Aiken v. Insull

• Decision Date: 01 October 1941
• Docket Number: No. 7430.,7430.
• Citation: 122 F.2d 746
• Parties: AIKEN et al. v. INSULL et al.
• Court: U.S. Court of Appeals — Seventh Circuit

122 F.2d 746 (1941)

AIKEN et al. v. INSULL et al.

No. 7430.

Circuit Court of Appeals, Seventh Circuit.

August 22, 1941.

Rehearing Denied October 1, 1941.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Edmund D. Adcock, Roger Q. White, and Lewis F. Jacobson, all of Chicago, Ill., for appellants.

Floyd E. Thompson, Edward J. Farrell, and Walter Brewer, all of Chicago, Ill., for appellees.

Before SPARKS, MAJOR, and KERNER, Circuit Judges.

KERNER, Circuit Judge.

In this case plaintiffs, on their own behalf as owners and holders of corporate debentures and on behalf of all other owners and holders of such debentures and all other creditors who desired to join in the suit and share the costs thereof, sought an accounting from the defendants, directors of the Insull Utility Investments, Inc., for the wrongful pledging of assets in violation of certain debenture covenants and for the improper declaration of dividends. The defendants interposed an affirmative defense and moved for summary judgment against the plaintiffs, filed under Rule 56 of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c. The District Court sustained the motion, dismissed the complaint and entered a decree in favor of the defendants. From that decree this appeal is prosecuted.¹

The complaint filed on February 3, 1933 alleged that I.U.I. was incorporated under the laws of Illinois to acquire, dispose of, underwrite and deal in securities and to do a general investment business; the election of the defendants as directors; the composition of the Executive & Finance Committees; the issuance of certain debentures aggregating approximately $66,000,000 and the sale thereof. The debentures were long term, interest bearing obligations of $1,000 each, unsecured except for restrictive covenants on the power of I.U.I. to borrow and pledge.²

The complaint further alleged that the defendant directors of the I.U.I. induced and caused I.U.I. to borrow about $45,000,000 from certain Chicago and New York banks, and induced and caused I.U.I. to pledge with said banks substantially all its assets as collateral to said loans without securing the outstanding debentures equally and ratably with such loans and without securing them whatsoever, and that neither all nor any of said loans was made for a period not exceeding one year.

The complaint also alleged that on April 16, 1932 an involuntary petition in bankruptcy was filed against the I.U.I., that it was on September 22, 1932 adjudicated a bankrupt, and on March 7, 1937 Harry A. Bigelow was appointed trustee of I.U.I.

After the adjudication in bankruptcy, class suits were brought by some of the debenture holders against the New York and Chicago banks. Generally these complaints were alike in substance and charged that the lenders knew, when they made the loans and took the pledged assets, that the debentures were outstanding, that they contained restrictive covenants on the power of I.U.I. to borrow and pledge, and that the covenants were being violated by the loans made. The purpose of the suits was to establish equitable rights in the assets which had been pledged.

The Chicago bank suits were filed in the United States District Court for the Northern District of Illinois, Eastern Division, and consolidated by order of Court under the title of Case No. 12,357, but were never tried. The New York bank suits were tried in the United States District Court for the Southern District of New York, and were dismissed for want of equity, but the order of dismissal was reversed and the case remanded. Kelly v. Central Hanover Bank & Trust Co. et al., D.C., 11 F.Supp. 497; Id., 2 Cir., 85 F.2d 61. In addition there were pending the preference suits filed by the trustee in bankruptcy against the banks, and the instant suit filed by the debenture holders against the directors of I.U.I.

During 1933 motions to dismiss the complaint were filed by various defendants. Thereafter no further important steps were taken in the case until October 2, 1939 when defendants filed their amended motion for summary judgment, claiming, among other grounds, that the cause of action against them was barred.

In the meantime settlement negotiations had ensued which related to the many cases then pending against the banks, resulting in an agreement whereby all the claims of the banks and all other claimants, except the debenture holders, were withdrawn in the bankruptcy proceeding, and the claims of the trustee in bankruptcy and of the debenture holders against the settling banks were released. In addition to the withdrawal of their claims against I.U.I., aggregating $42,887,500, the banks agreed to pay the sum of $3,435,088 to the debenture holders. In these negotiations the defendant-directors took no part and they had nothing to do with fixing the amount which the debenture holders elected to accept in satisfaction of the injury done to I.U.I.

The settlement took the form of a petition embodying its terms, which was filed with the District Court having charge of the Chicago bank suits and of the bankruptcy case of I.U.I. On November 4, 1937, the District Court approved the petition, and in part (4) of its decree stated that "The settlement and compromise set forth in paragraph 26 of said petition is fair, just and equitable." On February 24, 1938, an order was entered in the consolidated case No. 12357, which confirmed the settlement, vested title to the collateral in the Chicago banks and enjoined the debenture holders from the prosecution of further suits against the banks. On the same day an order was entered in the bankruptcy case of I.U.I., which confirmed the settlement and approved the action taken by the trustee in bankruptcy in withdrawing and releasing claims he had formerly asserted against the banks.

In the instant case as before noted the defendant directors of I.U.I. are charged with the tort of inducing a breach of contract. The complaint states that they caused the corporate covenantor to violate the debenture clauses limiting borrowing and pledging.

The question naturally arises as to the part played by the lending banks in the harm resulting to the covenantees. In this connection the fact stands out that the complaints in the settled bank cases state in substance the same matter as does the complaint in the case at bar. In our view the banks have contributed substantial assistance to the directors in the production of the resulting tort. According to Illinois law, "It is enough if they were both liable for the same injury," Chapin v. Chicago & E. I. R. Co., 18 Ill.App. 47, 50, and neither conspiracy nor concert of action is necessary. We agree with the District Court's expression that "The joint action of each was necessary to the consummation of the wrong."

The plaintiffs would minimize the aid given by the banks in the commission of the tort, by arguing (1) that the directors were trustees and hence the liability sought to be enforced is not that of tort-feasors, and (2) that the claim against the banks in the settled cases might not have been grounded properly. It will be enough to say that the I.U.I. was not a bank or a trust company, but a going concern at the time. Under the circumstances we do not perceive upon what principle the directors could have been considered as trustees of I.U.I.'s creditors. See People v. Superior Court, 359 Ill. 612, 619, 195 N.E. 517; Gottlieb v. Miller, 154 Ill. 44, 50, 39 N.E. 992; see also Kelly v. Central Hanover Bank & Trust Co., D.C., 11 F.Supp. 497, 509. The cases cited by the plaintiffs do not compel a conclusion to the contrary. As to point (2), it is obvious that the bank settlement can not be thus explained away and that it is conclusive on whether the banks participated in the wrong. See Chapin case supra, 18 Ill.App. at page 51.

The defendants meet the complaint against them with the answer that the bank settlement operates to discharge them from liability. They rely on the strict common law principle that a release to one of several joint tort-feasors is a release to all, irrespective of the intent. Unquestionably this technical rule of release, as applied to joint wrongdoers, is followed in Illinois. Wallner v. Chicago Traction Co., 245 Ill. 148, 91 N.E. 1053; Gilbert v. St. Louis, S. & P. R. R., 220 Ill.App. 51; Stanley v. Leahy, 87 Ill.App. 465.

To be sure, a covenant not to sue is not the same as a release, and has no effect upon the liability of the other wrongdoers to the injured person, a fact which is recognized by the Illinois case-law. City of Chicago v. Babcock, 143 Ill. 358, 366, 32 N.E. 271. Usually in the tort cases the controversy is whether the settlement agreement constitutes a release or is merely a covenant not to sue. West Chicago St. R. R. v. Piper, 165 Ill. 325, 46 N.E. 186; Welty v. Laurent, 285 Ill.App. 13, 1 N.E. 2d 577; Chicago & A. Ry. v. Averill, 127 Ill.App. 275. Compare Petroyeanis v. Pirola, 205 Ill.App. 310, and Gore v. Henrotin, 165 Ill.App. 222.

We take it, however, that the harsh rule as to a release of one joint tort-feasor does not prevail in the contract cases. Parmelee v. Lawrence, 44 Ill. 405; Nickerson v. Suplee, 174 Ill.App. 136. According to the Parmelee formula, if there is language in the release of a joint debtor manifesting an intent to preserve the releasor's rights against the other co-obligors, effect is given to this manifestation. Strange though it may seem, the Illinois courts have not seen fit to extend this wholesome and common-sense formula to the tort cases. We fail to see a good reason for drawing this distinction between joint tort-feasor cases and joint debtor cases, compare Brown v. City of Cambridge, 3 Allen 474, 85 Mass. 474, 477, but we must accept the limitation fixed by the Illinois courts. We observe an encroachment on, or a possible exception to, the limitation above mentioned, in the case of Van Meter v. Gurney, 251 Ill.App. 184. There it appears that the...