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The Federal Land Bank of Berkeley v. Warner

Supreme Court of Arizona

July 1, 1933

THE FEDERAL LAND BANK OF BERKELEY, a Corporation, Appellant,
v.
SAMUEL S. WARNER, Also Known as S. S. WARNER, and LYDIA S. WARNER, His Wife, Appellees

APPEAL from a judgment of the Superior Court of the County of Maricopa. Joseph S. Jenckes, Judge. Judgment modified and affirmed.

Messrs. Phillips, Holzworth & Phillips (Mr. Richard W. Young, of Counsel), for Appellant.

Messrs. Woolf & Carter, for Appellees.

Messrs. Sanders, Childs, Bobb & Wescott, Mr. Everett Sanders, Mr. Edward F. Howrey, Mr. Peyton R. Evans and Mr. John Thorpe, Amici Curiae.

OPINION

[42 Ariz. 202] ROSS, C. J.

The plaintiff, the Federal Land Bank of Berkeley, on November 1, 1922, loaned the Warners, husband and wife, $7,200 on their note indorsed by the Salt River Valley National Farm Loan Association, a corporation, and secured by a realty mortgage on lands situate in Maricopa county. The defendant mortgagors defaulted in the payments, also in keeping the taxes, water dues, and insurance paid; hence this suit was brought to collect the note and foreclose the mortgage. The only defense was a claim to a set-off of $360. This the court allowed. The court also refused to allow the plaintiff an attorney's [42 Ariz. 203] fee as stipulated in the mortgage. Plaintiff has appealed, assigning as reasons therefor the allowance of the set-off and the refusal to allow an attorney's fee. We will consider these assignments in the order given.

Page 564

It appears from the pleadings that the defendants (Warners), through the Salt River Valley National Farm Loan Association, applied to the Federal Land Bank of Berkeley for a loan, and that under instructions from them to the bank the latter paid the $7,200 borrowed from it as follows: $6,840 on defendants' existing debts and $360, or 5 per cent. of loan, for borrowers' membership stock in the Salt River Valley National Farm Loan Association. It is asserted by defendants that, because this $360 membership fee in the association was used by the association in buying for itself an equal amount of the capital stock of the bank, they should be given credit therefor.

The plaintiff and the Salt River Valley National Farm Loan Association, to which we shall refer, respectively, as the bank and the association, were organized under and pursuant to the terms and conditions of the Federal Farm Loan Act, passed by Congress July 17, 1916. Chapter 245, 39 Stat. 360, title 12 U.S.C.A., § 641 et seq.(Our references will be to U.S.C.A.) Both these corporations drive their charters and charter powers from said act. They are very esential parts of the machinery devised by the Congress for the administration of a nation-wide system of farm loans proposed to be set up thereby. This system consists of twelve federal land banks for the United States, one for each of the twelve districts into which the country has been divided. The plaintiff's district is the eleventh, composed of Arizona, California, Nevada and Utah. Each of these twelve banks is supplied with ample funds to lend the farmer who shows himself qualified to borrow. These funds are obtained by sale of [42 Ariz. 204] the bank's capital stock, amounting to $750,000, to national farm loan associations and the government principally (sections 691, 692); and by the sale of farm loan bonds issued against first mortgages (sections 851-874).

The banks are authorized to make loans on the security of first mortgages on lands lying within their respective districts, such loans to be repaid by means of a fixed number of annual or semi-annual payments sufficient to retire the debt within an agreed period of not less than five, nor more than forty, years. The negotiations for loans are not carried on between the bank and the borrower but between the bank and a local farmers' association representing the borrower. Ten or more natural persons who are the owners, or who are about to become the owners, of farm land qualified as security for a mortgage loan, may unite to form one of these local associations, and, if their application is satisfactory, the Federal Farm Loan Board will grant them a charter (sections 716-720).

These associations are distinct, separate, legal entities. They have a board of directors, a president, a vice-president, and a loan committee, and a secretary-treasurer, who is the chief executive officer. They may contract debts and obligations, sue and be sued. One of the conditions of obtaining loans is that the association shall subscribe to the capital stock of the bank 5 per cent. of the aggregate loans to its members, and pay the same in cash when the loans are made (section 721). It shall also leave said capital stock with the bank as collateral security for the payment of loans. Upon full payment of mortgage loans, this stock shall be paid off and retired. The farmer who obtains a loan from the bank through his association must subscribe 5 per cent. of his loan in the capital stock of his association and pay the same in cash (section 733). This capital stock the [42 Ariz. 205] association is authorized to hold as collateral security for the payment of loan. Upon full payment of loan, the stock shall be paid off at par and retired.

Thus it is seen that the borrower is a stockholder in his association, and that his association in turn is a stockholder in the bank. The borrower is not a stockholder in the bank. The relation he and the bank sustain to each other is that of debtor and creditor, and, of course, what he owes the bank cannot be reduced by what the association owes him or may owe him upon a settlement. The debts are not between the same persons or corporations or their assigns -- an essential to the right of set-off or counterclaim.

Not only the association is obligated to the payment of the mortgage loan to the bank but all the members of the association are "individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such association to the extent of the amount of stock owned by them at the par value thereof, in addition to the amount paid in and represented by their shares." Section 744.

Until the borrower redeems his membership stock in the association by the discharge of the mortgage debt, he certainly has no right to have such stock, or a credit for it. Before he can claim such shares, he must discharge the debt for the payment of which they were pledged. To the extent of their value, equity will hold and apply the borrower's shares on the ...


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