Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

TCHEREPNIN v. FRANZ

August 6, 1970

ALEXANDER TCHEREPNIN ET AL., PLAINTIFFS,
v.
ROBERT FRANZ ET AL., DEFENDANTS.



The opinion of the court was delivered by: Campbell, District Judge.

   FINDINGS OF FACT, CONCLUSIONS OF LAW, MEMORANDUM, ORDER AND
                            JUDGMENT

This action, brought by the court appointed receivers as an ancillary proceeding in this case, seeks a determination that certain properties are held in constructive trust for the benefit of the estate in receivership. The court's receivers ask that an order be entered compelling certain persons allegedly in title or who claim some interest in the properties to convey said properties to City Savings Association.

Extensive evidence relating to these properties was presented by the receivers and by certain other interested parties. Upon the completion of all evidence of all interested parties, briefs were submitted clearly delineating the position of all parties. Having considered all of said evidence and the extensive briefs filed thereafter, I now make the findings of fact, and conclusions of law as set forth in this memorandum.

This case is most complex and difficult and requires some explanation of the proceedings in the case in chief. This case was originally brought by a group of shareholder-depositors of City Savings Association. Their complaint was filed July 24, 1964. Jurisdiction was based on the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.). After appeals to our Seventh Circuit Court of Appeals and to the United States Supreme Court, the jurisdiction of this court was affirmed. Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564. Upon remand from the Supreme Court and on motion of the depositors and after an extensive hearing on said motion, I removed the state appointed liquidators then in custody of the assets of the Association and appointed receivers of this court. 277 F. Supp. 472. That action was reviewed and affirmed by our Court of Appeals. Tcherepnin v. Kirby, 7 Cir., 416 F.2d 594.

In an effort to expedite a determination in this cause and because the case was and is a most complex one, involving thousands of documents and numerous claims of depositors who have been pursuing a federal remedy for almost six years, I ordered that this litigation should proceed pursuant to the enlightened procedures outlined in the Judicial Conference's Manual for Complex and Multidistrict Litigation. I also instructed the court's receivers that all claims of the Association were to be litigated in this court as ancillary to the case in chief.

On April 4, 1969, the Receivers filed a Cross Complaint herein alleging massive fraud by cross-defendants C. Oran Mensik ("Mensik") and Robert M. Kramer ("Kramer") in concert with the other officers and directors of City Savings and various other persons and corporations; the Cross Complaint alleged that certain parcels of real estate in the Chicagoland area owned or controlled by Mensik and Kramer belonged in equity to City Savings because of these frauds and urged the imposition thereon of a constructive trust for the benefit of City Savings, its members and creditors.

On May 1, 1970, the Receivers served notice of a hearing instanter on the issue of title to these properties. On May 4, through May 8, and on May 21, 1970, hearings were held and were consolidated by agreement of the parties with prior proceedings concerning the Rule upon cross-defendant Henry McGurren ("McGurren") as Trustee to show cause why the property commonly described as Palatine Estates should not be conveyed forthwith to City Savings. Cross-defendants McGurren, Kramer, Finlay, Peerless Closure Company and Braewood Building Corporation appeared and testified in support of their positions; evidence has also been offered by the Receivers to support City Savings' claim to these properties. Peerless Closure Company and Henry McGurren as Trustee have filed Briefs in support of their positions and in response to a Brief filed by the Receivers.

Cross-defendant Alexander J. Pikiel, Mensik's attorney, who is now deceased, testified extensively by deposition taken prior to his death by the attorneys for the Receivers.

Mensik is currently incarcerated in the Federal Penitentiary. However, on October 1, 1969, Mensik testified extensively by deposition taken by the attorneys for the Receivers in the DuPage County Jail in Wheaton, Illinois.

On June 26, 1964, the Department of Financial Institutions of the State of Illinois took custody of City Savings Association (hereafter "City Savings") a state-chartered savings and loan association, upon a finding, based upon an examination report issued by Peat, Marwick, Mitchell & Co., certified public accountants, that as of April 30, 1964, City Savings had a capital impairment exceeding $14,000,000. City Savings was closed by the State on June 30, 1964, and is currently in receivership under the jurisdiction of this court. City Savings is hopelessly insolvent.

At the time the State took custody — and for at least 20 years prior thereto — cross-defendant C. Oran Mensik had been the chief executive officer of City Savings, simultaneously holding the positions of President, Chairman of the Board of Directors and Chairman of the Executive Committee.

Cross-defendant Robert M. Kramer, Mensik's brother-in-law, became a Vice President of City Savings, a member of its Board of Directors and a member of its Executive Committee in 1954 and held these positions until City Savings was closed on June 30, 1964.

Mensik and Kramer operated City Savings, with Mensik the dominant figure and Kramer by his own admission functioning largely as assistant to and nominee and messenger boy for Mensik. Mensik and Kramer were assisted and supported in their efforts by the deceased cross-defendant Alexander J. Pikiel, Mensik's then attorney, whose offices adjoined those of City Savings in the City Savings Building at 1654 W. Chicago Avenue in Chicago, Illinois, and by various other persons, including cross-defendants Walter Kulikowski, Mildred Riehl and Marianne Barto.

From 1959 to 1964, cross-defendant Robert J. Zaucha was loan officer at City Savings. From 1959 until 1964, cross-defendants Francis J. Sochacki, Robert J. Siman and Angelo LoMonaco purportedly appraised properties on which City Savings made loans. However, it is undisputed that none of these cross-defendants honestly and responsibly performed the job he purported to hold; rather, all these persons responded utterly to Mensik's direction and control. All loan applications and appraisals were prepared in accordance with Mensik's directions, without regard to either the real identity or integrity of the purported borrower and wholly without regard to the true value of the land.

The primary function of the Executive Committee of City Savings was purportedly to approve the applications for loans submitted to it by Mensik. In addition to Mensik and Kramer, Joseph Holley, a director of City Savings, was a member of the Executive Committee until his death in 1959. Thereafter, cross-defendant Herbert J. Hoover became the third member of the Executive Committee.

As is obvious from the sad history of this institution, the Executive Committee and the Board of Directors of City Savings never fulfilled their responsibilities to the depositors and creditors to safeguard and protect City Savings' funds and to make considered and prudent investments. No loan application that Mensik recommended was ever refused. Mensik alone decided the amounts of money to be loaned, which loans would be approved and under what conditions. In sum, Mensik alone, in the words of his attorney, Pikiel, "controlled the outpouring of funds from City Savings."

Under Mensik's domination, City Savings fell into ruin. By April 30, 1964, 82% of the entire loan portfolio of City Savings was concentrated in 776 loans in two projects, Apple Orchard in Bartlett, Illinois, and Howie in the Hills in Palatine Township, Illinois. The outstanding net unpaid balance of the Apple Orchard loans on June 30, 1964 — when City Savings was closed — was $14,827,415.20; the outstanding net unpaid balance of the Howie in the Hills loans was $5,675,047.14. Thus, City Savings' net investment in these two projects exceeded $20.5 million. The actual estimated value of these projects at the time City Savings was closed in 1964 was approximately $2,000,000. These loans were the greatest single factor in the demise of City Savings.

The mortgage loans made by City Savings on the security of the real estate in the Apple Orchard and Howie in the Hills projects were based upon grossly inflated and fraudulent appraisals. The loans were made to entities controlled by Mensik and Kramer and their nominees: Cross-defendants Henry McGurren, Carl M. Melberg, Fred Melberg, Vernon C. Melberg, Maurice Melberg, C.J. Szymanski, Thor Ringstrom, Herbert J. Hoover, Charles Hartman, M.A. Barto, Mildred Riehl, Genevieve Jarecki and Walter Kulikowski.

It was the general practice of City Savings to purportedly finance subdivision development in three phases. In phase 1, City Savings loaned mortgage money to various corporations and individuals, purportedly for the purchase of raw farm land. In phase 2, City Savings increased the mortgage loans on the same property for the purported purpose of subdividing the land and constructing sewer, water and other improvements such as streets and curbs. The outstanding unpaid balance of the first loan was "repaid" from the proceeds of the second mortgage loan. In phase 3, City Savings again increased the mortgage loan on the same property for the alleged purpose of constructing buildings. The unpaid balance of the second loan was "repaid" from the proceeds of the third loan. In reality, however, the moneys were not utilized by the purported borrowers for development; rather, vast amounts of these loan funds were used for purposes unrelated to the development of the land purportedly offered as security for the loans.

The case of A-1 Construction Corporation ("A-1") a purported developer in the Apple Orchard complex, illustrates the pattern of fraud. A-1 was incorporated in 1954 by Carl M. Melberg, Marianne Barto and I.L. Kunitz. Melberg was a long-time colleague of Mensik; Barto was Mensik's secretary and Mrs. Kunitz was Mensik's sister. During 1962, Robert M. Kramer became a director of A-1. The President of A-1, Walter Kulikowski, was identified by Pikiel as a "leg man" for Mensik. At all times, Mensik voted the stock and controlled and dictated the policies of A-1.

From 1959 through 1964, Mensik caused City Savings funds to be disbursed to A-1 Construction Corporation in amounts exceeding 2.7 million; the loans were based on grossly inflated appraisals. Of these funds, A-1 made pay-outs of approximately $2 million to persons and entities that had no relationship to nor participation in the development of the land, specifically:

A. From September 1960 through April, 1962, A-1 disbursed $124,000 to Country Life Developers, a partnership; Kramer and Mensik were the sole partners. Country Life purportedly provided advice to parties who borrowed money from City Savings as to the proper use and development potential of the lands mortgaged as security for the City Savings loans; in fact, Country Life performed no such service. In addition, from March, 1960 through July of 1962, A-1 disbursed $17,500 directly to Mensik and $70,600 directly to Kramer. All these sums represented kickbacks to Mensik and Kramer for engineering the fraudulent loans to A-1.

B. From October of 1960 through September, 1962, A-1 disbursed $214,000 to Dollar Investment Company. Kramer was President and a director of Dollar from its inception in 1960 to its dissolution in 1962. Mensik controlled the Dollar Investment Company stock, caused Kramer's election, and controlled and directed the operations of the Company.

C. From July of 1959 through July of 1962, $807,136.55 was disbursed by A-1 Construction Corporation to Capital Mortgage Company. Kramer was President and a director of Capital. He was elected by Mensik and Mensik directed and controlled the operations of the company. There were no disbursements of funds by Capital Mortgage, Dollar Investment or A-1 Construction except at Mensik's direction.

D. From May 1959 through October of 1961, A-1 disbursed $327,692.17 to the Commercial Savings & Loan Association of Maryland, a Mensik controlled stock savings and loan association in Maryland.

E. From June 25, 1959 through September 24, 1962, checks amounting to $383,137.97 were cashed at City Savings by A-1. It is clear that much of the funds from the checks cashed by A-1 at City Savings directly enriched Mensik and his cohorts. No officer or director of any of these corporations or of City Savings exercised any control or responsibility whatsoever to prevent this enormous fraud because Mensik was utterly in control.

The fraud was compounded by the Mensik dealings in Maryland through Dollar Investment Company. In addition to the $214,000 disbursed from City Savings to Dollar Investment Company through A-1 Construction as set forth above, City Savings extended funds directly to Dollar Investment Company in the amount of $516,975.56 from February, 1962 through July 1962. Dollar then paid out the money, in part as follows:

A. From February 23, 1960, through May 8, 1962, approximately $241,816.39 was re-funneled by Dollar Investment back to ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.