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FEDERAL SAV. AND LOAN INS. CORP. v. BASS

October 31, 1983

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, IN ITS CORPORATE CAPACITY AND AS RECEIVER FOR UNITY SAVINGS ASSOCIATION, PLAINTIFF,
v.
HOWARD BASS, MITCHELL BASS, ROWLAND FRAZIER, HOWARD HARRIS, ANTHONY GRASSI, INTERCOUNTY TITLE COMPANY OF ILLINOIS AND CENTRAL NATIONAL BANK OF CHICAGO, DEFENDANTS.



The opinion of the court was delivered by: William T. Hart, District Judge.

MEMORANDUM OPINION AND ORDER

This action, currently before the Court upon the cross motions of all remaining parties for summary judgment, arises out of the failure of Unity Savings Association ("Unity"). The Federal Savings & Loan Insurance Corporation ("FSLIC") brought its one count complaint against Howard Bass and Mitchell Bass (the "Basses"), former officer-directors of Unity; Howard Harris, Anthony Grassi and Rowland Frazier, former Unity Officers; Intercounty Title Company of Illinois ("Intercounty"), escrow agent for the funds in issue; and Central National Bank in Chicago, the depository holding the escrowed funds at the time the complaint was filed. The FSLIC subsequently dismissed Harris, Grassi and Frazier as parties to this action.

In its complaint, the FSLIC attacks the validity of employment agreements between Unity and the individual defendants. Under those agreements, the individual defendants were to receive substantial "termination payments" in the event that: (i) the officer became disabled; (ii) the officer died; (iii) the officer was terminated without cause by Unity's board of directors; (iv) the officer voluntarily resigned pursuant to a request (but not ordered) by a state or federal financial regulatory institution; (v) Unity entered receivership; (vi) merger, consolidation, reorganization, liquidation or dissolution of Unity. The FSLIC contends that these agreements constitute a breach of the fiduciary duties imposed upon an officer and director of a savings and loan association by common law and state statute, Ill.Rev.Stat. ch. 17, § 3079, since they were entered into at a time when Unity was in a precarious and deteriorating financial position. The FSLIC also contends that these agreements are "unsafe and unsound practices" violative of federal law. 12 C.F.R. § 563.39.

When Unity entered into these agreements on October 31, 1971, it was undoubtedly in the midst of great turmoil. After over twenty years of profitable operations and substantial growth, Unity began to post successive monthly losses. The losses began in October, 1980 and quickly worsened to the point that after June, 1981, Unity was losing money at a rate of over $2 million per month. Those losses rapidly depleted Unity's nearly $30 million net worth (as of October, 1980). They continued until February 20, 1982, when the Illinois Commissioner of Savings & Loan Associations took custody of Unity, then insolvent, and closed its operations.

During this same period, the Basses labored to staunch the flow of red ink at Unity and sought new infusions of capital and potential merger partners for Unity, to rebuild its net worth. Four of Unity's vice-presidents, however, abandoned their involvement in Unity, resigning their positions in June and August of 1981. The stated purpose of the employment contracts at issue was to respond to this series of resignations.

At the September 23rd meeting of Unity's board of directors, the Basses recommended employment contracts for Frazier and Grassi. The minutes reflect that employment contracts for the Basses were also proposed, and were to be reviewed by the outside directors. As noted, a key feature of those contracts was a provision for incentive payments on the happening of the enumerated events.

At the October 21st board meeting, Howard Bass recommended approval and execution of employment contracts for the Basses, Frazier, Harris and Grassi. Louis Spear and James Flannery, both independent directors, moved and seconded the resolution for approval. The minutes state that the resolution "was unanimously adopted." On October 31, 1981, all five contracts were executed. At its meeting of November 6th, Howard Bass "reported" this execution to the Unity board. The Unity board then ratified those contracts. In accordance with these agreements, Unity deposited the sum of $330,000 into a special escrow account, for which Intercounty was to act as escrow agent.*fn1

Intercounty's Motion for Summary Judgment

Intercounty involved itself in this litigation by filing an interpleader action, pursuant to Fed.R.Civ.P. 22. However, Intercounty's role as stakeholder is at an end, since it has deposited the funds here at issue with the Court. See Walker v. Pritzker, 705 F.2d 942, 944 (7th Cir. 1983). The Basses, recognizing that the deposit of funds has mooted their crossclaim against Intercounty, have amended that crossclaim. Their original claim sought only the return of the escrowed funds. Their amended claim seeks damages for failure to turn over the escrowed funds in accordance with the escrow agreement. The damages alleged are the costs of defending this action.

  However, the FSLIC would have brought this action against the
Basses regardless of whether Intercounty or the Basses were in
possession of the escrowed funds. It is the employment contract
that created the escrow fund, not the fund itself, that the FSLIC
attacks in this action. Therefore, the Basses have suffered no
damages as a result of Intercounty's actions. To the contrary,
Intercounty, not the Basses, is the party that has been forced to
incur legal expenses as a result of the dispute between the FSLIC
and the Basses. See Clarkson Co., Ltd. v. Shaheen, 533 F. Supp. 905
 (S.D.N.Y. 1982).

Further, Intercounty did not breach the escrow agreement. Intercounty was contractually obligated to pay out those funds only if Unity had not objected to the Basses' demand within ten days after receiving notice of the demand. Intercounty received the Basses' demand for escrowed funds on February 22, 1982. On February 20, 1982, the Illinois Commissioner of Savings & Loan Associations took custody of and closed Unity. On the same day the FSLIC was appointed receiver for Unity. This action was filed by the FSLIC on March 2, 1982, and Intercounty filed its appearance in this action that same day. All parties appeared before Judge Getzendanner on March 3, 1982, when she entered a temporary restraining order enjoining Intercounty from paying out the funds to the Basses. These events, all of which occurred within the ten day contractual holding period, relieved Intercounty of any contractual duty to pay out funds. The Court finds that Intercounty has not breached its fiduciary duties owed to the Basses.

In light of the absence of any breach of duty by Intercounty or any damage to the Basses, the Basses' amended crossclaim against Intercounty can only be characterized as frivolous. Therefore, Intercounty's motion for summary judgment on those crossclaims is granted.*fn2

Since Intercounty has deposited with the Court all funds at issue, its motion for summary judgment on its claims for interpleader is granted, and it is discharged from further liability for or in connection with escrow accounts CE5027 ...


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