CURTIS, J., Dissenting. I dissent. I take issue with the following statement found in the early part of the majority opinion: “The theory behind this plan [the plan under which said association was organized] is that the other shares [membership shares] and certificates will receive a more or less fixed reasonable rate of return, with the guarantee stock (or reserve fund) as a protection, and that those who supply the capital for the guarantee stock will receive the entire surplus over the amount necessary to pay the fixed return to the other investors, and will also control the business. In brief, the guarantee stockholders take the risks, manage the affairs, and receive the profits in excess of the fixed charges. ’ ’ The opinion is based solely upon this theory. The substance of the entire theory is stated in the last sentence of this statement. This statement, in my opinion, does not correctly set forth the respective rights, duties and obligations of the guarantee stockholders and the holders of membership shares.
In the first place, the guarantee stockholders do not take the risks of the association alone, but assume them only in part and jointly with the holders of membership shares. If the association fails to make any profit, after paying the general running expenses of the association and the interest due on the investment certificates, the holders of membership shares, like the guarantee stockholders, receive no return on their investment. If there is a surplus after paying these expenses and interest, this surplus may be paid out in dividends to both the guarantee stockholders and the holders of membership shares. The holders of membership shares are entitled to dividends at the same rate as is allowed the guarantee stockholders. The only risk assumed by the guarantee stockholders, not assumed by the membership shareholders, is [149]that the stock of the former is liable for assessment and to creditors.
The claim that the guarantee stockholders have the controlling voice in the management of the association is based upon a provision of the by-laws that five out of nine directors must be guarantee stockholders, but these five directors, as well as the other four directors, are elected by the combined votes of the guarantee stockholders and the holders of membership shares, each entitled to one vote. From the character of an association organized like the Pacific Coast Building-Loan Association, it is obvious that the number of membership shares would exceed by far the guarantee stock. It, was so in the present association as the holders of membership shares largely predominated over the guarantee stockholders in the proportion of over ten to one. There were 2,755 shares of guarantee stock, and over 34,000 membership shares outstanding at the time this association was taken over by the commissioner. The shareholders, therefore, were able to control the election of the board of directors, who in turn managed the affairs of the association. While it is true that five of the nine directors were required to be holders of guarantee stock, if they owed their position to the vote of the holders of membership shares, it is only reasonable to assume that they would carry out the wishes of the power that elected them. Furthermore, there were twenty-nine holders of membership shares, who were also holders of guarantee stock. There was nothing to prevent the membership shareholders from casting their votes for at least five of these holders of both guarantee stock and shareholder stock, and together with the four that they might elect from their own membership, elect a board of directors consisting wholly of holders of membership shares. In such an event, which is not only possible but probable in the management of an association with a corporate structure like the Pacific Coast Building-Loan Association, the management of the association would be in the entire control of the holders of membership shares. It is not correct, therefore, to say that the guarantee stockholders manage the affairs of the association. They may do so only with the consent and approval of the holders of membership shares. The latter are legally the controlling factor in the management of the affairs of the association. The majority opinion refers to the custom of holders of membership shares to execute proxies in favor [150]of the secretary, but they were under no legal obligation to execute such proxies, and they might recall them at any time.
Neither can it be correctly said that the guarantee stockholders receive the profits in excess of the fixed charges. The fixed charges are the expense of conducting the association and the interest on borrowed money, including the interest on the investment certificates.' After these charges have been paid, the balance, if any, belongs to the stockholders, both guarantee stockholders and membership shareholders, and may be paid to' them in dividends. The dividends are declared by the board of directors, and must be paid equally on the stock, both of the guarantee stockholders and that of holders of membership shares. This dividend is not a fixed charge, but is only payable by resolution of the directors and when declared is paid alike to both classes of stockholders.
It is apparent, therefore, that the distinction which the majority opinion makes between these two classes of stockholders has little, if any, basis to support it. On the other hand, these two classes do possess many points of similarity which would indicate that they are each stockholders of the association, although they may not have equal rights in the corporate property, and their duties and liabilities may differ in some respects. They each are members of the corporate 'body. They have equal voting privileges. The members of each class may act as directors and officers of the association. They are entitled to equal dividends on their stock. These rights and privileges are usually enjoyed only by stockholders of a corporation, and when they arise by reason of a person’s relation to a corporation, invariably constitute that person a member of a corporation. Then again the name of the security—“membership shares”—is a clear indication that it was intended that the owners thereof were to be stockholders in the corporation. The word “shares”, when used in connection with an interest in a corporation, invariably denotes the interest a stockholder has in the corporate property. Not content with designating the corporate interest of this class of investors in a building association as a “share”, the act went further and described it as a -“membership share”, further indicating that the owner thereof was to be a member of the corporation or a stockholder thereof.
[151]It is true that the guarantee stockholders were entitled to participate in the reserve fund, which right was not enjoyed by the holders of membership shares, but this right given to tlie former does not affect the status of the latter as members of the corporation. Mere inequality in the right of different classes of stockholders to share in the profits of the corporation does not take either class out of the stockholders’ status. Section 290 of the Civil Code provides for different classes of stockholders with different rights and liabilities, yet all are stockholders of the corporation. The laws of this state permit the formation of a corporation with preferred and common stock. The rights of these two classes of stockholders to share in the profits of the corporation are different, yet the members of each class are stockholders.
There may be other slight differences between the rights and liabilities of guarantee stockholders and those of holders of membership shares, but they are not so fundamental that they change the character of the latter and constitute them creditors instead of stockholders, when they possess all the characteristics of stockholders above enumerated.
Particular reliance is placed in the majority opinion upon the right of withdrawal which may be exercised by holders of membership shares, which right is not enjoyed by guarantee stockholders. Conceding that after this right has been exercised by shareholders, those exercising such right thereafter become creditors of the corporation and can no longer be regarded as stockholders, it does not follow that prior to exercising this right of withdrawal and from the inception of their acquiring membership shares, they were merely creditors. After exercising their right of withdrawal pursuant to the by-laws of the association, their only right therein was to receive the amount due on their surrendered shares. The association then owed them a debt, and that was its only obligation to them, and that was their only right. Prior thereto, their rights were entirely different. Before notice of withdrawal they had no right to demand' of the association the amount called for by their shares, but were remitted to dividends on their shares. As we have seen, prior to withdrawal, they had all the rights of a stockholder including not only the right to receive dividends on their stock, but the right to vote at all its meetings, act as a director and officer of the association, and as we have seen, through this right they had a part in, and it was even within [152]their power, acting in conjunction with other holders of membership shares, to actually manage the affairs of the corporation. It seems too clear for argument that by exercising their right of withdrawal their status had been completely changed. Their rights as shareholders had been wiped out, and the new rights as creditors had been created.
Those holders of membership shares, who were such at the time this association was taken over by the Building and. Loan Commissioner for the purpose of liquidation, and they include all such shareholders who are now contending that they are mere creditors of the association, occupy an entirely different position. Respecting the rights of such shareholders, who attempted to withdraw after the Building and Loan Commissioner took over the association for the purpose of liquidating, the accepted rule is, “The rights of withdrawal ‘are provided for with respect to going concerns only.’ (Reddick v. United States B. & L. Assoc., 106 Ky. 94 [49 S. W. 1075] ; and Hohenshell v. Home B. & L. Association, 140 Mo. 566, [41 S. W. 948]).” (Pacific Coast Sav. Soc. v. Sturdevant, 165 Cal. 687 [133 Pac. 485, 49 L. R. A. (N. S.) 1142].)' In that case, this court further said, [page 694] “Assuming that a notice of withdrawal given and accepted while the society is actually solvent gives stockholders so withdrawing the status of creditors after the lapse of the time required for notice, we think the burden is upon a stockholder seeking to show that his status has been changed to that of a creditor, to allege and prove the essential fact that the corporation, admittedly insolvent at the time the distribution is sought, was not insolvent when the alleged right of payment accrued.’’
The Sturdevant case was cited with approval in Fidelity Savings & Loan Association v. Burnet, 65 Fed. (2d) 477, 481 [62 App. D. C. 131], where the court referring to the Sturdevant ease construed it as follows: “In Pacific Coast Sav. Soc. v. Sturdevant, 165 Cal. 687, [133 Pac. 485, 49 L. R. A. (N. S.) 1142], a building association had become insolvent. Certain of its stockholders who had the right of withdrawal had given notice of their intention to withdraw. The question was, Did they, by virtue of this notice, change their position from stockholders to creditors, or, as stated by the Supreme Court of California, did they by this fact cease to be stockholders and become creditors? The court answered this question in the negative. It is quite true in that [153]case no guaranty stock had been sold and issued and therefore the provisions of the law subordinating that stock to the other stock did not apply, but the principle decided was conclusive of the legal relation of such shareholders to the association, that is to say, that they did not occupy to the association the same aspect as a depositor to a savings bank. And this, it seems to us, is necessarily correct, for, if it were held that the fact of the issue by the association of permanent stock itself made all other classes of stock debts, and all other stockholders creditors, it might, by the issuance of a negligible amount of guaranty stock relieve practically all of its assets from liability to general creditors except upon an equality with shareholders participating in the conduct of the association’s affairs. Hence it would seem to us that the fact of the issue by the company of guaranty stock has no such significance as is claimed.”
The case of Cook v. Emmet Perpetual & Mutual Bldg. Assn., 90 Md. 284 [44 Atl. 1022], holds that general creditors are entitled to preference over stockholders who gave notice of withdrawal before judicial determination of insolvency where the association was in fact insolvent when the notice was given.
In the present case, it was judicially determined that the Pacific Coast Building-Loan Association was insolvent on January 11, 1932, the day the Building and Loan Commissioner took possession of it for the purpose of liquidation, and it follows from the above authorities that any withdrawal, or any notice of withdrawal, after that date, was ineffectual to transform the stockholder attempting thus to withdraw into a creditor of the corporation.
The main authority relied upon by the majority opinion as holding that these shareholders are creditors of the association is the case of In re Western States Building-Loan Association, 50 Fed. (2d) 632, in which it was held in effect that the right of a holder of membership shares created the association the 1 ‘debtor of its shareholder” and accordingly holders of membership shares were creditors, and were entitled to sign a petition in involuntary bankruptcy proceedings. This case is out of line with the decision in the case of Fidelity Savings & Loan Association v. Burnet, supra, and the other cases relied upon above. The court in the Fidelity Savings & Loan Association ease, supra, refused to follow the earlier ease of In re Western States Building-[154]Loan Association, supra. The last-named ease is a decision of the United States District Court and was rendered by an individual judge while the decision in the Fidelity Savings & Loan Association was by the Circuit Court of Appeals and was the unanimous conclusion of four justices of that court. I submit that, with due deference to the ability of the eminent jurist who wrote the earlier decision, the latter one is entitled to greater weight, as it is later in date, was rendered by a higher court, and was approved by four eminent justices thereof, while the first opinion had only the approval of a single member of the court. But independent of the weight to be given these opinions of the federal courts, the question before us is the construction of a statute of this state. The court in the Fidelity Savings & Loan Association, supra, cited and relied upon two decisions of this state, the Sturdevant case, supra, and Groover v. Pacific Coast Sav. Society, 164 Cal. 67 [127 Pac. 495, Ann. Cas. 1914B, 1261], and is, therefore, in harmony with the law as declared by the decisions of this state, while the decision in the Western States Building-Loan Association makes no reference to either of these two eases, or any other decision of this, or any other appellate court of this state. For this reason alone, the decision in the Western States Building-Loan Association ease, supra, should not be followed by the courts of this state.
The only correct conclusion that can be reached in this case, in my opinion, is that holders of membership shares are members of the association, and therefore are stockholders ; that holders of investment certificates are creditors of the corporation, and are, therefore, entitled to be paid in full, principal and interest, before anything is paid to the stockholders. The case of Greva v. Rainey, 2 Cal. (2d) 338 [41 Pac. (2d) 328], cited in the majority opinion, has no application in this case, as the controversy involved there was between two classes of bank depositors, all of whom were concededly creditors of the corporation. In reaching this conclusion it is not necessary to rely upon section 5.01 of the Building and Loan Act, which expressly provides that, •1 ‘ The holders of investment certificates . . . shall be entitled upon liquidation of an association to receive payment in full before any payment or distribution shall be made to shareholders. ...” The judgment should [155]be reversed with directions to the Building and Loan Commissioner to pay to the holders of investment certificates, interest upon the amount due them on their investment certificates from the date on which the commissioner took over said association for the purpose of liquidation, to the date of payment.
Rehearing denied.