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Lanigan v. Apollo Savings

OPINION FILED OCTOBER 2, 1972.

JOHN J. LANIGAN, COMMISSIONER OF SAVINGS AND LOAN ASSOCIATIONS,

v.

APOLLO SAVINGS. — (FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION ET AL., APPELLANTS,

v.

TRANSCONTINENTAL INSURANCE AGENCY, INC., ET AL., APPELLEES.)



APPEAL from the Circuit Court of Cook County; the Hon. DONALD J. O'BRIEN, Judge, presiding.

MR. JUSTICE KLUCZYNSKI DELIVERED THE OPINION OF THE COURT:

This appeal is taken from a judgment of the circuit court of Cook County finding, inter alia, that claimant, Federal Savings and Loan Insurance Corporation (hereinafter FSLIC), was not entitled to interest as assignee of insured withdrawable capital account holders of defendant, Apollo Savings — a state-chartered association (hereinafter Apollo). This finding was predicated upon the court's conclusion that the status of the holders of withdrawable capital accounts under the Illinois Savings and Loan Act (hereinafter I.S.L.A.) (Ill. Rev. Stat. 1969, ch. 32, par. 701 et seq.) was that of shareholders and not creditors of Apollo, thus negating any claim for interest from the date of default to the date of final distribution of Apollo's assets. We granted appeal. 50 Ill.2d R. 302(b).

The stipulated facts may be summarized as follows. On April 8, 1968, FSLIC issued a cease and desist order prohibiting Apollo from paying a scheduled dividend because of the latter's seriously impaired financial condition. On April 26, 1968, plaintiff, Justin Hulman (then Commissioner of Savings and Loan Associations of the State of Illinois), issued an order taking custody of Apollo pursuant to section 7-8 of the I.S.L.A. (Ill. Rev. Stat. 1969, ch. 32, par. 848) and he appointed a receiver for the purpose of liquidating Apollo. The order stated that custody was taken because "the association was unable to continue operations," and that "an emergency existed which might have resulted in loss to the members or creditors of the association." On the same day Apollo's directors adopted resolutions consenting to the Commissioner's order. Thereafter, on May 2, 1968, the Commissioner instituted these proceedings and the circuit court of Cook County entered an uncontested decree of liquidation finding that "sufficient cause existed on April 26, 1968, and still exists for the custody, liquidation and dissolution" of Apollo.

Apollo was an insured institution within the meaning of the National Housing Act. (12 U.S.C. § 1724(a) and 1726.) The appointment of a receiver constituted a "default" (12 U.S.C. § 1724(d)) and FSLIC was thereby required to pay insurance to Apollo's account holders. (12 U.S.C. § 1728(b).) As of March 31, 1971, the total insurance paid by FSLIC on nearly twenty thousand Apollo accounts was $54,289,660.

In return for the payment of insurance, each account holder delivered to FSLIC an assignment providing in part, as follows:

"In consideration of the payment of insurance on said insured account, claimant hereby * * * (b) assigns, transfers and sets over to the Corporation [FSLIC] all of claimant's right, title and interest in and to said insured account * * *. It is understood that this assignment does not convey the assignor's interest in uninsured funds."

Pursuant to these assignments and the applicable provisions of the National Housing Act (12 U.S.C. § 1728(b), and 1729(b), (c)(1)) FSLIC became subrogated to the rights of the insured account holders in the assets of Apollo. Marshall Savings and Loan Ass'n v. Henson, 78 Ill. App.2d 14.

As of the default date, 589 depositors had accounts exceeding the then applicable insurance limit of $15,000. These account holders (uninsured depositors) had principal claims against Apollo in excess of $1,000,000. Heritage Finance Company (hereinafter Heritage) was granted leave to intervene in the circuit court proceedings on behalf of itself and all other uninsured depositors. Heritage sought interest upon uninsured funds which Apollo owed to it from the date of the entry of the liquidation decree. While the judgment of the circuit court only denied FSLIC's claim, implicit in the judgment was a denial of any interest claim to uninsured depositors. On appeal we allowed Heritage's motion to intervene as an additional appellant.

The objectors to payment of post-default interest were owners of approximately 85% of the permanent reserve shares of Apollo. Their petition to intervene in the circuit court, which was allowed, alleged that they will be entitled to receive distribution of all assets of Apollo after payment in full is made for receivership expenses, claims by creditors of the association and claims by the withdrawable account holders of Apollo.

Edward P. Kelly, Chairman of the Board and chief executive officer of Apollo at the time of its closing, controlled approximately 80% of the outstanding permanent reserve shares. His control was exercised through Transcontinental Insurance Agency, Inc., the record owner of the Kelly stock. All of Transcontinental's stock was owned by his wife and her grandmother and he is its chief executive officer.

During oral argument of this cause we were informed that a majority of the permanent reserve shares owned by Transcontinental were pledged to secure a note, and had been recently sold to GWJ Investments, Inc. and George W. Jensen. They were granted leave to intervene as additional objectors. The remaining objectors are Eugene S. Ferrier, Amelia S. Ferrier and Helen Berdelle. The latter were directors of Apollo.

It is asserted by FSLIC and objectors that a potential liquidated surplus estimated between ten and twenty-five million dollars will occur as a result of Apollo's dissolution. FSLIC contends that this surplus will be created because of Apollo's closing, for its major cost of doing business — the payment of "dividends" to account holders — has terminated, thereby eliminating an annual cost of approximately $2,500,000. Apollo's income from mortgage investments, however, continues without interruption. Therefore, the receivership is operating at a profit and generating a surplus because it enjoys the income earned from nearly $56,000,000 deposited by account holders (and invested by Apollo in mortgages) without paying any return for the use of that money. We are therefore presented with the unique situation of the relative rights of the parties herein to the distribution of this substantial surplus.

It is the position of FSLIC, Heritage and the Commissioner that the trial court erred in construing that the holders of withdrawable capital accounts or their assignee (FSLIC) have the status of shareholders in Apollo and never become its creditors and are not entitled to interest as provided by law. Ill. Rev. Stat. 1969, ch. 74, par. 2.

FSLIC primarily argues that holders of withdrawable capital accounts enjoy a hybrid status as shareholders in the association and become its creditors upon default. Heritage urges that general equitable considerations permit the payment of post-default interest before any distribution to the permanent reserve shareholders. The Commissioner, supporting the aforementioned positions, contends that public policy dictates that once the holders of withdrawable capital accounts are denied the right to ...


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