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Crest Finance Co. v. First State Bank

OPINION FILED MARCH 29, 1967.

CREST FINANCE CO., INC.,

v.

FIRST STATE BANK OF WESTMONT. — (FEDERAL DEPOSIT INSURANCE CORP., APPELLEE,

v.

LEO NIEDERBERGER, APPELLANT.)



APPEAL from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County; the Hon. JOHN J. LUPE, Judge, presiding.

MR. JUSTICE HOUSE DELIVERED THE OPINION OF THE COURT:

Rehearing denied May 16, 1967.

Plaintiff, Crest Finance Company, Inc., filed a declaratory judgment action against the original defendant, First State Bank of Westmont, seeking a declaration that it was entitled to possession of certain commercial paper, asking that the bank be enjoined from disposing of or encumbering the paper and praying its return. About two weeks thereafter Joseph E. Knight, Director of the Department of Financial Institutions, took possession of the bank and appointed the Federal Deposit Insurance Corporation receiver. Upon petition, the receiver was granted leave to intervene and to make Leo Niederberger a third-party defendant. The circuit court of Cook County entered a decree finding the paper to be Westmont's property, ordered recovery by the receiver of $605,882.46 from plaintiff and Niederberger, representing collections on the paper to October 23, 1963, and enjoining plaintiff from making further collections.

The Appellate Court, First District, held that insofar as possible, the pre-agreement status of the parties be restored, that Niederberger refund the sale price of Crest's stock in the sum of $600,000 to Westmont, and that the paper belonged to Crest. (66 Ill. App.2d 364.) We granted Niederberger's petition for leave to appeal.

This controversy arose out of an agreement by Niederberger to sell to Lester A. Brock all of the 750 outstanding shares of Crest, evidenced by certificates issued in the name of Niederberger and his wife jointly. Crest is an Illinois corporation engaged in the business of installment loans to relatively small business enterprises. Its loans were secured by notes, assignments of accounts receivable and liens on other collateral. Crest's receivables on February 28, 1963, approximately a month prior to the agreement, were $1,334,279.51, after deducting for deferred income and allowance for losses.

Brock was introduced to Niederberger by a broker and offered to buy Crest's stock for $600,000. In the negotiations leading up to an agreement Brock stated that he was acting not for himself but for a principal, the identity of whom he did not then disclose. He later testified that his principal was Lawrence A. Stickell.

Brock was closely associated with Stickell and Norman H. Weaver. They had gained control of First State Bank of Westmont in February, 1963. The bank's deposits were approximately $6,000,000 and its capital and surplus were about $350,000. These men proceeded to loot the bank in the manner hereinafter explained. (All three of them have been convicted in Federal court, and Stickell, a member of the bar, has had his name removed from the roll of attorneys.)

A meeting held at the office of Crest on April 2, 1963, was attended by Niederberger and his attorney, Brock, Otto Stephani (the latter a broker who brought Brock and Niederberger together and to whom Niederberger paid a fee of $30,000), Wayne E. Willard, executive vice-president and cashier of Westmont, and two other persons, Urban, an employee of Westmont, and Ash, an employee of Crest.

The agreement was in the form of a letter offer by Brock to Niederberger dated March 30, 1963, and accepted by the latter at the meeting on April 2, 1963. The letter agreement provided that Brock was to pay $600,000 for the stock, that Niederberger's guarantees of some of Crest's indebtedness were to be eliminated by substitution of Brock's guarantee or payment, and Niederberger was to co-operate with Brock in the operation of Crest for three months at $1,000 per month, with Brock retaining an option for an additional three months at compensation to be agreed upon.

Willard attended the meeting under instructions from Stickell and Weaver. He was told he was to pick up paper (notes and other evidence of debt) for Westmont. He took four cashier's checks of Westmont to the meeting, one of which was signed by an assistant cashier. The others were unsigned and all were in blank as to payee and amount. At the meeting, three of the cashier's checks were completed. The one signed by the assistant cashier was drawn on Continental Illinois National Bank and Trust Company of Chicago and was made payable to Niederberger for $300,000. Two others drawn on the Mercantile National Bank of Chicago, for $150,000 each, were signed by Willard and made payable to Niederberger. The checks were delivered to Niederberger during the meeting.

At the time the cashier's checks were delivered, Crest bank loans which had been guaranteed by Niederberger, totaled approximately $900,000. Apparently Niederberger was unwilling to deliver the stock certificates representing his shares in Crest until relieved of his guarantees of its loans. Whereupon the parties agreed that the certificates would be placed in escrow with Niederberger's counsel. The latter executed a brief escrow statement acknowledging receipt of the certificates, agreeing to hold the stock as escrowee pending written advice from his client (which of course, could not be withheld arbitrarily) that he had been released from all personal liability as guarantor of Crest, and agreeing to deliver the stock to Brock upon receipt of notice from Niederberger that his guarantees had been released.

After delivery of the checks, Brock and Willard were given access to Crest's files. During the late afternoon of April 2 and throughout the days of April 3 and April 4 Willard photostated installment notes and other paper held by Crest evidencing loans made by it (as well as the collateral relating to such loans), endorsed a receipt on each photostat and placed them in Crest's files. At the close of each day he removed the original material to Westmont's files. He gave a receipt to Helen Ware, a Crest employee, for the paper removed each day and then sealed Crest's vault where the remaining securities were kept for the night. The notes removed by Willard were payable to Crest and were unendorsed. Willard apparently was uninstructed as to the face amount of paper to be removed. He made no tabulation as he removed the paper, but he estimated that at the close of the day on April 4, he had removed about $900,000 in face amount. Willard's banking experience was limited. He was dominated in his activities for Westmont by Stickell, Weaver and Brock and the record does not indicate he was a party to the fraudulent conduct of the three. He read none of the documents presented at the April 2 meeting and none were read to him. He was unaware that the cashier's checks of Westmont were delivered to pay Brock's purchase price for stock of Crest rather than for purchase of Crest installment paper by Westmont.

After Willard completed removing Crest paper, he charged, by a "debit ticket" dated April 3, 1963, Westmont's accounts receivable ledger with $600,000 to offset the $600,000 in cashier's checks payable to Niederberger, thus indicating on Westmont's records a purchase by it of accounts receivable for $600,000. Apparently Brock, Weaver, and Stickell believed Westmont had or would have $957,000 in Crest installment notes as the result of Willard's transfers. (The Director of Financial Institutions checked this paper and located $868,158 in face amount, later found by the receiver to total $900,976 in face amount.) To account for the $357,000 excess, Willard prepared another "debit ticket" charging accounts receivable of Westmont with this additional amount. As an offset $357,000 was credited to a checking account which Brock, purporting to act for Crest, had opened with Westmont.

On the evening of April 4, although the escrow condition was unperformed and although the certificates were still held by the escrowee unendorsed, Brock proceeded to hold a stockholders meeting of Crest, at which he elected himself, Jack E. Sohn and Landra K. Ryan as directors. These directors then held a meeting. They elected Brock president and Sohn vice-president. To support Crest's purported sale of installment paper to Westmont they authorized Crest's sale of accounts receivable to Westmont in an amount not exceeding ...


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