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Mensik v. Smith





APPEAL from the Circuit Court of Cook County; the Hon. CORNELIUS J. HARRINGTON, Judge, presiding.


Rehearing denied March 28, 1960.

The defendants, Elbert S. Smith as Auditor of Public Accounts of the State of Illinois and Conrad F. Becker as Director of Financial Institutions of the State, appeal directly to this court from a decree of the circuit court of Cook County enjoining the Auditor from further custody of City Savings Association, requiring defendant Auditor to restore to the association certain special assistant Attorney General fees and other costs which had been paid and refusing to allow additional attorney fees.

The action was instituted by plaintiffs as officers of the association pursuant to section 7-12 of the Illinois Savings and Loan Act of 1955 (Ill. Rev. Stat. 1957, chap. 32, par. 852) to enjoin further custody by the Auditor and for the entry of such further order as the court may deem in equity and good conscience. Intervenors petitioned the court on behalf of shareholders for an order re-opening the association and retaining jurisdiction to implement whatever decree the court should enter. Intervenors also petitioned the court for an order directing repayment of fees and costs to the association.

In 1908 City Savings Association was chartered by the State of Illinois to transact business as a savings and loan association. From its creation the association transacted its business pursuant to applicable law, free from any written criticism by the State Auditor, with no questions or objections raised regarding its operations or valuations until April 16, 1957. Elbert S. Smith was elected Auditor of Public Accounts of the State of Illinois in November, 1956, and took office as such on January 14, 1957. He caused an examination of the association to be instituted on February 18, 1957, which concluded on March 8, 1957.

The report of such examination was placed in the mail addressed to the officers and directors of the association on April 16, 1957, and was received by the association on April 18, 1957. Accompanying the report of examination was a letter of transmittal criticizing certain practices and challenging certain appraisals and valuations of the association. The letter specified 30 days as the "reasonable" time required by statute within which the criticized practices were to be corrected, and the report bore on its face a legend that it was strictly confidential.

Late in the afternoon of April 23, 1957, one of the plaintiffs, C. Oran Mensik, filed a lawsuit against the defendant Smith as Auditor and others, which suit made no reference to and did not involve City Savings Association. Prior thereto on the same day the Auditor of Public Accounts released the report of examination and the letter of criticism to the Chicago press. On the following day, April 24, 1957, the association was open and doing business as usual up to the close of business at noon. At 5:00 P.M. that day there appeared in one of the daily newspapers of Chicago a headline and article reading in part, as follows:


"Smith said his examiners will be on hand Thursday morning. He said if a run develops, the State will step in and may invoke a by-law which requires 60 day notice for withdrawals over $500.00.

"The confidential report noted that Mensik conducted his business in such a way `that the Auditor may well be justified in a finding that the business of the Association is being conducted in a fraudulent, illegal and unsafe manner.'"

On the morning following the news story, that is, on April 25, 1957, a run occurred on the association and a crew of examiners and a photographer previously sent by the Auditor were on hand. The photographer had been instructed to take pictures every half hour. At 12:45 P.M. the Auditor took custody of the association. At that time there was in excess of $270,000 cash on hand and, in addition, $1,000,000 was available by a previously committed loan from the Federal Home Loan Bank, of which the Auditor was aware.

On April 30, 1957, plaintiffs filed their action as officers of the association to enjoin further custody. The court referred the matter to a master in chancery, who proceeded with hearings from June 17, to August 9, 1957, and filed his findings of fact and conclusions of law on August 22, 1957. Thereafter oral arguments were had before the court on objections to the master's report.

On October 15, 1957, intervenors filed their petition for leave to intervene on behalf of stockholders, praying for reopening of the association and for retention of jurisdiction by the court, which intervention was allowed.

On December 6, 1957, the trial court entered a decree which adopted most of the master's findings and specifically found that the association was solvent at the time the Auditor took custody and had remained so throughout the proceedings; that association earnings had been substantially in excess of dividend requirements at all relevant times; that no emergency existed prior to the run on the association on April 25, 1957; that such run was the direct result of the publication of the news article on April 24, 1957; that such publication was the direct consequence of the Auditor of Public Accounts furnishing the confidential report of examination to the newspapers on April 23, 1957; that the Auditor expected that after publication by the press of such report an emergency would arise at the association and he prepared for such eventuality; and that the taking of custody by the Auditor prevented the officers and directors from complying with any of the requirements or correcting any of the practices objected to by the Auditor.

The decree of December 6, 1957, ordered that (1) the officers and directors of the association be permitted to immediately resume control of the operation and management thereof subject to continued jurisdiction of the court; (2) the Auditor of Public Accounts and all his employees, etc., be enjoined until further order of the court from custody and management of the association; (3) the Auditor account to the court for receipts and disbursements of the association during the period he was in custody thereof; (4) the Auditor return custody of the association to its officers and directors, subject to continued jurisdiction of the court; and (5) the officers and directors of the association, under the supervision of the court, undertake to perform certain specified undertakings with respect to conservation of assets, additional reserve requirements, management, officers' escrow accounts, leases of space in the association building and other matters.

Defendant Auditor filed a motion to vacate the decree which was denied. Prior thereto, the Auditor had applied to this court for leave to file a petition for writ of mandamus which was denied June 13, 1957. On December 26, 1957, the Auditor filed in this court a motion for leave to file a second petition for mandamus which was denied. On December 31, 1957, the Auditor filed notice of appeal to this court from the December 6, 1957, decree, which appeal was dismissed as not being a final appealable order under section 50(2) of the Civil Practice Act. In September, 1958, defendant Auditor filed a third petition for writ of mandamus for an order to require the expunging of the December 6, 1957, decree, which petition was dismissed as moot on March 10, 1959, after entry by the trial court of a final decree on February 3, 1959. Defendant Auditor never appealed the interlocutory injunction to the Appellate Court.

Custody of the association was restored to its officers and directors pursuant to the decree of December 6, 1957. From time to time plaintiffs made reports to the master in accordance with the decree. Such reports showed compliance with all requirements except those relating to procuring insurance of share accounts which the court had recommended but had not made mandatory, and the disposition by plaintiff Mensik of his stock holdings in the First Guarantee and Chicago Guarantee Savings associations. Defendant Auditor was given the opportunity to file objections to such reports and the master from time to time imposed further requirements as a result thereof. In the period between restoration of custody on December 6, 1957, and the entry of final decree on February 3, 1959, the association received substantial new saving deposits, paid dividends to its shareholders for 1957 and 1958, distributed Christmas savings accounts to its shareholders, permitted depositor withdrawals of $5,000,000 and paid $1,000,000 on its loan from Federal Home Loan Bank.

On July 1, 1958, defendant Becker, as Director of Finance, succeeded to the powers and responsibilities of the Auditor of Public Accounts under the Savings and Loan Act, entered his appearance herein and was added as a defendant. Subsequent to restoration of custody, both Auditor Smith and Director Becker made further examinations of the association. Defendant Becker granted the association permission to sell $6,500,000 of mortgages at par to raise funds for further mortgage loans, and they were so sold.

Prior to entry of the final decree, intervenors had filed a petition for entry of an order directing the defendant Auditor to repay to the association certain fees and disbursements withdrawn from the association during his custody. After hearing, the court on December 24, 1958, directed the defendant Auditor to pay over to the association as improper disbursements of association funds during custody $45,748.40 legal expenses, $5,000 master's fees, $5,264.50 court reporter fees, and $7,665 accounting expenses. The sum of $28,838.75 in fees paid into the State treasury for examination and custody was not disturbed. A petition by defendants for additional counsel fees in the amount of $73,000 was thereafter presented and denied.

On February 3, 1959, the court entered a final decree which, after adopting the findings of fact and conclusions of law made in the decree of December 6, 1957, ordered and adjudged: (1) that the defendants' motion to return custody of the association to the Auditor or Director of Financial Institutions be denied; (2) that defendants' motion for allowance of fees and expenses to the Auditor be denied; (3) that defendants' motion to vacate the order of December 24, 1958, directing the Auditor to repay to the association amounts improperly disbursed by him be denied; (4) that intervenors' motion to vacate an order directing the association to pay certain master's fees be denied; (5) that the master's reports on proceedings subsequent to the decree of December 6, 1957, and findings of substantial compliance therewith be approved and defendants' exceptions and objections thereto be denied; and (6) permanently enjoined the defendants and all of their employees, agents, etc., from taking custody and management of the association on the basis of any examination or act which transpired prior to December 6, 1957, the date of the decree requiring the defendant to return custody of the association to its officers and directors.

Both the master and trial court, from substantial evidence, found that the Auditor's report of examination was inaccurate and misleading in that (a) the appraisal values adopted were not true appraisal values and could not be accepted in the face of appraisal reports by four experienced and independent appraisers; and (b) the schedule of loans subject to comment was inaccurate and misleading in that it presupposed and assumed certain facts which were incorrect and untrue. Based upon the appraisals and other evidence the court also found (a) an excessive valuation on the books of the association building of $72,210; (b) that the book value of the building was slightly in excess of 2% of net assets, although section 5-9 of the Illinois Savings and Loan Act of 1955 permitted up to 5% of net assets for its office building without prior approval of the Auditor; (c) a doubtful value of $156,385.28 in total loans outstanding of $31,703,685.41, or 10% of the doubtful value assessed by the Auditor; (d) that the Auditor did not require kindred associations to establish any reserve for loss on United States Treasury bonds, and therefore no loss thereon as indicated by the Auditor should be allocated; and (e) the doubtful value of association assets on February 16, 1957, was $228,595.28, covering which there was a net reserve of $1,196,171.05.

In its decree of December 6, 1957, the trial court directed the officers and directors of the association, among other things, to undertake (a) to make all delinquent loans current in 90 days or institute foreclosure proceedings thereon; (b) to require further collateralization of loans by multiple borrowers; (c) to reduce book value of the office building; (d) to reduce the ratio of operating expenses to gross operating income to 25%; (e) that reserves be equal to not less than 5% of total liabilities; (f) that plaintiff Mensik relinquish all management and control of his two other savings and loan associations; (g) that the association attorney refrain from serving conflicting interests and pay fair rental for office space in the association building; (h) that an officer's escrow account be discontinued; (i) that unfavorable leases with a Mensikowned safety deposit box company, insurance agency, and currency exchange be renegotiated; (j) that payment of employees' salaries in the insurance agency and currency exchange by the association be discontinued; (k) that an existing pension plan be suspended and referred to the master for modification and conformation to certain standards; and (1) that efforts be made to obtain insurance of withdrawable shares. The final decree found compliance with all except two of these requirements. As to Mensik's required divestiture of management and control of his two other associations the court found Mensik had undertaken to divest himself thereof, and, as to the insurance of shares, the court found that there had been unsuccessful efforts to acquire such insurance but that the court's prior order in respect thereto had been directory and not mandatory.

The defendants in appealing to this court from the final decree urge as grounds for reversal that (a) the trial court assumed and usurped executive power contrary to article III of the Illinois constitution; (b) defendants were deprived of procedural due process contrary to the Illinois and United States constitutions; (c) the taking and retention of custody by the Auditor was justified and proper; (d) the trial court acted without jurisdiction in allowing prosecution of the case by unauthorized persons; (e) the trial court had no jurisdiction to order a reference to the master; (f) the trial court erred in allowing intervention; and (g) the trial court erred in ruling on fees and expenses.

The plaintiffs' position is, first, that defendants have failed to state a case cognizable on appeal because they are not parties aggrieved and because there is no justiciable controversy of constitutional construction, and, second, that the decrees of the trial court were constitutional, proper and appropriate in every respect.

The intervenors in their brief contend that this appeal is moot except as it relates to fees; that the trial court properly enjoined custody; that the question of jurisdiction under the interlocutory decree is not presented by this appeal but that such decree was within the court's power and authority and required by the facts.

The first issue which must be answered is the question of this court's jurisdiction on direct appeal. The defendants' basic and primary contention throughout this litigation has been that the trial court assumed and usurped executive power which was vested in the defendants contrary to article III of the Illinois constitution. Such contention was raised by them and argued at the first opportunity and consistently urged by them throughout the proceedings. They argue that it was the function and duty of the defendants, and not the court, to determine what corrective measures were necessary in the light of existing conditions and, further, to determine at a later time whether the corrective measures were carried out. The substance of such argument is that the trial court had no jurisdiction or power to decide such questions by virtue of the fundamental constitutional provision pertaining to the separation of executive, legislative and judicial powers contained in article III of our State constitution. The answer to this contention goes beyond a mere construction of the statute in question, although a construction of the statute in deciding the case may be necessary if this court has direct appellate jurisdiction. The question on this issue is whether or not the court exercised executive powers, and, if so, was such action a violation of the constitutional separation-of-powers clause. If such decree was unauthorized and without the court's jurisdiction, the Auditor has certainly been aggrieved and has a right to review, even though the course of litigation may have rendered moot many of the issues other than the portions of the decree concerning fees and costs. It is our opinion that this court has jurisdiction on direct appeal in this case because of the alleged usurpation of executive power by the judiciary. Saxby v. Sonneman, 318 Ill. 600; People ex rel. Elliott v. Covelli, 415 Ill. 79; McQuade v. City of Joliet, 293 Ill. 515; West End Savings & Loan Ass'n v. Smith, 16 Ill.2d 523.

The general statute involved in this case is the Illinois Savings and Loan Act of 1955. Ill. Rev. Stat. 1957, chap. 32, pars. 701-944.

In addition, the defendants' claim that they were denied procedural due process of law under both the Illinois and Federal constitutions would require this court to take jurisdiction on direct appeal. First Federal Savings and Loan Ass'n v. Loomis, (7th cir.) 97 F.2d 831.

It would seem, furthermore, that the State may have a direct and substantial interest in the outcome of the suit, in that there is a claim that the attorneys for the defendants were improperly paid from association funds. If such contention is sustained, these fees may come from State funds. People ex rel. Hamilton v. Cohen, 355 Ill. 499; State Board of Agriculture v. Brady, 266 Ill. 592.

The initial and general responsibility for supervision under the Illinois Savings and Loan Act was vested before July 1, 1958, in the Auditor of Public Accounts and in the Director of Financial Institutions thereafter. Such supervisory authority delegated by the legislature is an executive function — the execution and administration of the law. One of the primary questions is whether the exercise of such executive power is exclusive and free of any checks, restraints or control by the judiciary, or whether it is subject to judicial limitations and control. An examination of the statutory provisions and intentions thereby expressed in the Savings and Loan Act is pertinent and necessary.

The first seven sections of article 7 of the act spell out the Auditor's general supervisory powers over savings and loan associations as to the making of regulations, examinations, audits, reports, information to Federal authorities, and procedure upon the impairment of guaranty and permanent reserve capital. Section 7-8 of the act pertains to the Auditor's authority to take custody. It first spells out five circumstances under which he may in his discretion take custody. The last paragraph of such section spells out that unless an emergency exists which may result in loss to members or creditors and requires that he take custody immediately, the Auditor shall first given written notice of the conditions criticized and state a reasonable time in which corrections may be made. Section 7-9 spells out the purposes of taking custody and 7-10 sets forth the Auditor's powers during custody. It should be noted that section 7-10 provides that the Auditor without appointment of a receiver but upon order of a court of competent ...

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