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Houck v. Martin





APPEAL from the Circuit Court of Sangamon County; the Hon. RICHARD J. CADAGIN, Judge, presiding.


Rehearing denied April 21, 1980.

On April 23, 1975, the plaintiff, serving as trustee in bankruptcy for the Martin Supply Company, which owned and operated a grain elevator, filed a multicount complaint against Edward Martin, Audrey Martin, and Carol Martin, and against the First National Bank of Springfield (FNB). Edward is the son of LeRoy, now dead, and Audrey; Carol is Edward's wife. The plaintiff sought to recover from Edward as the principal obligor on a $200,000 loan allegedly made by FNB to Edward and repaid with proceeds from insurance policies on LeRoy's life assigned by the company, as owner of the policies, to FNB as collateral for the loan. The plaintiff sought to recover from Edward, Audrey as executor of the estate of LeRoy and individually, and Carol on the basis of surety agreements signed by them at the time FNB allegedly loaned the $200,000 to Edward; the plaintiff sought contributions from these sureties, who had not repaid any of the loan. The plaintiff also sought to recover from Edward and Audrey on the theory that they were statutorily liable as corporate officers and directors for loans made to Edward, another corporate officer or director (Ill. Rev. Stat. 1977, ch. 32, par. 157.42-4). The plaintiff based his action against FNB on two theories: (1) FNB had converted the insurance proceeds by failing to seek repayment of the loan from Edward, instead collecting insurance proceeds before the note was due; and (2) the assignment of the insurance policies was void because it created a preference in favor of FNB, defrauding the other creditors of the Martin Supply Company. This action proceeded to a three-day trial before a jury, beginning March 5, 1979.

Dale Houck testified that he became the trustee in bankruptcy on August 27, 1974. The bankruptcy court had authorized him to pursue this case. Some of the bankrupt's records were destroyed in a fire; the previous trustee had stored them in a building that burned down. He did not know whether the $200,000 loan proceeds were paid into the company's checking account with FNB. On September 9, 1974, he received $588.02 from FNB as the final balance in the company's checking account.

Russell Brannon, an auditor for FNB, testified that he had copies of several documents involved in the case, including microfilm copies of the notes; the originals had disappeared. Plaintiff tendered several exhibits: copies of the successive notes, the guarantees and assignments, and the bank loan officer's notes. Edward signed the original note and the 90-day renewal notes. As part of the security agreement for the loan, the company assigned FNB the beneficial interest in a land trust. Brannon said that no one, not even Edward, signed the loan application, and Edward did not sign the land trust assignment.

The next witness was Walter Mills, who was a loan officer at FNB at the time the $200,000 was loaned and had supervised the making of the loan. Mills explained that $20,000 was paid on the debt October 25, 1972, so the renewal note made that day was for only $180,000. LeRoy died February 9, 1973, during the life of the fourth note, and $52,075 was left on the indebtedness even after the insurance proceeds had been applied to the debt. A liability ledger showing balances on the loan from the date of the loan, April 28, 1972, until September 6, 1974, was introduced into evidence. Mills testified that the loan was made to Edward, not to the Martin Supply Company. FNB required the company to sign security agreements on the company's inventory and equipment, to give FNB the beneficial interest in a land trust, and to guarantee the loan. The loan guaranty agreements signed by the company, Edward, Carol, Audrey, and LeRoy are identical printed forms prepared by FNB. The signer jointly and separately guarantees payment of varying amounts on the loan. FNB also required that LeRoy sign a resolution of the board of directors of the company, authorizing the corporate guaranty. On the assignments of the life insurance proceeds, FNB was listed as the beneficiary. Other insurance policies secured loans made by FNB to the company; these loans are not related to that allegedly made to Edward and involved in this case. The proceeds from all the policies securing corporate debts totaled $400,000; the proceeds earmarked for this debt, however, were insufficient to repay entirely the $200,000 loan, and a balance of approximately $52,000 remained, which was paid off by the sale of realty held in the land trust.

Over the plaintiff's objection, the court permitted counsel for the Martins to cross-examine Mills on discussions leading up to the actual signing of the loan document on April 28, 1972. FNB did not take a loan application from Edward, and he did not sign any financial statements. Counsel for the Martins introduced into evidence the deposit slip signed by Mills, depositing the $200,000 loaned in the company's checking account. Upon redirect examination, Mills testified that after LeRoy died, Edward had FNB loan more money to the company on February 22, 1973.

During the plaintiff's rebuttal, Mills testified that he had learned from another loan officer, who in turn had been told by LeRoy that the purpose of the loan was to help Edward buy approximately 200 shares of stock in the company. Mills also testified that he did not ask either LeRoy or Edward to fill out a loan application and that he did not know the value of the stock. Mills identified as his handwriting a notation on the loan application saying, "Issued 110 shares to Ed." Further, the purpose of the loan — financing Edward's purchase of stock — was discussed while the documents were signed. Mills testified that FNB took a security interest in everything owned by the company to guarantee the loan. He never saw a corporate resolution regarding the sale of shares to Edward.

Audrey Martin, LeRoy's wife, was called as a witness to testify for the plaintiff under section 60 of the Civil Practice Act (Ill. Rev. Stat. 1977, ch. 110, par. 60). Audrey's testimony revealed that although she had been an officer of the company, she knew little if anything about corporate affairs. She realized that she had been secretary of the company, but was not sure whether she had ever been vice president; she had signed minutes of meetings, yet was unfamiliar with the company's records. She said that she was a director and officer "on paper only." The plaintiff introduced into evidence copies of the minutes from shareholders' and directors' meetings of 1972 and 1973.

During the defendants' examination of Audrey it was brought out that LeRoy's signature does not appear on any minutes dated after 1970; the defendants were trying to show that the minutes of the various meetings were prepared after LeRoy's death but predated. Audrey testified that she never attended stockholders' or directors' meetings. She also said that LeRoy was the only one who owned stock in the company. The defendants then offered another exhibit, a certified copy from the Illinois Secretary of State of the company's annual report for 1972. The 1972 annual report was signed by LeRoy. The annual report lists LeRoy as president, Audrey as secretary, no one as treasurer, and one John Bullington, the family lawyer, as director. According to the report, the company was authorized to issue 1,000 common shares, with a par value of $100. Only 210 shares had been issued, however. The annual report is dated March 20, 1972. The minutes for the stockholders' meeting, held March 16, 1972, say that LeRoy, Audrey, and Edward were that day elected directors of the company. The minutes also say that LeRoy owned all the outstanding shares, 210. The minutes for the directors' meeting, also held March 16, 1972, say that LeRoy, Bullington, and Edward were the directors attending, and that LeRoy was elected president, Audrey, vice president and assistant secretary, and Edward, secretary and treasurer. LeRoy did not sign any of these minutes, although the stockholders' minutes has a blank for his signature, as chairman of the meeting. The plaintiff objected to the defendants' suggestion that the book of minutes was inaccurate; the plaintiff argued that the defendants could not attack the veracity of the witness and could not use parol evidence to contradict the written corporate minutes. The trial court overruled the objection and admitted the testimony. On the plaintiff's examination, Audrey testified that she signed documents without knowing what they were and that she did not know which was correct, the minutes or the annual report.

The defendants, too, called Audrey as a witness. She testified that she had worked parttime at the grain elevator. She did not read the corporate documents she signed because she had "complete confidence" in LeRoy. She did not go to FNB on April 28, 1972, the date the money was loaned, and did not remember attending any meeting at which Edward was elected an officer or director before LeRoy's death.

The plaintiff called Edward as a witness. He testified that he had been an officer in the company and had signed the notes payable to FNB. He did not repay any of the loan. On defendants' examination, Edward testified that he knew he was an officer because his father had told him he was one. He never attended any corporate meetings before LeRoy's death and never prepared minutes. Edward acknowledged that the minutes showed that he was elected secretary-treasurer and Audrey assistant secretary at the directors' meeting March 16, 1972. The plaintiff's exhibits were admitted without objection.

Edward, testifying for the defense, said that he had never applied for a loan from FNB. His net worth was about $7,500 on April 28, 1972. He went to the bank that day because LeRoy told him to do so; his father said that he was old enough to meet some of the bankers. He did not ask for a loan and signed the note only after his father told him to. Edward did not know what was done with the $200,000, but said that he never received it personally. He did not fill out a deposit slip. At the time the loan was made he signed various papers at his father's request. As far as he knew, he had never received any money from the company except his salary and never owned any stock in the company. The night the loan was made, he first learned of being an officer in the company. At his father's request, he signed the notes renewing the loan. Edward never saw the corporate books before his father died; he signed some checks drawn on the account at FNB before his father's death, but did not fill them out. He never asked anyone to guarantee a loan for him.

Edward's testimony concerning ownership of the stock is confusing and often inconsistent. During cross-examination, Edward admitted that when he signed the notes he knew what he was doing and that the purpose of the note was for him to buy stock in the company. The day of the loan his father talked to him about his owning part of the company. He acknowledged his own and his father's names on signature cards from FNB; Edward's card designates him vice president of the company. For his own benefit, Edward traded commodities and had accounts in his own name.

Yet Edward also testified that LeRoy had never offered to sell him stock in the company, and that he, Edward, never told anyone at FNB that he wanted to buy stock. Still, when he and his father left FNB, the bankers congratulated him "on having purchased half the elevator."

Eleanor Rundel, the company's bookkeeper for 12 years, testified for the defendants that Edward was a regular worker for the company and that Audrey occasionally worked at the grain elevator. LeRoy ...

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