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TCHEREPNIN v. FRANZ
April 14, 1975
ALEXANDER TCHEREPNIN ET AL., PLAINTIFFS,
ROBERT FRANZ ET AL., DEFENDANTS.
The opinion of the court was delivered by: Robson, Chief Judge.
This matter comes before the court on the motion of
cross-plaintiff City Savings Association (City Savings), by its
receiver Samuel Berke, and pursuant to Rule 56 of the Federal
Rules of Civil Procedure for entry of summary judgment on Counts
I, II and III of its Amended First Cross-Complaint against
cross-defendant First National Bank & Trust Company of Alton,
Illinois, executor of the estate of Joseph E. Knight (Estate of
Knight). In addition, the Estate of Knight has moved to dismiss
Counts I, II and III of the Amended First Cross-Complaint.
Cross-defendant Justin Hulman has joined in the motion to dismiss
and has adopted the Estate of Knight's memorandum in support
thereof. For the reasons set forth below, the motions to dismiss
shall be denied and the receiver's motion for summary judgment
shall be granted as to Counts I and II and denied as to Count
This complex and protracted litigation involves the events
surrounding the collapse of City Savings Association, a savings
and loan association chartered by the State of Illinois and
presently under the control of federal receivers. The history of
City Savings and its mentor, C. Oran Mensik, is a chronicle of
political intrigue and corruption perhaps unmatched in Illinois
history. It is replete with examples of official misconduct and
chicanery and permeated with a blatant disregard by both state
and City Savings officials for the rights of the unfortunate
depositors. The result of these defalcations was a massive fraud
which milked the depositors of nearly $23,000,000.
To fully comprehend the allegations made in the Amended First
Cross-Complaint, the history of City Savings and of this
litigation must first be reviewed in some detail.
Events Prior to the Commencement of This Litigation
City Savings Association was founded in 1908 in Chicago,
Illinois. It issued to its depositors withdrawable capital
shares, as authorized by the Illinois Savings and Loan Act,
Ill.Rev.Stat. 1963, ch. 32, §§ 701-944. City Savings was located
in and serviced an area known as the Chicago-Ashland business
district, a focal point for various Chicago ethnic groups. The
Failure of the City Savings Association, a report to the Illinois
General Assembly, Illinois Legislative Investigating Commission,
January, 1972 (hereinafter referred to as Legislative Report), p.
In 1942, C. Oran Mensik, the principal manipulator of this
fraud, first became associated with City Savings. Mensik's
emergence as president and director of City Savings, six months
later, marked the beginning of an astounding period of economic
growth. When Mensik joined City Savings there were 348
shareholders and $147,000 in assets. By 1952, the reported assets
of City Savings had reached $12,000,000 and in the next five
years this figure climbed to over $35,000,000. Mensik remained in
control of City Savings until at least 1964. Legislative Report,
On July 18, 1956, the Auditor of Public Accounts for the State
of Illinois, the public official then charged with the
supervision of state-chartered savings and loan associations,
ordered state examiners to conduct an examination of the books
and records of City Savings. Subsequent examinations were made in
October 1956 and February 1957. The last examination report was
sent to the management of City Savings on April 16, 1957, and was
accompanied by a letter from the Auditor outlining the State's
criticisms and recommendations. On April 23, these examinations
were released to the press. The resulting publicity caused a run
on City Savings. On April 25, 1957, the Auditor declared an
"emergency," took custody of City Savings and closed its doors to
the public. Ill.Rev.Stat. 1955, ch. 32, § 848; Legislative
Report, pp. 3-8.
The examination findings upon which the Auditor relied
revealed: that the capital of City Savings was severely impaired;
that certain favored companies staffed and operated by Mensik's
associates and relatives had received a disproportionate amount
of mortgage loans; that properties securing mortgage loans were
greatly overappraised; and that Mensik was involved in two other
guarantee associations which were both in financial straits.
Legislative Report, p. 7.
In response, Mensik filed suit in the Circuit Court of Cook
County charging that the Auditor and five of his associates were
engaged in a conspiracy to "steal" Mensik's associations from
him. The matter was referred to Nathan M. Cohen as Master in
Chancery. After an extensive hearing, the Master concluded that
the responsibility for the emergency was chargeable to the
Auditor because of his untimely release of the confidential
report and that the state seizure was therefore illegal. On
December 6, 1957, Judge Cornelius Harrington adopted the Master's
findings and ordered that control of City Savings be returned to
Mensik. This decision was ultimately affirmed by the Supreme
Court of Illinois in 1960. Mensik v. Smith, 18 Ill.2d 572,
166 N.E.2d 265 (1960).
Judge Harrington, however, also found that some of the
criticisms registered by the Auditor were valid and retained
supervisory jurisdiction over City Savings to oversee the
implementation of certain suggested remedial measures. One of
these suggestions was the institution of a system of limited and
restricted withdrawals pursuant to Section 773(b) of the Illinois
Savings and Loan
Act, Ill.Rev.Stat. 1963, ch. 32, § 773(b). Legislative Report,
On December 19, 1957, City Savings was reopened to the public.
On February 3, 1959, Judge Harrington determined that the
conditions which the court directed to be remedied had been in
fact corrected and terminated all judicial supervision of City
Savings. Legislative Report, p. 11.
The rapid growth experienced by City Savings prior to its 1957
closing declined sharply due both to the damaging publicity it
had received and to its decision to operate under the provisions
of Section 773(b). Legislative Report, p. 14.
On July 9, 1959, the Illinois General Assembly enacted Section
773(h) of the Illinois Savings and Loan Act. Ill.Rev.Stat. 1959,
ch. 32, § 773(h.). It provided:
(h) An association while operating under this
Section may accept additional withdrawable capital
from its present shareholders as well as accept new
withdrawable capital accounts and such withdrawable
capital accounts shall not be subject to the
provisions of subsection (b) of this section but
shall be subject to withdrawal at will so long as the
association is operating under the provisions of
subsection (b) of this section.*fn1
Mensik seized the unique advantages offered by this new law and
embarked on an extensive advertising campaign, offering expensive
prizes such as television sets and radios to new depositors. He
also blazoned the maxim "Under State Government Supervision" on
his letterheads and circulars. Legislative Report, p. 14.
In January 1964, the State Department of Financial
Institutions, to whom supervisory authority over state-chartered
savings and loan associations had been transferred, began an
examination of the affairs of City Savings. The examination
included an audit by Peat, Marwick, Mitchell & Co., independent
public accountants, whose report dated June 15, 1964, showed a
capital impairment of approximately $14,000,000. Tcherepnin v.
Franz, 316 F. Supp. 714 (N.D.Ill. 1970). On June 26, 1964, the
State of Illinois took custody of City Savings and on June 30,
1964, City Savings was closed to the public. Legislative Report,
On July 28, 1964, a meeting of the depositors of City Savings
was held at which a plan of voluntary liquidation, agreed upon
between Mensik and the State of Illinois, was put forward and
approved by the depositors. Pursuant to the plan, three voluntary
liquidators were appointed, one nominated by Mensik and the other
two by the State of Illinois. Legislative Report, pp. 17-18.
On July 24, 1964, four days prior to the depositors' meeting
called to solicit approval of the plan of voluntary liquidation,
the plaintiffs' complaint was filed by Alexander Tcherepnin and
certain other holders of withdrawable capital shares of City
Savings. Their complaint named Joseph E. Knight, then Director of
the Department of Financial Institutions of the State of
Illinois; Justin Hulman, then Supervisor of the Savings and Loan
Division of the Department; certain officers and directors of
City Savings; and Louis Kwasman, Harry Hartman and Dennis Kirby,
the voluntary liquidators of City Savings, as parties defendant.
Defendants Hartman and Kirby were savings and loan examiners and
employees of the Department of Financial Institutions; Kwasman
was a business associate and nominee of Mensik.
No wrongdoing was alleged by, and no relief was sought against,
the named state officials or the State of Illinois. Nonetheless,
on November 20, 1964, the Attorney General of the State of
Illinois moved to strike and dismiss the complaint.
On January 17, 1966, Judge Campbell, before whom the matter was
then pending,*fn2 denied all motions to dismiss plaintiffs'
complaint and held that plaintiffs owned "securities" as defined
by federal law, and certified his ruling for an interlocutory
appeal. Tcherepnin v. Franz, 277 F. Supp. 472 (N.D.Ill. 1966).
On January 20, 1967, the United States Court of Appeals for the
Seventh Circuit reversed Judge Campbell's order and, with one
Judge dissenting, held that the plaintiffs were not in fact
holders of "securities." Tcherepnin v. Knight, 371 F.2d 374 (7th
On December 18, 1967, the United States Supreme Court reversed
the order of the court of appeals and held that plaintiffs'
withdrawable capital shares were "securities" within the meaning
of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.
Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564
(1967). The matter was remanded to this court for further
On February 9, 1966, the plaintiffs first moved for the
appointment of a receiver to replace the state-supervised
voluntary liquidators. Judge Campbell denied this motion but
indicated that he would reconsider his decision after appellate
review of his order sustaining plaintiffs' complaint. Tcherepnin
v. Franz, 277 F. Supp. 472 (N.D.Ill. 1966).
On May 29, 1968, upon remand from the Supreme Court, plaintiffs
renewed their motion for the appointment of a receiver. From
August 19, 1968, to August 23, 1968, a full hearing on the motion
On September 7, 1968, Judge Campbell entered an order
appointing Leonard B. Ettelson and William J. Friedman receivers
of City Savings.*fn3 In this order Judge Campbell found that the
state-supervised plan of voluntary liquidation was:
. . tainted with fraud. . . . No reasonable
person could have concluded, and I specifically find
that Justin Hulman did not believe on June 15, 1964,
that the liquidation of City Savings
Association . . . could ever result in anything but
an enormous loss to the depositors. Nevertheless, the
State, while in custody of City Savings Association,
allowed C. Oran Mensik . . . to call a meeting of the
shareholders [fraudulently] soliciting proxies. . . .
Commissioner Hulman was aware of these
misrepresentations before, during and after the fact
and at no time did he prevent or correct these lies
although he had the power and duty to do so. . . .
I find and conclude that the representations made
to the shareholders of City Savings Association were
false, misleading and deceptive. . . . I therefore
hold the voluntary liquidation is void because it was
tainted with fraud from its inception.
Order of September 7, 1968. This order was subsequently appealed
and affirmed. Tcherepnin v. Kirby, 416 F.2d 594 (7th Cir. 1968).
On October 10, 1968, Judge Campbell entered an order
tentatively delineating two classes of depositors — the
plaintiffs consisting of post-July 9, 1959 depositors and the
intervening defendants consisting of pre-July 9, 1959 depositors.
On March 10, 1970, Judge Campbell held that the plaintiffs were
entitled to a preference in the distribution of the assets of
City Savings. This order was affirmed on appeal. Tcherepnin v.
Franz, 461 F.2d 544 (7th Cir. 1972).
Thereafter, in November, 1974, the plaintiffs, intervening
defendants and the receiver entered into a settlement agreement
whereby the plaintiffs were dismissed from the case and any
further recovery of assets would run to the benefit of the
intervening defendants. The plaintiffs had recovered
approximately 100 per cent of their investment in City Savings.
On August 6, 1970, Judge Campbell entered an order imposing a
constructive trust on certain property located in the Chicagoland
area for the benefit of City Savings and its depositors.
Tcherepnin v. Franz, 316 F. Supp. 714 (1970). That order was also
affirmed on appeal. Tcherepnin v. Franz, 485 F.2d 1251 (7th Cir.
On January 15, 1969, the receivers filed their First
Cross-Complaint, naming Joseph E. Knight, Justin Hulman and
Dennis Kirby as cross-defendants. On September 23, 1969, the
receivers amended the cross-complaint to name Chris Stolfa,
former Supervisors of Savings and Loan Associations of the State
of Illinois, Louis Kwasman, Harry Hartman, William DeWoskin,
Richard Ray and Steven J. Kadlicek, voluntary liquidators of City
Savings, as additional cross-defendants. Cross-defendants Hartman
and Kadlicek were also employees of the Department of Financial
Institutions for the State of Illinois.
The cross-complaint was again amended to add the State of
Illinois and Fidelity and Deposit Company of Maryland as
additional cross-defendants. Fidelity and Deposit Company was the
surety for the individual cross-defendants.
The gravamen of the Amended First Cross-Complaint is that the
named officers and employees of the State of Illinois and the
other voluntary liquidators breached their statutory duties to
City Savings, thereby rendering themselves, the State of Illinois
and their surety liable for damages to the depositors of City
On April 6, 1972, the State of Illinois moved to dismiss the
Amended First Cross-Complaint and for summary judgment. The
receivers filed a cross-motion for summary judgment. In a
memorandum entered March 12, 1973, this court, with myself
presiding, denied the State's motions and granted the receiver's
cross-motion for summary judgment against the State of Illinois.
In that memorandum, it was specifically found that, "The willful
failure of the State through its officials, agents and employees
to adequately supervise City Savings . . . was . . . willful and
wanton negligence" and that the State was liable to the
depositors of City Savings for the damages they incurred as a
result of the collapse of that institution. Memorandum, Findings
of Fact, Conclusions of Law and Decree entered March 12, 1973, p.
Subsequently, the State and the receivers entered into
settlement negotiations. On September 10, 1973, the Governor
signed into law a bill passed by the 78th General Assembly
appropriating $12,467,500 for the reimbursement of the depositors
of City Savings.
On October 9, 1973, this court entered an agreed order
approving a settlement between City Savings and the State of
Illinois and ordering that the State be dismissed with prejudice
as a cross-defendant.
On November 5, 1973, the receiver filed a motion for summary
judgment against cross-defendants Justin Hulman, Chris Stolfa,
Louis Kwasman, Harry Hartman, Dennis Kirby, William DeWoskin,
Richard Ray, Steven J. Kadlicek and the Estate of Knight, and on
February 25, 1974, the receiver filed a motion for summary
judgment against cross-defendant Fidelity and Deposit Company of
Maryland. Although these motions were initially consolidated for
briefing, pursuant to the request of the receiver, the motion for
summary judgment against the Estate of Knight was placed on an
accelerated briefing schedule and is the subject of this
memorandum. The Estate of Knight is a named cross-defendant in
the first three counts of the First Amended Cross-Complaint.
These counts deal with events in chronological order and will be
Count I of the Amended First Cross-Complaint deals with events
transpiring between 1959 and June 1964, when City Savings was
closed by the State for the second time. Named as
cross-defendants are the Estate of Knight, Chris J. Stolfa and
Justin Hulman. Donald Swope, who was originally named as a
cross-defendant, was dismissed pursuant to this court's order of
October 9, 1973.
Joseph E. Knight was the Director of the Department of
Financial Institutions for the State of Illinois from January 16,
1962, to April 1968. Prior to that appointment, he served as
Secretary to the Illinois Commerce Commission under former
Governor Henry Horner, Supervisor of Loan Companies under former
Governor Adlai Stevenson and Assistant Director of the Department
of Financial Institutions under former Governor Otto Kerner.
Knight, pp. 4-5, 11; Legislative Report, p. 54.*fn4
Chris J. Stolfa was Supervisor of Savings and Loan Associations
for the Department of Financial Institutions from 1959 (1960?)
to November 1963. Stolfa had been a state employee since 1942.
The bulk of his experience was in the area of state supervision
of financial institutions. Stolfa, pp. 3-11; Legislative Report,
Justin Hulman was first employed by the State of Illinois on
January 15, 1964, as a technical advisor to Joseph Knight. Prior
to that, in November and December 1963, Hulman acted as an
unofficial advisor to Knight in connection with the examinations
of various savings and loan associations which appeared to be in
financial straits. On June 5, 1964, Hulman was appointed by
Knight as Supervisor of Savings and Loan Associations for the
Department of Financial Institutions. On August 1, 1965, his
official designation was changed by statute to Commissioner of
Savings and Loan Associations, a position he held until his
resignation on October 1, 1969. Hulman, pp. 2-7; Legislative
Report, pp. 55-56.
Donald Swope was acting Supervisor of Savings and Loan
Associations from November 1963 to until June 6, 1964, when he
was replaced by Hulman. Stolfa, p. 5; Knight, p. 9.
The Illinois Savings and Loan Act, Ill.Rev.Stat. 1963, ch. 32,
§§ 701-944, in effect for the period 1959-63, imposed a
comprehensive duty on the Director of the Department of Financial
Institutions and the officers and employees of that department to
supervise the affairs of all savings and loan associations within
the state and to ensure that these businesses were operated "only
by associations organized and conducted in accordance with the
authority provided in this Act." Ill.Rev.Stat. 1963, ch. 32, §
(a) The Director, at least once in each year,
without previous notice, shall cause an examination
to be made of the affairs of every association. Such
examination shall be made by competent examiners
appointed for that purpose, who are not officers or
agents of, or in any manner interested in, any
association which they examine, except that they may
be holders of withdrawable capital.
Section 842(b) of the Act granted to the Director or his
examiners access to the books and records of every savings and
loan association and empowered them to question the management
and employees of those associations regarding the conduct of its
(b) The officers, agents, or directors of any such
association shall cause the books of the association
to be opened for inspection by the Director or his
examiners and otherwise assist in such examination
when requested; and for the purpose of examination,
the examiner in charge thereof shall have power to
administer oaths and to examine under oath any