In

at par. Such reserves are, of course, expected to operate as a cushion to absorb losses which an association may suffer. Reserves which are set aside for the meeting of contingencies should be allocated on the books of the association and revolved when circumstances warrant doing so. case of losses, the interest of patrons in such reserves should be reduced on as equitable a basis as practicable and the bylaws of the association should give the board of directors authority to order such a reduction.

As previously indicated, a sharp line of demarcation should be drawn between operating and maintenance expense items, and investments which the members of an association make in their association.

The revolving-fund plan of financing is believed to be the most practicable way of insuring that ultimately all the major contributions of patrons to the assets of an association may be returned to them. The fairness of the plan should make it easier for an association to obtain members and to build up adequate capital. It provides a means by which the capital of an association increases as its volume of business increases.

Many of the largest and most successful agricultural cooperatives use this method of financing. 19 It is being adopted not only by new associations but by associations which have been operating for many years.

The validity of the revolving-fund plan of financing has been specifically recognized. 20 Yet it should be kept constantly in mind that a member of a cooperative, like a member of any other business corporation, may be an ordinary creditor thereof. He may make an outright loan to a cooperative and thus become a creditor in the sense in which that term is customarily used. Likewise, a member who supplies money to an association may provide it subject to specific terms and conditions. In the absence of fraud, the courts will ordinarily enforce the terms of such agreements.

To illustrate, in a case 21 involving a cooperative formed by retail grocers to operate a wholesale agency, it appeared that bylaws were adopted pursuant to which 1 percent was added to all statements for the purpose of creating a credit reserve fund "to guarantee the accounts of all members with the Association who receive credit." The bylaws further provided that the amount credited to each member's reserve account "shall be returnable with interest upon the member ceasing to be a member of the Association," less a pro rata percentage of losses sustained by the Association on account of credit extended to members. The funds thus accumulated were not held out as constituting part of the assets of the cooperative. The wholesale agency was placed in bankruptcy and creditors thereof contended that the members had no claims against the bankrupt on account of their contributions to the credit reserve fund, but the Court held otherwise. As agricultural cooperatives that use the revolving-fund plan of financing usually provide that the obligations of the association to the

19 For example, Washington Cooperative Farmers' Association, Seattle, Washington; Dairymen's League Cooperative Association, Inc., New York, N. Y.; and various associations comprising the Sunkist system in California.

20Reinert v. California Almond Growers Exchange, 9 Cal. 2d 181, 63 P. 2d 1114, 70 P. 2d 190; Adams v. Sanford Growers' Credit Corporation, 135 Fla. 513, 186 So. 239; Ozona Citrus Growers' Association v. McLean, 122 Fla. 188, 165 So. 625; Proodian v. Plymouth Citrus Growers Association, 143 Fla. 788, 197 So. 540; Parker v. Dairymen's League Cooperative Association, Inc., 226 N. Y. S. 226, 222 App. Div. 341; Loomis Fruit Growers' Association v. California Fruit Exchange, 128 Cal. App. 265, 16 P. 2d 1040. See Farmers Union Coop. Gin Co. v. Taylor, 197 Okla. 495, 172 P.2d 775.

"Warner v. Schoner, 90 F. 2d 579.

holders of certificates issued in connection therewith are junior and subordinate to the claims of other creditors, the opinion just discussed goes much further than a court ordinarily would be called upon to go in a case involving such a cooperative. The status of certificates which are junior and subordinate to other claims is similar to that of stock certificates.

As showing that borrowed money may be borrowed under such terms and conditions that it may be considered as capital and, therefore, may not be required to be shown on the books of a corporation as a liability, a case 22 in which a cooperative automobile insurance company issued for its preferred stock so-called retirable guaranty-fund certificates so as to enable the company to be exempt from the payment of Federal income taxes, is significant. It was held that the money evidenced by such certificates was borrowed money though the certificates had no fixed maturity dates and their holders "had no right to enforce payment of them" and that the certificates did not have to be carried “as a liability on its books and statements."

Authority for the revolving-fund plan of financing is found in the general rule that a corporation may purchase stock which it has issued. The general rule appears to be that:

23

A private corporation may purchase its stock if the transaction is fair and in good faith, if it is free from fraud, actual or constructive, if the corporation is not insolvent or in process of dissolution, and if the rights of its creditors are in no way affected thereby.

In view of the fact that a corporation may, under the conditions stated in the foregoing quotations, purchase its capital stock, it appears that there should be no doubt of the right of a cooperative to revolve its capital which is evidenced by stock or other certificates, especially as in the usual situation a cooperative would not actually be depleting its capital because the amount of current contributions to capital would be equivalent to the amount of capital which would be retired, thus leaving the cooperative with substantially the same amount of capital after the transaction had been completed that it had prior thereto. In any event, there would appear to be no basis for applying a stricter rule to the retirement of funds in a revolving fund than is applied in an ordinary case involving the purchase of its own stock by a corporation.

As previously indicated, an association may use stock, revolving-fund certificates, or a certificate bearing a different designation to evidence capital in the revolving fund. In fact, it is not indispensable that any form of certificate be issued to evidence such capital, if the bylaws of the association are clear and specific with reference thereto. In any instance in which it is clear that the obligation of an association to its members on account of money furnished by them for a revolving fund is junior and subordinate to the rights of creditors, it is believed that the right of the association to retire any part of the revolving fund is subject to the rights

22 Commissioner of Internal Revenue v. National Grange Mutual Liability Company, 80 F. 2d 316. See also Island Petroleum Company v. Commissioner of Internal Revenue, 57 F. 2d 992; Luckenbach v. McCahan Sugar Refining Company, 248 U. S. 139, 39 S. Ct. 53, 63 L. Ed. 170, 1 A. L. R. 1522; Stephens v. Simpson, 87 N. Y. S. 1608, 94 App. Div. 298; Schachne v. Corporation of Chamber of Commerce, 102 Misc. Rep. 197, 168 N. Y. S. 791.

23 Porter v. Plymouth Gold Mining Company, 29 Mont. 347, 74 P. 938, 101 Am. St. Rep. 569. See also Griffin v. Bankers' Realty Investment Company, 105 Neb. 419, 181 N. W. 169; Howe Grain & Mercantile Company v. Jones, 21 Tex. Civ. App. 198, 51 S. W. 24; Atlanta & Walworth Butter & Cheese Association v. Smith, 141 Wis. 377, 123 N. W. 106, 32 L. R. A. (N. S.) 137, 135 Am. St. Rep. 42; Koeppler v. Crocker Chair Company, 200 Wis. 476, 228 N. W. 130.

of existing creditors. The law is well established that a corporation may not retire any part of its capital stock when to do so adversely affects the rights of current creditors to whom the association is indebted.

In a Minnesota case 24

involving a cooperative, it was said:

To the extent that money, goods or stockholders' notes were exchanged for the stock, the capital of the corporation was depleted. The capital was its own property, but it could not be withdrawn or distributed among stockholders without provision being first made for the full payment of corporate debts.

In another case a corporation issued what were described as participating operation certificates, for which the purchasers paid $250 and on account of which they were entitled to receive $500, which was to be paid to the holders of these certificates out of funds obtained by setting aside in a bank 1 cent on each gallon of gasoline and 5 percent on other merchandise sold by each gasoline station concerned. The corporation was placed in the hands of a receiver and the court held that, inasmuch as the participating operation certificates obligated the corporation issuing them to make payments on them only out of receipts from operations, the holders of the certificates were not entitled to claim any part of the funds which had been set aside in a bank (apparently subject to the order of the corporation) with a view to ultimate distribution to the holders of the certificates; but, on the contrary, that the funds should be distributed only among the other creditors of the corporation.25

In a case 26 in which a stock corporation issued what were called trade certificates, the corporation issuing them was placed in bankruptcy and the holder of certain of such trade certificates was held on account thereof to be a creditor whose rights were "founded upon an express contract.” A certificate entitled its holder to purchase goods of the corporation "at a profit not to exceed 10 percent" and provided that it should be taken into account in the payment of dividends; but the holder was guaranteed the payment of at least 8 percent per annum on the amount of money which he had "deposited" with the corporation. The court said:

The fact that the certificate is payable in merchandise, after the end of two years, on the demand of the holder, in no way detracts from its value as an obligation to

pay.

In a Wisconsin case 27 "participating operation certificates" were secured by a deed of trust on real estate. They were payable out of a fund to be created by the deposit in a bank for that purpose of 1 cent for every gallon of gasoline and kerosene sold by the corporation concerned which guaranteed that the certificates would "be paid on or before ten years from the date hereof." The corporation was placed in bankruptcy and its trustees sold the real estate "subject to all legal liens and encumbrances." The purchaser contended that it took title free from the deed of trust securing the certificates. It was urged that the holders of participating operation certificates had the status of "stockholders, profit-sharers, and coadventurers," and not that of creditors, but the court held that as there was a definite promise to pay the certificates on or before 10 years from date, the relation between the corporation and the holders of certificates was

John H. Lebens, as Receiver of the LeSueur County Cooperative Company v. Nelson, 148 Minn. 240, 181 N. W. 350, 352. See also Learmouth v. Caledonia County Cooperative Association, 109 Vt. 526, 1 A. 2d 732.

25

United States & Mexican Oil Co. v. Keystone Auto Gas & Oil Service Co., 19 F. 2d 624. See also Stephenson v. Go-Gas Company, 268 N. Y. 372, 197 N. E. 317; In re Hawkeye Oil Company, 19 F. 2d 151.

27

In re Spot Cash Hooper Company, 188 F. 861, 863.

Kettenhofen v. Sterling Oil Company, 226 Wis. 178, 275 N. W. 425.

that of debtor and creditor and that the holders were thus entitled to the security afforded by the deed of trust. On the other hand where participating operation certificates did not have a maturity date and were by their terms payable only out of proceeds arising in the operations of the business, it was held in bankruptcy that the holders of such certificates were "not creditors, but * * * coadventurers ***;" and that the rights of such holders were "subordinate to those of general creditors.” 28

While the writer is of the opinion that the revolving-fund plan of financing may be adopted under the laws of any State, and that such a plan constitutes a valid contractual relationship for which there need be no specific statutory authority, the fact that some States have specifically authorized such a plan 29 is some indication of the increasing recognition given to this cooperative device.

Although a member may have withdrawn from an association, this does not give him a right to receive his interest in a revolving fund, except at the time and in the manner stated in the bylaws.

30

Whether blue sky laws of a given State are applicable to revolving-fund or other like certificates is a question which should be inquired into in every instance. In a Wisconsin case 31 it was held that the corporation involved was prohibited from offering for sale certain so-called goodwill contracts unless and until a permit had been issued by the Railroad Commission of the State. In this case the court pointed out that the goodwill contracts were neither stock on the one hand nor bonds on the other, but held that this did not prevent them from being a security within the definition of the statute.

Courts have not infrequently been perplexed as to the character of particular forms of certificates which were before them, primarily because of their hybrid character and their ambiguous provisions.32

On principle it is believed that certificates issued by cooperatives, irrespective of their designation, should be subordinate to the rights of general creditors for the reason that the members should finance and bear the risks of their own enterprise. The real status of certificates issued by an association should be apparent on their face.

MAY

Associations Operating in Various States

AY an association formed under the laws of one State do business in other States? At the outset it may be said that generally speaking the power of a corporation to act outside the State of its creation need not be expressly conferred, but may be implied; provided, of course, the State in which a foreign corporation does business consents, and also provided there is no restriction in its charter. The charter of a corporation is the same abroad as it is at home, and wherever it goes for business it carries its charter as the law of its existence. When a State permits a foreign corporation to come within its borders, it is presumed to have consented that the corporation may exercise all the power conferred by its charter and the 28 In re Hawkeye Oil Company, 19 F. 2d 151, 152. See also McAbee Powder & Oil Company v. Penn-American Gas Coal Company, 295 F. 630.

29 Iowa Code Ann., secs. 499.30, 499.33; Utah Code Ann., sec. 3-1-9.

30 Reinert v. California Almond Growers Exchange, 9 Cal. 2d 181, 63 P. 2d 1114, 70 P. 2d 190; Parker v. Dairymen's League Cooperative Association, Inc., 226 N. Y. S. 226, 222 App. Div. 341.

31 Brownie Oil Company v. Railroad Commission, 207 Wis. 88, 240 N. W. 827, 87 A. L. R. 33. See also State v. Gopher Tire & Rubber Co., 146 Minn. 52, 177 N. W. 937, 938.

32 28 Colum. L. Rev. 65.

laws pertaining thereto, unless prohibited from so doing by some direct enactment of the State or some rule of public policy. 33

If an association desires to enter into marketing contracts with producers in States other than that in which organized, must the association comply with the laws of those States respecting foreign corporations? All the States, it is believed, have statutes relative to foreign corporations doing business within their borders. If a cooperative formed in one State enters into marketing contracts with producers in another State, and the products covered by the contracts on delivery to the association are to be moved out of the State or delivered to the association outside the State in which grown, then it seems clear that an association would not be required to comply with the laws of the State with respect to foreign corporations.34

The situation would involve interstate commerce, and the Supreme Court of the United States has held that a corporation of one State may purchase goods in another State for shipment out of the State without the consent of the latter. The following quotation is taken from an opinion of the Supreme Court of the United States. 35

A corporation of one State may go into another, without obtaining the leave or license of the latter, for all the legitimate purposes of such commerce; and any statute of the latter State which obstructs or lays a burden on the exercise of this privilege is pro tanto void under the commerce clause.

Where goods in one State are transported into another for purposes of sale, the commerce does not end with the transportation, but embraces as well the sale of the goods after they reach their destination and while they are in the original packages. Brown v. Maryland, 12 Wheat, 419, 446-447; American Steel & Wire Co. v. Speed, 192 U. S. 500, 519. On the same principle, where goods are purchased in one State for transportation to another the commerce includes the purchase quite as much as it does the transportation.

In no case has the court made any distinction between buying and selling or between buying for transportation to another State and transporting for sale in another State. Quite to the contrary, the import of the decisions has been that if the transportation was incidental to buying or selling it was not material whether it came first or last.

In a Nebraska case 36 it was urged that a cooperative incorporated under the laws of Kansas could not maintain a suit in Nebraska because the association had not complied with the laws of that State respecting foreign corporations, but the Supreme Court of Nebraska held that the association was engaged in interstate commerce and hence was not required to comply with the laws of Nebraska affecting foreign corporations.

A number of the States have provisions in their statutes which specifically refer to cooperatives formed in other States.37 In 1926, the laws of Indiana 38 provided as follows:

(1) Before any foreign corporation without capital stock and not for pecuniary profit shall be permitted or allowed to transact business or exercise any of its corporate powers in the State of Indiana, it shall be required to file in the office of the

33 Milton-Freewater & Hudson Bay Irrigation Co. v. Skeen, 118 Ore. 487, 247 P. 756, 761.

But see Gwin,

34 Currin v. Wallace, 306 U. S. 1, 59 S. Ct. 379, 83 L. Ed. 441. White & Prince, Inc. v. Henneford, 193 Wash. 451, 75 P. 2d 1017. 35 Dahnke-Walker Milling Co. v. Bondurant, 257 U. S. 282, 283, 290, 291, 42 S. Ct. 106, 66 L. Ed. 239. See also Currin v. Wallace, 360 U. S. 1, 59 S. Ct. 379, 83 L. Ed. 441.

37

36 Nebraska Wheat Growers' Association v. Norquest, 113 Neb. 731, 204 N. W. 798. Cooperative Corporation's Law, sec. 76, McKinney's Consolidated Laws of New York, Ann.

38 Burn's Indiana Statutes, §§ 4925, 4927 (repealed by acts of 1935, c. 157, § 34).