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Town & Country Bank of Quincy v. E. & D. Bancshares

August 4, 1988

TOWN & COUNTRY BANK OF QUINCY, an Illinois banking corporation, Plaintiff-Appellant,

v.

E. & D. BANCSHARES, INC., an Illinois corporation, William C. Harris, Commissioner of Banks and Trust Companies for the State of Illinois, Federal Deposit Insurance Corporation, Receiver of the Mendon State Bank for the Commissioner of Banks and Trust Companies for the State of Illinois, Federal Deposit Insurance Corporation, Receiver of the Mendon State Bank for the Commissioner of Banks and Trust Companies for the State of Illinois, as substituted party defendant for Mendon State Bank, an Illinois banking corporation, First Midwest Bank of Quincy, an Illinois Banking Corporation, and Unknown Owners and Non-Record Claimants, Defendants-Appellees

(Federal Deposit Insurance Corporation, Receiver of the Mendon State Bank for the Commissioner of Banks and Trust Companies for the State of Illinois, Counterplaintiff- Appellee,

v.

Town & Country Bank of Quincy, an Illinois banking corporation, Counterdefendant-Appellant).



Appeal from the Circuit Court of Adams County; the Hon. Dennis K. Cashman, Judge, presiding.

APPELLATE Judges: JUSTICE McCULLOUGH delivered the opinion of the court. KNECHT and SPITZ, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE MCCULLOUGH

The plaintiff, Town & Country Bank of Quincy , appeals a summary judgment entered in favor of defendants in a mortgage foreclosure action. The principal issue involved in this case is whether there are triable issues of fact concerning whether defendant Mendon State Bank acted within its powers in mortgaging its banking premises to T&C, and if so, whether there was adequate consideration for the mortgage. An additional issue is whether the circuit court abused its discretion in vacating a default judgment or not awarding attorney fees and costs to the party in whose favor the default judgment was entered as a condition of vacating the judgment.

This litigation had its genesis in a $425,000 loan which T&C made to E. & D. Bancshares, Inc. , in 1985. E&D owns the majority of the stock of MSB. E&D is owned solely by Don Schoch and Steve Schoch. The MSB shares owned by E&D were pledged as collateral for T&C's loan to E&D.

As a result of actions by the Federal Deposit Insurance Corporation , which first classified T&C's loan to E&D as "substandard" and later required T&C to charge off at least a portion of the loan, T&C on August 7, 1986, demanded immediate payment of that loan. On the morning of August 20, 1986, T&C and E&D agreed that if MSB hypothecated and mortgaged MSB's bank building to T&C, T&C would not at that time accelerate payment on the E&D loan.

Don Schoch then called a special meeting of MSB's board of directors, which was held at approximately 1:30 that afternoon. At that meeting, MSB's board of directors voted to mortgage MSB's bank building and land to T&C in order to secure E&D's debts to T&C. Both Eldon Schoch, MSB's president, and Sherry Bryson, MSB's vice president and cashier, signed the mortgage at that time.

Present at the August 20, 1986, board meeting was Louis P. McClelland, T&C's vice-president. He agreed that T&C would not accelerate the due date of E&D's notes if T&C received additional collateral for its loan to E&D.

The minutes of the August 20, 1986, meeting of MSB's board of directors reflect that board members expressed concern regarding MSB's liquidity. The board felt that if T&C made public its foreclosure on the MSB stock which E&D had pledged to it, a possible run on MSB would result.

MSB was closed by the Commissioner of Banks and Trust Companies at 3:10 p.m., on August 20, 1986. At approximately 4 p.m. on the same date, First Midwest Bank of Quincy (First Midwest) agreed to purchase the assets of MSB, including its bank building. The FDIC was appointed receiver of MSB on behalf of the Commissioner of Banks and Trust Companies.

On September 15, 1986, T&C filed a complaint seeking foreclosure of its mortgage on MSB's banking premises. On September 30, 1986, the FDIC filed an answer and counterclaim against T&C. The counterclaim requested that MSB's mortgage to T&C be ordered stricken from the records of the recorder of deeds; that T&C's complaint seeking foreclosure of the mortgage be dismissed with prejudice; that T&C be ordered to cease and desist from all attempts to foreclose the mortgage or otherwise impair the FDIC's title to the MSB premises; and such other relief as might be appropriate. On December 29, 1986, the FDIC filed an amended counterclaim requesting the same relief, which also named MSB and First Midwest as counter-defendants.

T&C filed a motion requesting a default judgment against MSB on June 3, 1987. A written order of default judgment was entered on June 23, 1987. On July 13, 1987, the circuit court vacated the default judgment on the FDIC's request and granted the FDIC leave to be substituted as the party for MSB. The FDIC accordingly entered its appearance for MSB on July 15, 1987. The FDIC, as substituted party for MSB, answered T&C's complaint for foreclosure on July 24, 1987.

In the meantime, the FDIC, in its capacity as receiver of MSB, filed an amended motion for summary judgment on May 20, 1987. The court allowed this motion in an order entered September 11, 1987. In this order, the court found: (1) no genuine issues of material fact were in dispute; (2) MSB's pledging its assets for the debts of another was outside its general corporate powers; (3) MSB "received no benefit" for mortgaging its banking premises to T&C; and (4) it is against the public policy of Illinois for a bank to pledge its assets "without benefit to the bank." The court held that MSB's mortgage to T&C, as well as any recorded lis pendens documents relating to the mortgage, are null and void.

In appealing the circuit court's summary judgment order, T&C contends summary judgment was improperly entered in the FDIC's favor because the power to pledge bank assets in order to guarantee the debt of another in exchange for benefits to the pledgor bank is among the incidental powers of State banks. T&C asserts MSB had a valid business purpose in mortgaging its banking premises to secure E&D's indebtedness to T&C, since MSB felt such action was necessary in order to avoid (1) the adverse publicity which would result from T&C foreclosing on the MSB shares which it held as security for its loan to E&D and (2) the run on MSB which would result from such adverse publicity. T&C also asserts that in finding that MSB's mortgaging its premises under these circumstances is against the public policy of Illinois, the circuit court impermissibly amended the statutory provisions governing the powers of banks.

The FDIC asserts that a bank's mortgaging one of its assets for the benefit of a third party is ultra vires and against public policy. In support of this position, it points out that a bank is a "commercial pursuit of a public character" and that depositors place their faith and trust in banks to care for their money in a proper manner. The FDIC contends a holding that MSB properly mortgaged premises to T&C would mean that banks could give away their major assets and deny their depositors recourse to such assets. The FDIC maintains such actions are not among the "incidental powers . . . necessary to carry on the banking business" which applicable legislation (Ill. Rev. Stat. 1985, ch. 17, par. 311(11); 12 U.S.C. § 24 (Supp. IV 1986)) confers on national banks. The FDIC further argues that by enumerating the specific situations in which banks may pledge their assets (Ill. Rev. Stat. 1985, ch. 17, par. 311(7)), the legislature intended to prohibit banks from pledging their assets under other circumstances, including those involved in the present case.

First Midwest adopts the arguments of the FDIC. Additionally, First Midwest acknowledges that banks may guarantee debts which a customer owes to third parties in order to enhance the collectability of debts owed the bank by the same customer (see Corn Belt Bank v. Lincoln Savings & Loan Association (1983), 119 Ill. App. 3d 238, 456 N.E.2d 150), but asserts that this is not such a case. First Midwest points out that E&D's debt was not owed to T&C by MSB and that T&C could not have exercised any enforcement rights against MSB.

Section 5(11) of the Illinois Banking Act provides:

"A bank organized under this Act or subject thereto shall be a body corporate and politic and shall, without specific mention thereof in the charter, have all the powers conferred by this Act and ...


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