People ex rel. Nelson v. Chicago Lawn State Bank

• Decision Date: 08 July 1940
• Docket Number: Gen. No. 40908.
• Parties: PEOPLE EX REL. NELSON, AUDITOR OF PUBLIC ACCOUNTS, v. CHICAGO LAWN STATE BANK. VAN SCHAICK, SUPERINTENDENT OF INSURANCE, v. ALBERS.
• Court: United States Appellate Court of Illinois

306 Ill.App. 107

28 N.E.2d 294

PEOPLE EX REL. NELSON, AUDITOR OF PUBLIC ACCOUNTS,

v.CHICAGO LAWN STATE BANK.

VAN SCHAICK, SUPERINTENDENT OF INSURANCE,

v.ALBERS.

Gen. No. 40908.

Appellate Court of Illinois, First District, First Division.

June 24, 1940.

Rehearing Denied July 8, 1940.

Appeal from Superior Court, Cook County; Grover C. Niemeyer, Judge.

Proceeding by the People of the state of Illinois, on the relation of Oscar Nelson, as auditor of public accounts of the state of Illinois, against the Chicago Lawn State Bank for suspension of the bank's business and appointment of a receiver. Joseph B. McDonough, the county treasurer of Cook county, had $100,000 on deposit with the bank when it closed. The deposit was secured by bond of the Constitution Indemnity Company of Philadelphia, which, upon demand by McDonough, paid the amount of the deposit with interest. The surety company filed its petition to be subrogated to the right of the state of Illinois to have the amount which it had paid allowed as a preferred claim. Charles H. Albers, receiver of the Chicago Lawn State Bank, opposed the petition for subrogation. From a decree allowing the claim but denying a preference, George S. Van Schaick, superintendent of insurance of the state of New York, appeals.

Affirmed. Barnes & Murphy and Glenn, Real & Browning, all of Chicago (Raymond G. Real, of Chicago, of counsel), for appellant.

Kirkland, Fleming, Green, Martin & Ellis, of Chicago, for appellee.

MATCHETT, Justice.

I. On June 9, 1931, the Chicago Lawn State Bank suspended business and its books and assets were turned over to the Auditor of Public Accounts. The auditor appointed a receiver and the appointment was later approved by the court. Joseph B. McDonough, the County Treasurer of Cook County, had on deposit with the bank when it closed $100,000, which had been placed with it under a written agreement that the deposit would draw interest at the rate of 2 1/2%. This deposit was secured by a bond of the Constitution Indemnity Company of Philadelphia, executed January 9, 1931. When the bank failed, McDonough demanded payment from the surety company and October 29, 1931, the surety company paid the amount of the deposit with interest, a total of $101,240. October 31, 1931, the surety company filed its petition to be subrogated to the right of the State of Illinois to have the amount which it had paid under its bond allowed as a claim entitled to preference over all other general and preferred creditors. The receiver answered denying petitioner's right to subrogation or preference. The cause was referred to a master who reported recommending allowance as a general claim but disallowance as a preferred claim. The chancellor overruled exceptions and on May 31, 1939, entered a decree as recommended. Van Schaick, superintendent of insurance, who through consolidations and insolvency proceedings has succeeded to the rights of the surety company, appeals.

II. The subrogation of a surety to the rights of a party whose obligation the surety has been required to pay is an elementary rule of equity law. The right of the sovereign to have a debt due to the sovereign from an insolvent paid in full and in preference to general creditors has been recognized by the courts of England and of Illinois. In this and other states it has been held that this right exists even in the absence of any statute declaring the right. People v. Farmers' State Bank, 335 Ill. 617, 167 N.E. 804, 65 A.L.R. 1327;People v. Bank of Chebanse, 340 Ill. 124, 172 N.E. 50;People v. West Englewood Bank, 353 Ill. 451, 187 N.E. 525;Marshall v. New York, 254 U.S. 380, 41 S.Ct. 143, 65 L.Ed. 315;People v. Marion Trust & Savings Bank, 347 Ill. 445, 179 N.E. 893;American Legion Post No. 279 v. Barrett, 371 Ill. 78, 20 N.E.2d 45. These cases also hold that the right exists notwithstanding a statute similar to those which in some other states has been held to indicate a legislative intention to the contrary, of which In re South Philadelphia State Bank, 295 Pa. 433, 145 A. 520, 83 A.L.R. 1123, and United States F. & G. Co. v. McFerson, 78 Colo. 338, 241 P. 728, are illustrative.

III. The courts of Illinois have not expressly held that the prerogative right of the state passes by subrogation to a surety company upon its complying with its voluntary contract to guarantee the payment of moneys due from an insolvent institution. The right of such surety company to be subrogated to the right based on the sovereign prerogative is denied by the respondent. There is conflicting dicta on the question without direct decision. Nelson v. Colegrove & Co. State Bank, 268 Ill.App. 56, and the same case in 354 Ill. 408 at page 415,188 N.E. 461, 464, where the Supreme Court remarked in substance that the plaintiff in error had failed “to show how this attribute of sovereignty can be acquired by an individual * * *.” On the other hand, in People v. Farmers' State Bank, 335 Ill. 617, 167 N.E. 804, 65 A.L.R. 1327, a statement in the opinion indicates that a public official might be subrogated to this prerogative. Petitioner cites Lochenmeyer v. Fogarty, 112 Ill. 572, where, however, the question was not involved. Also, Richeson v. Crawford, 94 Ill. 165;Whitbeck v. Estate of Ramsey, 74 Ill.App. 524, with Hunter v. United States, 5 Pet. 173, 8 L.Ed. 86, in which the right of a surety to subrogation is considered with reference to the provisions of particular statutes. Such a distinction was said not to be important under the facts in People v. People's Savings Bank & Trust Co., 362 Ill. 395, 199 N.E. 824, and the validity of such distinction has been denied in a majority of the states. United States F. & G. Co. v. Borough Bank, 161 App.Div. 479, 146 N.Y.S. 870;Maryland Casualty Co. v. McConnell, 148 Tenn. 656, 257 S.W. 410;State ex rel. Rankin v. Banking Corporation, 77 Mont. 134, 251 P. 151; and American Surety Co., v. Pearson, 146 Minn. 342, 178 N.W. 817.

The doctrine of subrogation is an equitable doctrine and when enforced by court of equity it would seem it should be applied according to equitable principles. The reason for the rule giving the state a prerogative right in such a case is stated to be the necessity that the state may enjoy sufficient revenue. It would seem upon principle that when a surety complying with its contract has performed its obligation and paid the debt, the reason for the rule would cease. In these days the undertaking of a surety is usually made for a consideration. It is difficult to see the equity or justice of giving such a surety who has merely complied with the terms of a contract voluntarily undertaken by it for profit, a right of subrogation to be paid in full to the exclusion of other creditors and depositors. We are much impressed by the reasoning in In re South Philadelphia State Bank, 295 Pa. 433, 145 A. 520, 83 A.L.R. 1123.

IV. The County Treasurer statute (Ill.State Bar Stats.1939, chap. 36, § 5 of the Act, § 21 of the Statutes, p. 1024) provides for a classification of the funds in the hands of the county treasurer in a manner which would ear mark the money in his possession. Section 6 of the Act (§ 22 of the Statutes) makes it the duty of the county treasurer to deposit these funds as classified in separate accounts. The county treasurer did not comply with this statute. In People v. Dime Savings Bank, 350 Ill. 503, 183 N.E. 604, the Supreme Court held that the responsibility of keeping accounts so as to distinguish between taxes collected and money in the custody of the county derived from other sources was on the county treasurer. Respondent points out that there is no proof that the Chicago Lawn State Bank knew of the methods used by the county treasurer in bookkeeping. It further points out that the bond executed by the bank and signed by the surety described the moneys to be loaned as “county moneys of the County of Cook,” and that the moneys to be loaned were many times described in this agreement by substantially similar phrases. Section 1 of the Act (§ 17 of the Statutes, p. 1023) declares that “the term ‘county moneys' shall include all moneys to whomsoever belonging, received by or in the possession or control of the incumbent of the office of county treasurer when acting as such or in any other official capacity incident to his incumbency of the office of county treasurer.” This language would be broad enough to include undistributed tax moneys, and petitioner contends that it must be supposed that the terms used in the bond and contract were used in this sense. Respondent contends this construction is untenable for the reason that the definition is applicable only to the writing of which it is a part, unless there is a clear intention to incorporate it in a definition as used in another writing, which is not the case here.

Respondent goes on to argue that as the county treasurer made a deposit of what was ostensibly Cook county funds, he and his subrogee (the bond company) are now estopped to maintain that the deposit was not Cook county funds as distinguished from funds in which the state had an interest. There might be some merit to this contention by a receiver representing the rights of other claimants if it is held, as a matter of law, the petitioner can not be subrogated to the prerogative right of the state. However, assuming as a matter of law, petitioner may be so subrogated and substituted, it seems (standing in the shoes of the state) estoppel could not be urged as a defense against petitioner. Seeger v. Mueller, 133 Ill. 86, 24 N.E. 513;Catlett v. People, 151 Ill. 16, 37 N.E. 855;People v. Gary, 196 Ill. 310, 328, 63 N.E. 749;People v. Bradford, 372 Ill. 63, 22 N.E.2d 691.

V. However, the master and the trial court put their decision on a ground sustained, we think, by the record, namely, that the petitioner failed to prove the fund deposited in the Chicago Lawn bank by McDonough, the Treasurer of Cook county, was a deposit of funds...