Appeal from the Circuit Court of Cook County; the Hon. JOHN J.
LUPE, Judge, presiding. Reversed and remanded.
MR. JUSTICE MURPHY DELIVERED THE OPINION OF THE COURT.
Rehearing denied February 3, 1966.
This is an appeal from a decree of the Circuit Court of Cook County which dismissed, for want of equity, a complaint in chancery filed April 30, 1963, whereby plaintiff sought a decree directing the defendant bank to deliver to plaintiff commercial paper and collateral of a face value of approximately $900,000.
On May 16, 1963, Joseph E. Knight, Director of the Department of Financial Institutions in the State of Illinois, took possession of the defendant bank, and on May 24, 1963, filed a complaint in the Circuit Court of DuPage County for its dissolution. On the same day, Federal Deposit Insurance Corporation was appointed receiver of the defendant bank. On June 25, 1963, the receiver was granted leave to intervene in the instant cause and to file its intervening petition. Leave was also granted to the receiver to make Leo Niederberger a third-party defendant.
The pleadings consist of a complaint, answer of the defendant bank, reply of the plaintiff thereto, and the intervening petition of the receiver.
Plaintiff, Crest Finance Company, is an Illinois corporation, engaged in the business of making loans to small businesses. Crest's borrowers sign promissory notes and, as collateral security for their loans, assign chattel mortgages, accounts receivable, conditional sales contracts, or similar commercial paper. Third-party defendant, Leo Niederberger, is president and treasurer of Crest and, with his wife, owned all of its outstanding stock. In order to secure funds for Crest by loans from Chicago area banks to Crest, Niederberger personally guaranteed in excess of $900,000 of Crest indebtedness to these banks. He had also agreed with the banks that none of the commercial paper held by Crest would be pledged by Crest as security.
Early in March, 1963, Niederberger decided he would sell ownership of Crest. Lester Brock was introduced to Niederberger as a potential purchaser of Crest by a business broker, Otto Stephani. Brock was a business man and a stockholder in defendant, First State Bank of Westmont. He was also manager of a corporation known as State Street Securities, a company owned by Norman Weaver and Lawrence Stickell. Weaver and Stickell were also the principal owners of the First State Bank of Westmont, having acquired control of the Westmont Bank in February, 1963. Stickell was a director of the bank, and Weaver was chairman of its board.
Throughout his negotiations with Niederberger, Brock represented that he was acting for others, but he never disclosed their identity. He testified later that Stickell was in fact his principal, and that Weaver also had knowledge of the transaction.
On April 2, 1963, an offer to purchase agreement, dated March 30, 1963, was entered into by Niederberger and Brock. Brock agreed to (1) pay Niederberger $600,000 for all of the outstanding shares of Crest stock which stood in the name of Niederberger and his wife; and (2) substitute Brock's personal guarantee for Niederberger's on $900,000 of Crest promissory notes held by Chicago banks, which previously had been personally guaranteed by Niederberger. In the alternative, Brock was to pay off the total bank indebtedness and eliminate Niederberger's "liability on any and all of such items." The selling price was arrived at as follows:
Book value $250,000 Reserves 80,000 Unearned income 120,000 Good will 150,000 _________ Total $600,000
Niederberger agreed "to execute or cause to be executed all documents necessary to consummate the sale of the said stock, and all matters coincidental." Niederberger was to "continue to operate the business of Crest Finance Company, Inc., in the same manner as heretofore," in cooperation with the buyer for at least three months, at a salary of $1,000 per month.
The agreement was executed at Crest's office on April 2, 1963. Present were Brock, Niederberger, Stephani (the broker), Hamilton Clorfene (Niederberger's lawyer) and Wayne Willard (Westmont's executive vice president and cashier). Willard testified that he participated in the meeting under the instructions of "[t]he Chairman of the Board, Mr. Weaver, and Mr. Stickell, a Director." Willard had brought four blank Westmont Bank drafts on Chicago banks. At Niederberger's direction, Willard made three of the drafts payable to Niederberger and inserted amounts totaling $600,000. The Crest stock was not endorsed, transferred or delivered to Brock at that time, but was placed in escrow with Niederberger's lawyer, to be held until such time as Brock had either substituted himself as guarantor or paid off all the $900,000 bank loans on which Niederberger was secondarily liable. The escrow receipt, dated April 2, 1963, and signed by Hamilton Clorfene, was as follows:
"The undersigned hereby acknowledges the receipt of three stock certificates for a total of Seven Hundred Fifty Shares of the common stock of Crest Finance Co., Inc., an Illinois corporation, . . . . The undersigned agrees to hold the stock as escrowee under the following condition: Upon written advice from Leo Niederberger that he has been released from all personal liability as guarantor of Crest Finance Co., Inc., the undersigned agrees to deliver all of the said stock of Crest Finance Co., Inc. to Lester A. Brock."
On April 2, 1963, shortly after receiving the drafts totaling $600,000, Niederberger left the meeting at Crest's office to go to the Irving Bank to deposit the drafts in his personal account. During his absence, Brock and Willard then took approximately $800,000 of commercial paper from Crest's office and removed it to the Westmont Bank.
On April 3, 1963, Willard, together with an assistant, returned to the Crest offices and remained there the entire day. He testified that both Mr. and Mrs. Niederberger were there on the 3rd, and that Niederberger helped Willard remove some of the commercial paper, and by the end of the 4th of April, Willard had taken to Westmont "roughly a million dollars worth of paper," although he did not stop to audit it at that time. Willard left some receipts for part of the collateral, bearing the inscription "Received Bank of Westmont Wayne Willard." Niederberger was at the Crest office only briefly during these several days. He observed Willard photostating some documents and met with several customers of Crest. He testified that he thought it was the credit files that were being removed for audit, and that he specifically told Willard and Brock not to remove the commercial paper. It was about April 15, 1963, when he learned for the first time that "the First State Bank of Westmont was in possession of documents or securities which had been or was the property of Crest Finance Company."
On the evening of April 2, 1963, Weaver, Stickell and Arvin Brackmann held a Westmont directors' meeting and under date of April 2, 1963, authorized the "purchase" by the bank of $957,000 installment paper from Crest Finance Company, "with proper guarantee of payment to be made by Crest Finance Company." This authorization was matched by an "offer for sale" by Crest, signed by Brock, as "President" of Crest, under date of April 2, 1963.
On the afternoon or evening of April 4, 1963, Brock convened what purported to be a meeting of Crest stockholders in the lobby of the bank at Westmont. The only participants in the meeting were Brock and Jack E. Sohr (a friend). Brock, Sohr and Sandra Kay Ryan (Brock's secretary) were elected directors of Crest. Then, as directors, Brock and Sohr elected Brock, president, Sohr, vice president and treasurer, and Helen Ware, secretary of Crest. Helen Ware had previously been an employee and the secretary of Crest, but she was not informed of her "re-election."
At the same purported special meeting of the Crest board of directors, resolutions were adopted (1) authorizing the president to sell as of April 2, 1963, to the First State Bank of Westmont, "accounts receivable belonging to this Company in an amount not to exceed One Million ($1,000,000.00) Dollars, . . .," and (2) "that the Secretary of this Company be and she is hereby directed to accept the shares of stock of this Company, outstanding in the name of Leo Niederberger and to issue in their place a certificate representing a like number of shares in the name of Sandra Kay Ryan." Minutes of these purported stockholders' and directors' meetings of Crest Finance Company are dated April 2, 1963, and are in evidence.
On the same evening of April 4, on behalf of plaintiff Crest, and as its president, Brock signed and delivered to the Bank of Westmont a written offer dated April 2, 1963, to sell "certain promissory notes secured by assignments of accounts receivable, notes and mortgages" for the "purchase price $957,000." The offer further agreed to deliver to the bank "the original of each and all notes" and "all notes will be assigned to the First State Bank of Westmont with payments being guaranteed by Crest Finance Co., Inc." The offer further shows, "Accepted: First State Bank of Westmont, By: Norman H. Weaver." Brock also signed and delivered to the bank certain assignments of the commercial paper here in controversy. It is these assignments that plaintiff Crest contends are invalid.
Of the proceeds of the $957,000 purchase authorization of April 2, 1963, and by ledger entries, $600,000 was immediately used to offset the Westmont drafts for $600,000 given by Willard earlier that day to Niederberger. The remaining $357,000 was deposited in a checking account at the Westmont Bank entitled "Crest Finance Company," by a deposit slip dated April 3, 1963. Of the $357,000 "Crest Finance Company" account at Westmont, $335,162 was used to pay personal obligations of Stickell, Weaver and Brock by cashier's checks issued by the Westmont bank and offset by "Crest Finance Company" checks on its account at that bank, signed by "Lester A. Brock, President." These transactions took ...