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Kerrigan v. Unity Savings Association





Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County; the Hon. Walter P. Dahl, Judge, presiding.


The plaintiff, Walter F. Kerrigan, a permanent reserve shareholder of Unity Savings Association, a savings and loan association chartered under the Illinois Savings and Loan Act (Ill. Rev. Stat. 1973, ch. 32, pars. 701 through 944), brought this derivative action in the circuit court of Cook County on behalf of himself, Unity, and all Unity's other members against five directors of Unity and against Plaza Insurance Agency, Inc. The complaint sought an accounting of profits and injunctive relief. After the complaint and the answer had been filed, each party moved for summary judgment. The court granted the defendants' motion, and dismissed the action. On the plaintiff's appeal the Appellate Court for the First District reversed and remanded. (11 Ill. App.3d 766.) We granted defendants' petition for leave to appeal.

The complaint alleged that Unity was the successor to a savings and loan association formed prior to 1959, and that Plaza had been organized in 1962 by "some or all" of the five individual defendants. The five include three directors who are also officers of Unity: Saul Z. Bass, Unity's president; Mitchell H. Bass, a vice president; and Howard Bass, the secretary and also a vice president. These three defendants also hold positions with Plaza. Saul Z. Bass is Plasa's president; Mitchell H. Bass is its registered agent, and Howard Bass is its secretary. The complaint does not specify what positions, if any, are held with either Unity or Plaza by the two remaining individual defendants, Louis Speer and Myron Voss. It is admitted by the answer, however, that the individual defendants control Unity's business affairs.

The complaint further alleges that Plaza has its offices in the building owned and occupied by Unity under a lease from the latter, and that Unity "refers" its borrowers to Plaza to obtain fire and homeowner's insurance and other forms of insurance coverage in connection with mortgage loans made by Unity. These allegations were all admitted by the answer. In addition, in response to interrogatories from the plaintiff, Plaza admitted that it had advertised itself as an "agent" of Unity.

The complaint contained a further allegation that Plaza was empowered under its articles of incorporation to place loans on real estate on terms competitive with loans which Unity was authorized to make. The defendants admitted that allegation, but stated in their answer that Plaza had not done so. Defendants also stated in their answer, and in an affidavit supporting their motion for summary judgment, that the lease of office space to Plaza was at a rental no lower than that prevailing for comparable property.

The theory of the complaint was that the individual defendants, by creating Plaza, had assumed a role which would produce a conflict of interest with their positions as directors and officers of Unity. Plaintiff also made the specific charge that by selling insurance to borrowers from Unity the defendants had appropriated for their own benefit a business opportunity which properly belonged to Unity. The relief sought included an accounting of profits, the imposition of a constructive trust on all shares of Plaza stock, and an injunction restraining defendants from continuing the practices complained of. From the answers to plaintiff's interrogatories by Plaza it appears that over the period from 1962 through 1969 Plaza earned approximately $428,000 in insurance commissions. Although one of plaintiff's interrogatories requested information on the amount of Plaza's commissions on insurance placed on persons referred to Plaza by Unity, no figures with respect to that item appear in the record.

The only affirmative defenses raised in the answer with respect to the admitted allegations of the complaint, and the only grounds relied on in defendants' motion for summary judgment were that Unity lacked the power under the Savings and Loan Act to write insurance, and that Unity was in any event forbidden to do so by provisions of the Illinois Insurance Code of 1937 (Ill. Rev. Stat. 1973, ch. 73, par. 613 et seq.). The appellate court determined that Unity did have the legal power to engage in the insurance business, either directly or through a subsidiary, and reversed the decision of the circuit court. Because the appellate court felt that the asserted liability of the defendants involved questions of fact which could not be determined without a trial, it remanded the case for a determination of those questions.

Each party has argued the cause here, as they did in the appellate court, on the theory that defendants cannot be held liable if Unity lacked the legal power to perform the business activities engaged in by Plaza, since in that event there would have been no business opportunity for defendants to appropriate. We conclude, as did the appellate court, that at the time when Plaza was formed Unity did have the power to engage in the same activities performed by Plaza. We are of the opinion, however, that upon the facts alleged in the complaint and admitted by defendants the liability of the latter does not depend solely on whether in 1962 Unity had the power to engage in the insurance brokerage business.

We turn first to the question of Unity's powers under the Savings and Loan Act. While no power to act as an insurance broker is expressly conferred by the Act, section 1-8 thereof (Ill. Rev. Stat. 1961, ch. 32, par. 708) does provide: "An Association also shall have any power conferred on a corporation by the Business Corporation Act, and any power not prohibited by law which is reasonably incident to the accomplishment of the express powers conferred upon the Association by this Act." One of the powers expressly conferred by the Act is the power granted by section 5-1(b) (Ill. Rev. Stat. 1961, ch. 32, par. 791) to make loans to members on the security of real estate.

When such a loan is made on improved property it is in the obvious interest of the mortgagee that the improvement be covered by insurance in an adequate amount. Although the mortgagee, under Illinois law, acquires only a lien on the property (Kling v. Ghilarducci (1954), 3 Ill.2d 454, 460), its interest is an insurable one to the extent of the debt (Trustees of Schools v. St. Paul Fire and Marine Insurance Co. (1921), 296 Ill. 99, 102), and the mortgagee may therefore procure the insurance itself. Alternatively, the mortgagee may require the mortgagor to obtain the insurance, and may, as an incident to the making of the loan, act as the broker for the borrower in placing the insurance.

The question of the authority of the mortgagee to act as broker was answered over 100 years ago in Chicago Building Society v. Crowell (1872), 65 Ill. 453. There a loan association, having obtained a covenant from a mortgagor to keep the buildings on the premises insured, agreed to obtain the policy for him. Before that objective had been realized, however, the buildings were destroyed in the Chicago fire, and the mortgagor brought suit against the association for breach of its agreement. By way of defense the association urged that its charter did not empower it to procure insurance, and that the agreement to do so was not incidental to the purpose for which the association had been formed. In rejecting that defense the court stated:

"The company was expressly authorized and empowered by the act of the legislature to make loans and provide for the security of the same on real estate, as well upon improved as upon unimproved property. As an incident to security upon improved real estate, no reason is perceived why it may not be regarded as within the powers granted, that the corporation should have the right to contract for insurance on the improvements on the property, to make more available and certain their security, and such a contract would be for the benefit of the company." 65 Ill. at 457.

While there is language in the opinion relating to estoppel, the decision, in our opinion, established that it was within the power of a savings and loan association to act as a broker in the placement of insurance, because that activity was reasonably incident to the making of the mortgage loan. A similar conclusion was reached in Goodman v. Perpetual Building Association (D.D.C. 1970), 320 F. Supp. 20. Our own conclusion is reinforced by the fact that section 506 of the Insurance Code (Ill. Rev. Stat. 1973, ch. 73, par. 1065.53) contains a specific prohibition against the ...

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