First Nat. Bank of Ottawa v. Kay Bee Co.

• Decision Date: 16 April 1937
• Docket Number: Gen. No. 23973.
• Citation: 366 Ill. 202,7 N.E.2d 860
• Parties: FIRST NAT. BANK OF OTTAWA v. KAY BEE CO. et al.
• Court: Illinois Supreme Court

366 Ill. 202

7 N.E.2d 860

FIRST NAT. BANK OF OTTAWA

v.KAY BEE CO. et al.

Gen. No. 23973.

Supreme Court of Illinois.

April 16, 1937.

Action by the First National Bank of Ottawa, Ill., and the Smith Trust & Savings Bank, against the Kay Bee Company and others. From a judgment of the Appellate Court [286 Ill.App. 546, 3 N.E.(2d) 961], affirming a decree for plaintiffs, plaintiff Smith Trust & Savings Bank appeals.

Reversed and remanded, with directions.Appeal from Appellate Court, Second District, on Appeal from Circuit Court, Whiteside County; Leonard E. Telleen, Judge.

McCalmont, Ramsay & Bull, of Morrison, for appellant.

Hibbs & Pool, of Ottawa, for appellee.

HERRICK, Chief Justice.

On October 29, 1932, the Kay Bee Company (hereinafter called the company), a corporation, was indebted to the First National Bank of Ottawa (hereinafter called the Ottawa bank) and also to the Smith Trust & Savings Bank of Morrison (hereinafter designated the Morrison bank) for money borrowed of the respective banks. Each bank held the company's notes representing the debt due from it. In financing the company the banks acted independently of one another. On the day above mentioned the company made and delivered its trust deed by which it conveyed to the Ottawa bank, as trustee, certain real estate in Whiteside county, Ill., to secure the payment of $50,000, evidenced by the company's two bearer bonds, Nos. 1 and 2, each in the principal sum of $25,000 maturing July 1, 1938, bearing 6 per cent. interest, payable semiannually. By the terms of the trust deed there was no priority between the bonds. To secure the indebtedness then owing by the company to the respective banks, as well as any future and additional loans which each might make to it, the company delivered and pledged bond No. 1 to the Ottawa bank and bond No. 2 to the Morrison bank. The company defaulted in the payment of the interest due on its bonds. Under the authority granted by the terms of the trust deed, foreclosure proceedings were instituted. At that time the Ottawa bank held the company's eight notes aggregating the principal sum of $24,000. The Morrison bank had the company's six notes in the principal sum of $16,500. There was in addition accrued interest due each bank. On March 20, 1936, a decree of foreclosure was entered by the circuit court of Whiteside county. The decree found there was due that Ottawa bank, $24,956.20, for which it held as collateral security bond No. 1, and due the Morrison bank, $17,117.25, for which it held as collateral security bond No. 2. The mortgaged premises were directed to be sold to satisfy the indebtedness. The decree further provided that if the sum should be insufficient to pay the several amounts due the respective banks, then the master should distribute the fund in the proportion that the sum due each bank bore to the total amount due both banks. By the stipulation of the parties the question as to the correctness of that portion of the decree which directed the method of the distribution of the funds as between the banks was certified to the Appellate Court for the Second District. That court affirmed the decree of the circuit court (286 Ill.App. 546, 3 N.E.(2d) 961). The Morrison bank, on leave granted to appeal, brings the record here for review.

The Morrison bank takes the position that until such time as the debt secured by the hypothecated bonds is satisfied, the proceeds of the foreclosure sale should be prorated between the banks on the basis of the proportion which the bond held by each bore to the total amount of the bonds issued. The issue presented is one of first impression in this state.

The Ottawa bank contends there is a distinction to be made in those cases where the obligation of a third person is pledged by a borrower to secure his primary obligation, and the pledging of the borrower's own obligations. It insists the correct rule is, that the debtor's additional promise to pay cannot be treated as collateral security for any debt he then owes. The rule invoked is applicable...