Braeburn Securities Corp. v. Smith

• Decision Date: 18 September 1958
• Citation: 153 N.E.2d 806,15 Ill.2d 55
• Parties: BRAEBURN SECURITIES CORPORATION, Appellee, v. Elbert S. SMITH, Auditor of Public Accounts, et al., Appellants. no. 34811.
• Court: Illinois Supreme Court

Page 806

153 N.E.2d 806

15 Ill.2d 55

BRAEBURN SECURITIES CORPORATION, Appellee, v. Elbert S. SMITH, Auditor of Public Accounts, et al., Appellants.

no. 34811.

Supreme Court of Illinois.

Sept. 18, 1958.

Rehearing Denied Nov. 24, 1958.

Latham Castle, Atty. Gen., Benjamin S. Adamowski, State's Atty., Chicago (William C. Wines, Raymond S. Sarnow and A. Zola Groves, Chicago, of counsel), for appellants.

John A. Bussian, William M. Doty, Chicago, for appellee.

Henry F. Tenney, Chicago, amicus curiae.

HERSHEY, Justice.

The 70th General Assembly enacted the Bank Holding Company Act of 1957, and the same was approved on July 5, 1957. At the same time the legislature passed, and the Governor approved an amendment to the Business Corporation Act, Ill.Rev.Stat. 1957, c. 32, § 157.1 et seq., limiting the general powers of corporations organized thereunder in respect to the ownership and control of stock in banks. The amendment to the Business Corporation Act was simply a means of making that act reflect the limitations and restrictions found in the Bank Holding Company Act of 1957.

Plaintiff, a corporation organized under the Business Corporation Act, by its articles of incorporation and amendments thereto, filed in February of 1956, had as one of its corporate powers and purposes a general investment securities business and specifically the power to purchase, without limitation, the capital stock of banks and bank holding companies, as well as the shares of capital stock of any nonbanking corporation.

The 1957 legislation did limit the nature and extent of the plaintiff's corporate activity by the exercise of control over its acquisition of bank stock and the plaintiff sought relief from these limitations in the circuit court of Cook County in a declaratory judgment proceeding to have the 1957 enactments declared unconstitutional and void. The Auditor of Public Accounts, the Attorney General and the State's Attorney of Cook County were named as defendants.

The defendants filed a motion to dismiss the complaint on the grounds that the legislation was in all respects constitutional. The circuit court overruled the motion and found the acts to be invalid in that said laws violate sections 13 and 22 of article IV, sections 2 and 14 of article II, and section 1 of article XI of the constitution of the State of Illinois, S.H.A., and also violate section 1 of the fourteenth amendment of the constitution of the United States.

Since the constitutionality of the legislation is involved, this court has jurisdiction of the matter on appeal filed by the defendants from the ruling of the circuit court.

The Bank Holding Company Act of 1957 (Ill.Rev.Stat.1957, chap. 16 1/2, pars. 71 et seq.) has as its declared purpose, as found in section 1 thereof, the protection of the independence of unit banks and the maintenance of competition in the banking system. A bank is defined so as to include both State and national banks, and a bank holding company is defined as any corporation, business, trust, partnership, joint venture, or similar organization (1) which directly or indirectly owns or controls 15 per centum or more of the voting shares of each of two or more banks or of a company which is a bank holding company by virtue of this act, (2) which controls in any manner the election of a majority of the directors of each of two or more banks, or (3) for the benefit of whose shareholders or members 15 per centum or more of the voting shares of each of two or more banks or a bank holding company is held by trustees. Certain exceptions are enumerated in the foregoing, but the same are not material to the issues herein presented.

The act follows with a prohibition of any action which results in a company becoming a bank holding company as thus defined. Any company in existence at the time of the effective date of the act which is a bank holding company by reason of the definition contained in the act is prohibited from further bank stock acquisition, if after such acquisition such company will own or control more than five per cent of the voting shares of such bank. An exception to this limitation as to existing companies permits such company that already has, by ownership or control, a majority interest in a bank to further acquire shares in such bank without limit.

The act then proceeds to provide the penalties for violation and repeals a 1955 enactment on the same subject.

The brief summary of the 1957 act as above set forth clearly manifests a legislative determination that future ownership and control of banks in Illinois by bank holding companies should be stopped, and that bank holding companies existing as of the date of the enactment should not extend ownership and control beyond the then existing holdings. The act thus seeks to accomplish the purpose announced by the legislature of preserving bank competition and the independence of unit banks by prohibiting corporate ownership of more than 15 per cent of the voting stock in two or more banks.

In our consideration of the questions here submitted we are not, nor can we be, concerned with the wisdom of the legislative action nor the desirability of the purpose as announced by the legislature. Our sole concern is to determine whether the legislature in adopting the policy has acted within its constitutional limitations. Stewart v. Brady, 300 Ill. 425, 133 N.E. 310.

The effect of this legislation is to divide corporations into two classes, first, those which did not on the effective date of the act own 15 per cent or more of the stock in two or more banks and are prohibited then to acquire more than 15 per cent of the stock in any two banks, but may acquire all or a majority of the stock of any one bank and up to 15 per cent of any number of banks, and secondly, those which are defined by the act as bank holding companies. These are prohibited from further acquisitions in banks in which they hold 15 per cent or more of the stock. As to any bank in which such company owns less than 5 per cent of the stock, it may acquire additional holdings not to exceed 5 per cent of the stock of such bank. A corporation in this classification is permitted unlimited acquisition of bank stock if on the date of the act it held a majority or more of the stock of any such bank. Clearly, such acquisition would not make any practical difference in control.

The lower court held that the above classification contained in the 1957 enactment was in violation of section 22 of article IV of the Illinois constitution prohibiting the legislative grant of an exclusive privilege to any corporation by special legislation, as well as violative of section 1 of the fourteenth amendment to the United States constitution as a denial of the equal protection of the laws. The classification is likewise alleged to offend section 1 of article XI of the Illinois constitution.

The issues raised by plaintiff in regard to these constitutional provisions all relate to the question of improper classification by this amendatory enactment. The plaintiff asserts the act is in contravention of that portion of section 22 of article IV of the Illinois constitution prohibiting any local or special laws granting to any corporation, association or individual any special or exclusive privilege, immunity or franchise whatever, in that bank holding companies existing as of the effective date of the act are allowed to continue thereafter their existing ownership of bank stock. Plaintiff additionally contends that the act violates section 1 of the fourteenth amendment to the United States constitution in that it discriminates against corporations, such as plaintiff, and results in a denial of equal protection of the laws, in that bank holding companies existing on the effective date of the act and owning or controlling a majority of voting shares of a bank, may purchase additional shares of that bank without limitation, and the minority interests are denied the right to acquire the majority interest, circumstances and conditions being the same. Section 1 of article XI of the Illinois constitution provides that all corporate laws shall be general in scope and apply to all corporations alike, and the plaintiff asserts that this act is a special law applicable only to some corporations, as it grants to some corporations the right to exist as bank holding companies and denies that right to others.

In our consideration of the power of the legislature to classify, if we find some reasonable basis for the classification it must be sustained, and the test is clearly set forth in Thillens, Inc., v. Morey, 11 Ill.2d 579, 144 N.E.2d 735, and Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61, 31 S.Ct. 337, 55 N.Ed. 369. In the latter case the court held that one who assails a classification in a statute has the burden of showing that it does not rest upon a reasonable basis but is essentially arbitrary. Therefore the question to be decided is whether or not the legislative classification in the Bank Holding Company Act of 1957 is based upon some reasonable basis.

Banking is a business peculiarly affected with a public interest. Local autonomy of banks serving the individual and commercial needs of a community has been impliedly the policy of this State since the 1929 amendment to the Illinois Banking Act (Smith-Hurd Stat. 1929, chap. 16 1/2, par. 9) enacted following the passage by Congress of the McFadden Act which, in effect, permitted the States to determine whether State or national banks operating within a State might maintain branches. Branch banking in Illinois has been prohibited for many years.

It is clear that this prohibition could be circumvented and indirect branch banking result if, through ownership of bank stock, one or more bank holding companies could control several banks. Branch banking can be accomplished by one bank operating at several locations or by one company owning or controlling several banks...