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Smyth v. Kaspar American State Bank

MAY 13, 1955.

EMMA SMYTH ET AL., CZECHOSLOVAK SOCIETY OF AMERICA, AND JOHN KOLINSKY, APPELLANTS,

v.

KASPAR AMERICAN STATE BANK, APPELLEE.



Appeal from the Superior Court of Cook county; the Hon. RUDOLPH F. DESORT, Judge, presiding. Reversed and remanded.

MR. JUSTICE NIEMEYER DELIVERED THE OPINION OF THE COURT.

Rehearing denied June 20, 1955.

January 31, 1955. Additional Opinion,

Plaintiffs, present and former owners of certificates of beneficial interest issued by defendant bank pursuant to a plan of reorganization and reopening of the bank on January 15, 1935, payable "without interest, solely out of the future recoveries and net profits . . . before any dividends or returns of any kind or character are paid on the capital stock of the bank," suing on behalf of themselves and of all owners of certificates on December 15, 1948 and their successors in interest, appeal from that part of an order entered on the pleadings which dismissed for want of equity the second amended and supplemental complaint (hereinafter called the complaint) as to certain prayers for relief and the allegations pertaining thereto, whereby plaintiffs seek to subject the net profits earned after the reopening of the bank to the payment of the certificates. The part of the order directing that the case proceed in due course as to the issues presented by the remaining portions of the complaint is not before us. Two questions are presented: The validity of the provisions for payment of the certificates out of the net profits of the bank, and, the right of plaintiffs to maintain a class, or representative, suit.

In the complaint the plaintiffs are divided into two classes: Group I, the named plaintiffs and other holders of certificates on December 15, 1948, when a final dividend of 15 per cent was tendered, who retained their certificates and did not receive the dividend, and Group II, the named plaintiffs and others who surrendered their certificates in order to obtain the dividend.

The prayers for relief as to which the complaint was dismissed for want of equity are, that the cancellation by the bank of each certificate surrendered as a condition precedent to the payment of the final dividend be adjudged and decreed to be void and of no force or effect; that the members of Groups I and II be adjudged and decreed to have a first and preferential right to be paid pro rata the full amount of their respective certificates before any dividends or returns of any kind or character are paid on the stock of the bank; that defendant be enjoined from paying any dividends or returns of any kind or character on its capital stock to its stockholders until such time as the certificates have been paid in full; that until the certificates have been paid in full the defendant be decreed to pay into court any dividend declared on its capital stock to the extent necessary to pay the certificates in full; that the court retain jurisdiction of the cause and the parties thereto until the certificates are paid in full.

Defendant answered the complaint, asserting among other things that insofar as the certificates purport to be and are a pledge of future income, profits, earnings and assets of the bank for the payment, directly or indirectly, of the certificates, they are illegal and void in that they are ultra vires the powers of the defendant and against public policy. Plaintiffs moved, under section 45 of the Civil Practice Act [Ill. Rev. Stats. ch. 110, § 169; Jones Ill. Stats. Ann. 104.045], to strike the answer or certain parts of the answer. The motion was denied. Plaintiffs' counsel in open court declined to plead further to certain paragraphs of the answer and, in respect to these paragraphs, elected to stand on their motion to strike. The ruling on the motion to strike is not questioned on appeal and the error, if any, in that ruling is waived. Defendant moved for a decree in its favor on the pleadings dismissing the complaint for want of equity as to the prayers of relief hereinbefore mentioned and the allegations pertaining thereto. The motion was allowed.

The following facts, aptly pleaded, are uncontradicted. The bank was closed by the Auditor of Public Accounts of the State of Illinois (hereinafter called the Auditor) on June 24, 1932, and a receiver appointed. Among its assets were slow, frozen or uncollectible assets (hereinafter called frozen assets) of an aggregate book value in excess of $3,000,000. A reorganization was effected under the supervision of the Auditor, and the bank resumed business January 15, 1935. More than 7,000 depositors severally executed depositor's agreements (hereinafter called waivers) whereby each depositor waived and released from payment 60 per cent of the amount standing to his credit on the books of the bank as of April 15, 1933 (54 per cent of the amount of his credit as of June 24, 1932) and agreed "to accept in lieu of payment in cash and as evidence of said sum waived, a deferred certificate/or a certificate of beneficial interest issued by said bank for a like sum, payable out of the future recoveries and the net profits of the bank and before any dividends or returns of any kind or character are payable to the stockholders." In consideration thereof the bank issued to the respective depositors a certificate of beneficial interest for the amount waived by him. These certificates amounted in the aggregate to more than $1,800,000. Each certificate recited that the certificate and all provisions thereof were subject to the terms, conditions and provisions of the waiver signed by the holder or his predecessor in interest as a depositor of the bank; that the waiver was incorporated in the certificate and made a part thereof, with the same force and effect as if the same were set forth therein in full, and that payment shall be made on such dates and in such manner as the bank shall determine, but only with the written approval of the Auditor; that before final payment shall be made the certificate shall be surrendered to the bank for cancellation, and that ". . . no lien or preference of any kind exists against any of the assets of the bank in favor of the holder of this certificate, and that payment hereon shall be made from time to time in such amount as shall be directed by the Auditor of Public Accounts in his sole discretion."

Prior to the filing of the second amended and supplemental complaint in May 1953, the net earnings of the bank were at least $343,203. No dividends had been paid or other returns made to the stockholders. The liquidation of the frozen assets had been committed to a liquidator appointed by the Auditor. To and including May 13, 1946 the bank had distributed or provided for distributions aggregating 55 per cent of the face amount of the certificates from the proceeds of frozen assets. September 21, 1948 the Auditor advised the bank in writing that no disbursements had been made to the holders of certificates since May 1946; that the bank's report of conditions as of close of business June 30, 1948 showed sufficient accumulations of recoveries and profits in its capital structure to make at least a 15 per cent distribution to the certificate holders. He requested that a disbursement of that amount be made. December 15, 1948 the bank in a letter to certificate holders stated that in return for their waivers they had received a "Certificate of Beneficial Interest to the effect that your waived deposit was to be repaid to you from the liquidation of the assets and out of future earnings of the bank"; that in considering a similar arrangement the Supreme Court of Illinois had decided in Logemeyer v. Fulton State Bank, 384 Ill. 11, that "the certificates were payable solely out of the money realized from the liquidation of the assets"; that all the frozen assets had been liquidated and the amount realized therefrom was insufficient to pay the certificates in full, and "since the Supreme Court decision is binding upon us, we are now required to make a final distribution, which amounts to 15% of the original sum waived by you"; that the check for each holder was ready at the bank and would be delivered only on surrender of the certificate, which would be canceled and kept by the bank. As of April 24, 1953 the holders of 5,874 certificates, to whom $250,980.74 of the final payment of $270,668.32 was payable, had received their checks and surrendered their certificates for cancellation, as provided in the certificate, leaving $19,687.58 of the final dividend unpaid. The certificates not surrendered are 1,187 in number and represent 8 per cent of the original face value of the certificates issued.

Defendant rests its claim that the provision for payment of the certificates out of the future net profits of the bank before payment of any dividends or returns of any kind or character on the capital stock and under the terms and conditions of the certificates, is against public policy and void upon the decision in Logemeyer v. Fulton State Bank, 384 Ill. 11, referred to in the letter of the bank to the certificate holders. Counsel say that the decision controls the case at bar. So far as the Logemeyer case is material here the court decided only that the bank had not contracted to repay waived deposits out of future profits. In the reorganization of the Fulton bank, which had been closed by the Auditor, depositors signed powers of attorney authorizing the waiver of 40 per cent of their deposits. More than four years later the Auditor wrote the bank, giving a resume of the bank's operations from November 19, 1932, when it resumed business, to November 9, 1936, showing total earnings, profits, recoveries and potential recoveries from the assets segregated or set aside by the Auditor. These figures were sent, as stated in the letter, "with a view toward arriving at a figure that would represent a fair settlement" with the waiving depositors. Several months later the officers of the bank, pursuant to authority from the stockholders, offered to pay a sum, approximately 55 per cent of the deposits waived, in full settlement of the liability to the depositors. Plaintiffs refused to accept the settlement and brought an action at law to recover the full amount of the deposits waived by them. The bank answered and filed a cross-complaint in equity to the effect that plaintiffs were entitled only to the proceeds of certain assets which had been withdrawn from the bank. The trial court decreed that plaintiffs' demands would be entirely satisfied by receiving their pro rata part of the sum offered. The decree was reversed by the Appellate Court (313 Ill. App. 270) but affirmed by the Supreme Court. In the latter court all contentions of plaintiffs were rejected, including their claim that the transactions immediately prior to the reopening of the bank constituted a promise to repay the full amount of deposits waived from the future earnings of the bank. In stating the position of an Illinois bank after it has been closed by the Auditor, the court said: ". . . any contract between such insolvent bank and its depositors, or any plan of reopening or reorganization, without the consent and approval of the Auditor, is void (Continental Ill. Nat. Bank and Trust Co. v. Peoples Trust and Savings Bank, 366 Ill. 366)." It added, ". . . both the Auditor and the chief bank examiner testified no plan was approved which involved a payment of any of the liabilities of the bank out of future profits, and counsel for appellees (plaintiffs) stated in court no testimony would be offered to prove such action upon the part of the Auditor." The court held that "the waivers contained in the several powers of attorney constitute the sole ground of liability of the bank," and that "the only assets in which the waived deposits were to participate under the contract were the `set aside' assets."

Here there is no dispute about the agreement of the bank to repay the waived deposits out of future net profits. The legality of the undertaking is attacked. The agreement was entered into while the affairs and assets of the bank were under the dominion and control of the Auditor, and with his consent and approval. It is not ultra vires the powers of the bank unless it is inconsistent with the requirements of public policy for the protection of depositors and creditors of the bank. These requirements are stated in People ex rel. Nelson v. Wiersema State Bank, 361 Ill. 75, where the receiver of a closed bank petitioned to have a pledge of certain assets of the bank to secure deposits of the Fernwood Park District declared void, and for return of the property pledged. The pledge was given before the bank closed. The Supreme Court affirmed the decision of the trial court and Appellate Court that the pledge was void. The court defines public policy as "being that principle of the law which declares that no one may lawfully do that which has a tendency to be injurious to the public welfare," and quotes with approval from Farmers & Merchants State Bank v. Consolidated School Dist. No. 3, Kanabec County, 174 Minn. 286, as follows: "`The primary duty of the banker is to protect and maintain that right (the depositor's) unimpaired. The plainest public policy demands that it shall be so maintained. Therefore, anything which unavoidably and in the usual course of things tends to its impairment is contrary to public policy.'" After referring to many other cases, the court concludes:

"The controlling feature to be observed is the paramount interest of the public in the welfare of those institutions and the preservation of the equality of the rights of those dealing with them. A pledge withdraws capital assets. (Texas and Pacific Railroad Co. v. Pottorff, supra.) Without a stable system of banking, commerce and trade must cease. . . . To permit such pledges would be inconsistent with many provisions of the Banking act which are designed to insure, in case of disaster, uniformity in the treatment of depositors and a ratable distribution of the assets. In consonance with the holdings of a majority of the courts of last resort in this country, we are of the opinion that the general practice of pledging assets by banks to secure deposits is not only unnecessary, but is dangerous to the general welfare and is against public policy."

The agreement in the instant case is easily distinguished from the transaction before the court in the Wiersema case. A pledge of assets gives a preference to the favored depositor. It withdraws capital assets and may impair the capital of the bank and render it insolvent. No such consequence can result from the agreement before us. The rights of the certificate holders are inferior to the rights of the depositors. There are no net profits out of which the waived deposits may be paid, unless the bank is solvent and its capital is unimpaired. The rights of the certificate holders are superior only to the rights of stockholders to dividends or other returns on the capital stock before the certificates are paid in full. Payment of the certificates cannot be enforced by money judgment or decree. They are payable only "on such dates and in such manner as the bank shall determine, and only with the written approval of the Auditor," and "from time to time in such manner as shall be directed by the Auditor of Public Accounts in his sole discretion." For payment the certificate holder must rely on the directors' sense of justice and the hunger of the stockholders for dividends. The agreement is not contrary to public policy. It promotes the general welfare, for without similar agreements there will probably be no reorganization of banks with depositor support.

Defendant contends that the acceptance of checks for the final dividend and the surrender of certificates for cancellation, as required by the contract, constitute an accord and satisfaction of the claims of the certificate holders who made the surrender. So far as the pleadings show, the acceptance of the dividends and the surrender of the certificates were voluntary, after a full and fair statement by the bank of its position that under the decision in Logemeyer v. Fulton State Bank, 384 Ill. 11, payments could not be made out of net profits. The basis of the bank's conclusion was thus made known to each certificate holder. Able counsel have argued in good faith in support of that position. The right of certificate holders to further payment was disputed. The acceptance of the final dividend constituted an accord ...


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