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Lanigan v. Apollo Savings

OPINION FILED JULY 29, 1976.

JOHN J. LANIGAN, COMM'R OF SAVINGS AND LOAN ASSOCIATIONS, PLAINTIFF,

v.

APOLLO SAVINGS, DEFENDANT. — (FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, CLAIMANT-APPELLANT,

v.

MARINO A. BERNARDI ET AL., INTERVENORS-APPELLEES.)



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

MR. JUSTICE MCNAMARA DELIVERED THE OPINION OF THE COURT:

This appeal is one of several resulting from the default of Apollo Savings in 1968. Federal Savings and Loan Insurance Corporation (hereinafter "FSLIC") appeals from an order of the circuit court of Cook County denying FSLIC's motion to vacate or modify the court's order which granted pre-default statutory interest to the intervenor account holders payable on a pro rata basis with the claims of FSLIC and other creditors for post-default interest. Earlier in the litigation, the circuit court had denied post-default interest to the uninsured creditors and to FSLIC in its own behalf as subrogee of the account holders. However, the Illinois Supreme Court reversed the holding and awarded post-default interest from the acknowledged liquidation surplus of the assets of Apollo. (Lanigan v. Apollo Savings (1972), 52 Ill.2d 342, 288 N.E.2d 445.) It should be noted that in Lanigan the court determined that the account holders had a hybrid status of shareholder-creditor upon default and were entitled to "interest" as creditors for use of their funds during liquidation as distinguished from "dividends" prior to default. The claim here is for "compensation" for the use of such funds and has been used interchangeably to denote "interest" and "dividend" in the cases cited as well as in the present case.

The parties agree on the facts in the present case. Apollo, originally organized in 1886, was an insured savings and loan association chartered by the State of Illinois. It was subject to the National Housing Act (12 U.S.C.A. §§ 1701-1750 jj), and the Illinois Savings and Loan Act (Ill. Rev. Stat. 1967, ch. 32, pars. 701-944). On March 19, 1938, FSLIC initially insured Apollo's accounts, and said insurance was in effect at the time of default. After receiving Apollo's semi-annual financial report, the governing board of FSLIC, on April 8, 1968, issued a cease and desist order prohibiting Apollo from paying a scheduled dividend because of its seriously impaired financial condition. Two weeks thereafter, the United States District Court in FSLIC v. Apollo Savings (N.D. Ill. 1968), 285 F. Supp. 750, issued an order restraining Apollo from violating FSLIC's order. On April 26, the Illinois Commissioner of Savings and Loan Associations took custody of Apollo pursuant to his statutory authority and appointed a receiver for the purpose of liquidation.

The appointment of a receiver constituted a "default" under section 401 of the National Housing Act (12 U.S.C. § 1724(d)) requiring FSLIC to make payment of insurance pursuant to section 405 of the Act (12 U.S.C. § 1728(b)). On May 3, 1968, the circuit court of Cook County entered an uncontested decree of liquidation finding sufficient cause for the "custody, liquidation and dissolution" of Apollo. On May 20, 1968, FSLIC commenced payment of insurance to the insured members of Apollo. Such payment did not include an allowance for dividends or compensation for the holding of depositors' funds for the pre-default period from October 1, 1967 to April 26, 1968, the date of default.

Marino A. Bernardi and Robert S. Clementi were joint holders and owners of withdrawable share accounts in Apollo at and prior to October 31, 1967 through the date when FSLIC paid insurance to the insured account holders. On August 22, 1973, the trial court granted leave to them to intervene and to file a claim on their own behalf and on behalf of the class they purported to represent for payment of compensation on their account for the aforestated pre-default period. Intervenors further requested that they be paid prior to the distribution of the post-default interest to FSLIC and the uninsured creditors. The trial court allowed intervenors' claim as interest for the pre-default period and ordered the payment of such claims on a pro rata basis with the claims of FSLIC and other creditors for post-default interest. FSLIC appeals from the trial court's denial of its motion to vacate that order. The intervenors have not filed a cross-appeal from the order denying their claim for priority in payment, and that issue is not before us.

FSLIC contends that intervenors are not entitled to predefault interest because of their contractual agreement with Apollo. FSLIC points out that the fundamental difference between a savings and loan depositor and a bank depositor is that the latter receives a pre-determined interest rate on his account, while the former by contractual agreement receives a dividend dependent upon the profitability of the savings and loan association. FSLIC further maintains that since Apollo was insolvent, it legally could not have paid a dividend during the period in question.

Intervenors counter with a number of arguments in favor of granting pre-default interest. Their principal assertion is that in view of the existence of a liquidated surplus, they have the same rights as similarly situated bank depositors. In support of this proposition, they argue that the equities of the situation demand such a ruling. Intervenors base these equities on an interpretation of the supreme court's earlier Lanigan decision, the allegation that intervenors relied upon Apollo's course of conduct and assertions to their detriment, and upon the contention that FSLIC breached its duty to protect the depositors.

We believe that the case of Federal Savings & Loan Insurance Corp. v. Huttner (7th Cir. 1968), 401 F.2d 58, while containing slightly different facts than the present case, is clearly dispositive of a number of the issues raised by intervenors. Huttner, as here, deals with an insolvent Illinois savings and loan association whose depositors sought a dividend for the time period immediately prior to formal default, but subsequent to the association's actual insolvency. The court held that a dividend had not been declared and was therefore not owed to the depositors. Because of that holding, the dividend in question was found not to be part of the insured withdrawal value of members' accounts and therefore not an obligation of FSLIC in favor of the members.

Intervenors attempt to distinguish Huttner by pointing out that unlike the present case, the receiver in Huttner had realized no surplus from the liquidation of the association's assets. They contend that the sole issue in Huttner was whether FSLIC's insurance obligation encompassed pre-default dividends. Regardless of the absence of a surplus, the language of the court in that case blunts the general thrust of intervenors' basic contention that they should be accorded the status of a similarly situated bank depositor. Citing a United States Supreme Court case involving an Illinois savings and loan association, the Huttner court quoted:

"`The holders of withdrawable capital shares are not entitled to a fixed rate of return. Rather, they receive dividends declared by an association's board of directors and based on the association's profits.

Because Illinois law ties the payments of dividends on withdrawable capital shares to an apportionment of profits, the petitioners can expect a return on their investment only if City Savings [the association involved] shows a profit.' Tcherepnin v. Knight, 389 U.S. 332, 337, 338-339, 88 S.Ct. 548, 554, 19 L.Ed.2d 564 (1967)." (401 F.2d 58, 61.)

Later in the opinion, Huttner underscores the position that unless a profit existed, there can be no dividend:

"The FSLIC insures against the loss of savings; it does not guarantee earnings on invested savings. As the Supreme Court noted in Tcherepnin v. Knight, supra, earnings on a savings and loan association account are dependent upon the profitability of the association." (401 F.2d 58, 62.)

Apollo earned no profit during the pre-default period and thus should not have paid dividends. An attempted payment of dividends was ordered stopped by FSLIC. This order was upheld by the United States District Court. In line with Huttner, we believe that the depositors had no right to receive a dividend for the nonprofitable, pre-default period, irrespective of the source. The Huttner court declined to go so far as to state such ...


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