The controversy in this case makes it necessary to determine the remedies available to a shareholder in an insolvent farm loan association upon the refusal of a demand for the retirement of his shares.
Respondent is the owner of a farm in Knox county, Ohio. His vendors were members of the Knox National Farm Loan Association, a co-operative membership corporation chartered under federal law. Federal Farm Loan Act, July 17, 1916, c. 245, § 7, 39 Stat. 365, 12 U.S.C. § 711 (12 U.S.C.A. § 711). Through that association they procured a loan from the Federal Land Bank of Louisville, giving a mortgage as security. Part of the proceeds of the loan (i.e., 5 per cent. thereof) they used for the purchase of stock in the co-operative association, there being a requirement of the statute that 'any person desiring to borrow on farm land mortgage through a national farm loan association shall make application for membership and shall subscribe for shares of stock in such farm loan association to an amount equal to 5 per centum of the face of the desired loan, said subscription to be paid in cash upon the granting of the loan.' Federal Farm Loan Act, § 8, 12 U.S.C. § 733 (12 U.S.C.A. § 733); cf. § 9, 12 U.S.C. 745 (12 U.S.C.A. § 745). The statutory plan has already been expounded in opinions of this court. Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 203, 41 S.Ct. 243, 246, 65 L.Ed. 577; Federal Land Bank v. Gaines, 290 U.S. 247, 54 S.Ct. 168, 78 L.Ed. 298; Federal Land Bank v. Priddy, 295 U.S. 229, 55 S.Ct. 705, 79 L.Ed. 1408.
Upon the purchase of the farm by respondent in October, 1927, he assumed the payment of the mortgage debt, succeeding at the same time to the interests of his vendors in the stock of the association and to the attendant liabilities. The shares were of the par value of $265. They had been pledged with the association, in accordance with the requirements of the statute (section 8, 12 U.S.C. § 733 (12 U.S.C.A. § 733)) as security for the loan. The association on its part had subscribed for an equal amount of the shares of the federal land bank, the lender of the money, leaving the shares so subscribed for as a pledge for the security of the lender. This too was a procedure called for by the statute. Section 7, 12 U.S.C. § 721 (12 U.S.C.A. § 721). From time to time thereafter there were payments on account, with the result that the loan had been reduced by March, 1933, to $2,122.46, at which time respondent made an effort to clear the farm of the mortgage and to put an end also to his liability as shareholder. To that end he paid the association $1,857.46 to be transmitted to the bank, insisting that the deficiency ($265) be satisfied through the retirement of the shares. The bank accepted the payment as one upon account, but refused to discharge the mortgage without payment of the balance. At that time, by concession, the association was insolvent. Its capital was impaired; it was indebted to the bank upon other mortgage loans, being liable as indorser or otherwise when it borrows for a member (Federal Land Bank v. Gaines, supra); it had no moneys in its treasury wherewith the shares could be retired.
The courts took up the controversy. Respondent joined the bank and the association as defendants in a suit in the court of common pleas of Knox county, Ohio. He prayed for judgment against the bank that the mortgage be held to have been canceled and extinguished and for judgment against the association that the shares of stock be paid off and retired, and that the business of the association be wound up and liquidated. For answer, the bank and the association took the ground that the partial payment made was insufficient to discharge the mortgage; that there could be no retirement of the shares while the association was insolvent; that the state court was without jurisdiction to liquidate the business of the association, an instrumentality of the federal government; and that jurisdiction in that behalf resided in the federal government exclusively.