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Continental Ill. Nat'l Bk. v. E. Ill. Water Co.

AUGUST 12, 1975.

CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, AS TRUSTEE, ET AL., PLAINTIFFS-APPELLEES,

v.

EASTERN ILLINOIS WATER COMPANY ET AL., DEFENDANTS. — (EASTERN ILLINOIS WATER COMPANY, DEFENDANT-APPELLANT.)



APPEAL from the Circuit Court of Crawford County; the Hon. CARRIE L. WINTER, Judge, presiding.

MR. PRESIDING JUSTICE JONES DELIVERED THE OPINION OF THE COURT:

This case involves a mortgage foreclosure proceeding in which plaintiffs sought the appointment of a receiver, an injunction against diversion of funds, an accounting, a decree for the sum found due, a foreclosure sale, a deficiency decree (if necessary), and any further relief the court should find equitable and proper. Essentially the property to be foreclosed constituted the entire operating systems of defendant Eastern Illinois Water Company, which secured outstanding Series A and Series B bonds issued by the defendant water company. The trial court, after a trial without a jury, found the sum of $2,222,310.97 to be due and owing the plaintiffs by defendant, which sum included principal and interest on the bonds and expenses and attorneys' fees. The court ordered that unless said sum was paid within 30 days after the entry of the decree, the mortgaged property should be sold at public sale to satisfy the obligations. From the decree the defendant brings this appeal.

Defendant contends that the trial court committed errors in that the court did not allow defendant reasonable discovery by virtue of limiting the scope of certain interrogatories, the court denied defendant reasonable discovery by way of a premature trial setting and denial of defendant's motion for continuance, and the court admitted improper evidence of expenses allegedly incurred by plaintiffs. None of these issues involve the merits of plaintiffs' case. The discovery issues raised relate to an affirmative defense which defendant asserted, and the evidence issues relate to the amount of the award made by the trial court. It will nevertheless be helpful in understanding the issues on appeal to set out as simply as possible the circumstances out of which this case arose.

Defendant Eastern Illinois Water Company (hereinafter referred to as "Water Company") is a public utility engaged in the production, distribution, and sale of water to the public. On or about January 1, 1963, Water Company became indebted in the amount of $1,850,000 to plaintiffs John Hancock Mutual Life Insurance Company, Royal Neighbors of America, and the Fidelity Mutual Life Insurance Company, for which Water Company issued Series A bonds bearing interest at the rate of 5% per annum and secured by an indenture of mortgage which essentially covered all property owned or thereafter acquired by Water Company. On or about March 28, 1972, Water Company became indebted to Fidelity Mutual Life Insurance Company in the amount of $325,000, for which Water Company issued Series B bonds bearing interest at the rate of 9 1/2% per annum. A supplemental indenture of mortgage was executed, the terms of which provided that it was to be construed in connection with the original indenture of mortgage and was to apply for the equal benefit of the holders of both the Series A bonds and the Series B bonds. Continental Illinois Bank and Trust Company was made trustee under the original and the supplemental mortgage.

On January 1, 1974, the amount of outstanding principal on the Series A bonds was $1,666,000 and on the Series B bonds was $318,500. The semi-annual interest payments on the Series A and Series B bonds in the respective amounts of $41,650 and $15,128 and the sinking fund deposits in the respective amounts of $18,579 and $4,551, all of which were to be paid on January 1, 1974, were not paid when due. Subsequently Mr. Barry C. Phelps, a director and the chairman of the Board of Directors of Water Company, was notified that a meeting would be held by representatives of the plaintiff companies on January 29, 1974, and Mr. Phelps was asked to attend at 2 p.m.

Before discussing the January 29, 1974, meeting it will be helpful in understanding this case to briefly discuss some background information which will demonstrate why Water Company came to be in the adverse financial situation that it was in January 1974. For the most part the background information comes from testimony of Barry C. Phelps, and describes the situation as it was in early 1974.

Water Company is wholly owned by the Water Securities Company, a Delaware Corporation whose principal place of business is 216 Higgins Road, Park Ridge, Illinois. The directors of Water Company are Barry C. Phelps, Melvin Parker, James P. Risely and Thomas McMahon. Phelps is chairman of the Board of Directors. Phelps is also the president and a director of Water Securities and owner of 15% of the stock of Water Securities. The Springfield Corporation owns 52% of the stock of Water Securities, and the remaining stock is owned by William McMillan and the Jewel Tea pension fund. The Springfield Corporation is an Illinois corporation whose principal place of business is also 216 Higgins Road, Park Ridge, Illinois. Phelps owns 80% of the stock of Springfield Corporation; the rest of the stock is owned, according to the testimony of Phelps, by his friends and relatives. Phelps is the president of Springfield Corporation.

During 1973, Water Company, at the direction of Phelps, took out a number of short term or demand loans from several different banks, which totaled over a million dollars. Water Company acted as a conduit of the money to Water Securities. Water Securities, at the direction of Phelps, invested the money in three corporations (identified by Phelps as United Utilities, Stress Pipe Research, and Magnatherm) and in 29 oil and gas wells. Phelps is a director and chairman of the Board of Directors of United Utilities and a director of Magnatherm. Water Securities owns 35% of the stock of Magnatherm and is a controlling shareholder of Stress Pipe Research. It is not clear from the record what percentage of the stock of United Utilities is owned by Water Securities.

As mentioned before, Water Company failed to make the January 1, 1974, payments to plaintiffs and, as a result, the meeting was called for January 29. On the morning of that date various representatives of the plaintiff companies held a meeting at which they discussed the Water Company situation. Four days previously the plaintiff companies had received a monthly statement from Water Company for the month of September 1973, which showed that Water Company had made advances to and had accounts receivable from the Water Securities Company in the respective amounts of $258,000 and $16,962. However, according to the testimony of three representatives of the plaintiff companies who had attended the meeting on the morning of January 29, it came to the attention of those in attendance with Water Company had made additional advances to and had additional accounts receivable from Water Securities and other affiliates to which the outstanding amount totaled over $1,249,000. It is not clear from the record how those in attendance became aware of the additional advances and accounts receivable. At any rate, they decided to accelerate the principal amount of the Series A and Series B bonds.

At a later meeting held that day, attended by the same representatives of the plaintiff companies and additionally by Barry Phelps, Phelps was given notice of the acceleration. According to the testimony of Phelps, after the meeting, Clarence Warren, a representative of plaintiff Royal Neighbors of America, advised him that the plaintiff companies would be willing to withdraw the acceleration if the management of Water Company was strengthened, if tighter controls were placed on the transactions of Water Company and if the advances made by Water Company were returned.

On February 20, 1974, plaintiffs filed their original complaint. On June 19, 1974, Water Company notified the plaintiff companies that Water Company would tender the past due principal and interest on June 21, 1974. On June 21, a representative of Water Company appeared at the location designated by Water Company and tendered to a representative of plaintiff companies the past due principal and interest; however, the tender was refused.

Subsequently, on June 24, 1974, Water Company filed an amended answer in which Water Company raised the affirmative defense that it would be inequitable to grant the relief sought by plaintiffs. Essentially there were two bases for the defense raised. The first was that the acceleration was for the sole purpose of obtaining the entire amount of the obligation on the Series A and Series B bonds in order to reinvest that amount at higher interest rates. The second was that Water Company had entered into negotiations to settle and cure the default in reliance on oral representations of plaintiffs that the default could be cured by payment of past due principal and interest.

Plaintiffs filed a reply to the affirmative defense on July 8, 1974. Then on July 23, 1974, Water Company filed, among other things, interrogatories to each plaintiff. The interrogatories to each plaintiff were substantially the same and, among other things, asked for information with respect to every meeting attended by an officer or employee of each plaintiff at which the subject of bond or debenture investments in general were discussed and at which the subject of the bonds described in the complaint were discussed.

On July 29, 1974, plaintiffs filed interrogatories to Water Company which asked, among other things, for an identification of all property owned by Water Company; for whatever information upon which Water Company had based its affirmative defense; for the minutes of any meetings of the directors, shareholders, management committees or other committees held since January 1972; for all evidence of indebtedness of Water Company; and for the names of each ...


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