FEDERAL S. & L. INS. CORP. v. American Nat. B. & T. Co. of Chicago

• Decision Date: 07 March 1968
• Docket Number: No. 15963.,15963.
• Citation: 392 F.2d 906
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, Plaintiff-Appellant, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

392 F.2d 906 (1968)

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, Plaintiff-Appellant, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant-Appellee.

No. 15963.

United States Court of Appeals Seventh Circuit.

March 7, 1968.

John W. Duffy, Emmett D. McCarthy, Chicago, Ill., Frank Delany, Washington, D. C., Roy C. Palmer, Chicago, Ill., for appellant.

Don H. Reuben, John E. Angle, Frank Cicero, Jr., Chicago, Ill., for appellee.

Before CASTLE, KILEY and CUMMINGS, Circuit Judges.

CASTLE, Circuit Judge.

Federal Savings and Loan Insurance Corporation, plaintiff-appellant, brought suit in the District Court to recover $305,175.00, with interest thereon from July 19, 1963, to date of judgment, from the defendant-appellee, American National Bank and Trust Company of Chicago. The $305,175.00 principal sum sought to be recovered represents the amount paid by Beverly Savings and Loan Association on July 19, 1963, to the Bank¹ for a note of Howard B. Quinn and his wife. The note, then in default, was secured by a pledge of permanent reserve stock of Beverly owned by the Quinns. Howard B. Quinn was Chairman of the Board of Beverly, and his wife was a director of Beverly.

In the course of its liquidation due to insolvency, Beverly, in October 1963, assigned all of its assets, including causes of action, to Federal, which provided the funds for payment of Beverly's liabilities and creditors. Federal sues as assignee and creditor of Beverly, and as the insurer-subrogee to the claims of depositors of Beverly.

Federal's claim against the Bank is set forth in Count I of its complaint, as amended, which asserts in substance that the purchase-sale transaction between Beverly and the Bank was an illegal transaction in violation of both Illinois statutes and federal statutes and regulations. Count II of the complaint sought recovery from four of the directors of Beverly who allegedly voted approval of the purchase of the Quinns' note from the Bank.

The case was tried to the court, without a jury. After Federal completed its initial proof against all of the defendants the adequacy of that proof was tested by each defendant by motion. The motions of the director-defendants were denied.² The motion of the Bank for a directed verdict and final judgment was granted. The court made and entered findings of fact and conclusions of law on the basis of which it entered a judgment order in favor of the Bank. Federal appealed.

The District Court found that on July 17, 1963, the Quinns were indebted to the Bank in the sum of $300,000 secured by 304,049 permanent reserve shares of Beverly,³ that the loan was in default, and the Bank had that day notified the Quinns that the collateral securing their indebtedness would be sold at 10:00 A.M. on July 19, 1963; that on July 18, 1963, the board of directors of Beverly, without prior communication with the Bank, voted to purchase the defaulted note and related collateral of the Quinns for the amount due on the note; that according to the board's resolution approving and ordering such purchase, Beverly was doing so to protect its then junior security interest in the collateral securing the note held by the Bank; that on July 18, 1963, the Bank was first advised of the resolution by counsel for Beverly; that on July 19, 1963, counsel for Beverly appeared at the Bank and acquired the note and related collateral for Beverly for the sum of $305,175.⁴ The court concluded that considering the evidence in the light most favorable to the plaintiff, Federal had failed to sustain its burden of proving its case; that the sale by the Bank was made by it in good faith and was a lawful transaction by the Bank, which, at the time of the sale had no reason to believe that the transaction was not in all respects legal and proper; and that Federal is not entitled to rescind the transaction.

The record discloses that the existence of the "junior security interest" of Beverly referred to in the resolution mentioned in the court's findings is based on a demand note and accompanying assignment and pledge agreement executed by Quinn. The demand note was in the amount of $500,000, payable to Beverly's order. The accompanying agreement provided, in effect, that the demand note was secured by a secondary security interest in the permanent reserve shares theretofore pledged with the bank as collateral on the Quinn note to the Bank. The $500,000 demand note and accompanying agreement were executed by Quinn on July 18, 1963, the date of the adoption of the resolution providing for the purchase of the Quinn note from the Bank. The $500,000 demand note Quinn gave Beverly represented the balance of an indebtedness of Quinn to Beverly which arose from an unauthorized withdrawal of $553,167 from the funds of Beverly which Quinn caused to be made on April 3, 1963, and had agreed to repay.

The main contested issues presented by Federal's appeal, as we conceive them, are (1) whether the District Court applied correct legal critera in concluding on the basis of the evidence adduced on Federal's case-in-chief that the sale by the Bank of the note and collateral of the Quinns to Beverly was a lawful transaction by the Bank; and (2) if good faith on the part of the bank in its participation in the transaction constitutes a factor which would serve to immunize the Bank from liability on what otherwise would be an unlawful transaction on its part, is the court's finding that the Bank acted in good faith and had no reason to believe that the sale by it was not in all respects a proper and legal transaction clearly erroneous on the basis of the evidence then before the court. An additional issue, presented by a contention the Bank makes in support of the judgment order, is whether Federal's action in recovering judgment against the Quinns on the $300,000 note here involved and obtaining a partial satisfaction ($11,538.98) thereon constitutes an election of remedies which precludes Federal from maintaining this suit against the Bank.

Section 5-11 of the Illinois Savings and Loan Act (Ill.Rev.Stat.1965, ch. 32, § 801) expressly prohibits the making of a loan by the savings and loan association:

"* * * to a majority permanent reserve shareholder, officer, or director of an association issuing permanent reserve shares, * * * except upon real estate occupied by such shareholder, officer, or director as a homestead, or upon the security of withdrawable capital; * * *."

By Section 5-1 of the Act (Ill.Rev.Stat., ch. 32, § 791) purchases of loans are restricted to those which the association could directly make. And, Section 4-3 (ch. 32, § 763) provides, with an exception not here pertinent, that permanent reserve shares shall be "nonwithdrawable, * * * until all liabilities of the association have been satisfied in full, including payment of the withdrawable value of all other types or classes of capital".

The Bank, of course, is chargeable with knowledge of the statutory prohibition,⁵ and the record discloses that the Bank was aware of the status of Quinn as an officer and director of Beverly at the time it originally made the loan to the Quinns on April 2, 1962. And Quinn continued to be chairman of the board and a director of Beverly at the time the Bank sold the loan to Beverly.

The loan made by the Bank to the Quinns was not a loan Beverly could have made to the Quinns — it was a loan expressly and clearly interdicted. It fell within neither of the two exceptions made to the statute's positive command that "no loan shall be made to" an officer or director of the association. On the face of the statute such a loan is declared ineligible for purchase by the savings and loan association, and its sale to the association would be an illegal transaction.

The Bank contends, however, that the ban of the statute does not operate to invalidate an otherwise prohibited transaction where it constitutes a salvage operation designed to minimize or obviate loss — that a savings and loan association has the right to engage in an otherwise interdicted or illegal transaction where it is in an unfortunate loan position and does so to protect its security position or to realize on an otherwise doubtful debt. On this premise the Bank urges that its sale to Beverly is a valid sale, and not subject to rescission. The Bank contends that Beverly's representation, formalized in the resolution of the board of directors of Beverly authorizing and directing the purchase of the Quinn loan, that the purpose of such purchase was to protect Beverly's junior lien position in the collateral served to establish a basis validating the Bank's participation in the transaction and immunizing it from liability thereon by way of rescission or otherwise. And that the Bank had no reason to believe at the time of the sale that the permanent reserve shares it held as collateral were not worth an amount in excess of the $305,175 paid by Beverly which would justify Beverly's acquisition of the loan and collateral to protect its secondary security position in connection with the $500,000 demand note it had received from Quinn. On the basis of this position, which also appears to be the basis for the District Court's judgment order, the Bank dismisses without import that it turned out that the value of the collateral was not such as justified its acquisition — that it proved to be worthless.

We have examined the case authority cited and relied upon by the Bank as articulating and applying the doctrine it espouses and characterizes as a "necessity" or "emergency purchase" doctrine grounded upon the realities of business life and which permits a financial institution to engage in an otherwise interdicted or illegal transaction if done to protect a security position. The Bank's reliance on First National Bank of Charlotte v. National Exchange Bank, 92 U.S. 122, 23 L.Ed. 679, in this connection is misplaced. In that case no expressly prohibited transaction was...