists of the following definition:
"Every corporation, partnership or association other than a building and loan association, which places or sells certificates, bonds, debentures or other investment securities of any kind, on the partial payment or installment plan, and every investment guaranty company doing business on the service dividend plan shall be deemed a bond investment company."
It is conceded that the purpose clause of the respondent's articles of incorporation empowers it to engage in business as a bond investment company. Likewise it is agreed that at the time the respondent entered into the first of the three above mentioned contracts it possessed the certificate of authority necessary for a bond investment company. This certificate expired December 31, 1932, and the relator in his capacity as supervisor of bond investment companies refused an application for a renewal thereof for the reason that he was "not satisfied that" the respondent had "complied with all the provisions of law." However, the respondent contends that it no longer needs such certificate because (1) it does not place or sell "certificates, bonds, debentures or other investment securities on the partial payment or installment plan," and (2) it is not an investment guaranty company "doing business on the service dividend plan."
A careful study of the involved terms of these contracts discloses three grounds upon which the requested writ must issue.
In the first place the respondent has contracted to place or sell its certificates "on the partial payment or installment plan." It is expressly provided that "the purchase price" shallbepaid "fromtimetotime." It is of course true that these payments or installments are to be realized from the liquidation of a special reserve fund of assets segregated for that purpose, but this circumstance in no wise alters the fact that the purchase price is to be paid from time to time in installments or payments. It is plain that these are to be made intermittently as the uncertain process of liquidation continues.
In the second place the respondent is an "investment guaranty company doing business on the service dividend plan." That it is "doing business on the service dividend plan" is apparent from numerous contract obligations as to services to be rendered. It "agrees to use all due diligence, reasonable care and prudence to collect the assets of said First party so delivered to its hands, and to carefully account for any and all loss or shrinkage which may occur in the collection of said assets." It "agrees that it will segregate all of the property and assets so sold and delivered to it in a special reserve fund entitled 'Columbia Savings Association Purchase Fund,' the liquidation of which shall be paid to apply on the purchase price from time to time as herein provided." It "agrees that it will in good faith endeavor to realize the largest possible amount for the property and assets so transferred and delivered to it." It "agrees that it will in good faith, endeavor to realize the largest possible amount for the segregated assets and agrees to exercise its sound discretion in the manner and terms of collection and disposal of such assets, including the renewals, extensions and indulgences, and that the net cash proceeds of any such liquidation shall be retained in said special reserve fund, with the right and power of the Company to invest and reinvest such cash fund in United States Government Bonds, United States Treasury Warrants, or other direct obligations of the Government of the United States, or issues of bonds guaranteed as to payment of principal and interest by the United States Government, or in any loans to the holders of certificates issued pursuant to paragraph 2 hereof." In its brief the respondent concedes that it "may charge against the property the amount of its necessary expenses and attorney's fees in the management of the property so purchased, but not to exceed three per cent per annum." From the funds realized as a result of these various services with respect to the association assets, the respondent is required to make certain payments, the unmistakable effect of which is a dividend.
But the respondent insists that even if it is doing business on the service dividend plan, it cannot properly be regarded as an "investment guaranty company." One difficulty with this contention is that in its contracts the respondent not only employs language importing a guaranty, but it also uses the very word "guarantee' itself. The respondent attempts to explain this by urging that the word as employed in its contracts "is simply another term for the agreement of the respondent to do the things which it has agreed to do," and is "simply a repetition of the promise to pay the face of the certificate." However, in view of the manifest astuteness with which these contracts have been drawn, it is not a little difficult to believe that surplusage of any sort was permitted to creep in, or that any words were employed except in their usual sense, although this court is of course agreed with the contention of the respondent that the mere label applied by parties to a contract is not conclusive of its legal nature. Under the circumstances it is not necessary to comment upon the other language of guaranty appearing in the contracts.
The third ground upon which this writ must be allowed is that these contracts attempt to provide a device for the private dissolution and liquidation of these savings and loan companies. That this device is in reality of this nature is demonstrated with such language as "First party desires to discontinue the savings and loan business heretofore conducted, and for that purpose to pay off its creditors and depositors and to cease and desist from active conduct of any business operations," "the Association is desirous of surrendering its corporate franchise and dissolving" and "the savings and loan company is desirous of surrendering its corporate franchise and dissolving." The state has exercised its right to preempt this field. State, ex rel. Bettman, Atty. Genl., v. Court of Common Pleas of Franklin County, 124 Ohio St. 269, 178 N.E. 258; Warner, Supt. of Bldg. Loan Associations, v. Mutual Building Investment Co., 128 Ohio St. 37, 190 N.E. 143.
WEYGANDT, C.J., STEPHENSON, JONES, MATTHIAS, DAY and ZIMMERMAN, JJ., concur.
WILLIAMS, J., not participating.