Reconstruction Finance Corporation v. McCormick

• Decision Date: 01 April 1939
• Docket Number: No. 6548-6552.,6548-6552.
• Citation: 102 F.2d 305
• Parties: RECONSTRUCTION FINANCE CORPORATION v. McCORMICK et al. and four other cases.
• Court: U.S. Court of Appeals — Seventh Circuit

102 F.2d 305 (1939)

RECONSTRUCTION FINANCE CORPORATION v. McCORMICK et al. and four other cases.

Nos. 6548-6552.

Circuit Court of Appeals, Seventh Circuit.

February 20, 1939.

Rehearing Denied April 1, 1939.

COPYRIGHT MATERIAL OMITTED

George T. Buckingham, Matthew Mills, Edward R. Johnston, Henry Garner O'Donnell, Benton Atwood, Doval Benjamin Williams, Karl Edwin Seyfarth, Samuel M. Rinaker, Michael F. Gallagher, Arthur R. Hall, Earl B. Wilkinson, Herbert Pope, Edwin J. Nergard, Matthias Concannon, William H. Dillon, R. F. Bostelman, Merritt C. Bragdon, Edward D. McDougal, Jr., Herbert M. Lautmann, David Levinson, A. Fishman, Don M. Peebles, Benjamin V. Becker, Walter E. McCornack, Paul R. Conaghan, George Gillette, John Mann, and S. Sidney Stein, all of Chicago, Ill., for appellants John A. McCormick et al.

Ralph McShaw, Walter E. McCornack, Frank H. Towner, and William C. Mulligan, all of Chicago, Ill., for appellants Robert F. Carr and others.

Franklin J. Stransky, of Chicago, Ill., for appellants 1468 small stockholders.

E. M. Ashcraft, Jr., Carroll J. Lord, and Rufus D. Beach, all of Chicago, Ill., for appellants John F. Jelke, Jr., and others.

O. John Rogge, of Chicago, Ill., Harold Rosenwald, of Washington, D. C., and Floyd M. Rett, of Chicago, Ill. (Claude E. Hamilton, Jr., Gen. Counsel, Clifford J. Durr, Asst. Gen. Counsel, and Hans A. Klagsbrunn, Counsel, Reconstruction Finance Corporation, all of Washington, D. C., and James A. Sprowl, of Chicago, Ill., of counsel), for appellee.

Before EVANS, SPARKS, and TREANOR, Circuit Judges.

EVANS, Circuit Judge.

The Reconstruction Finance Corporation is the plaintiff, and certain stockholders of the Central Republic Trust Company (hereinafter called Central) are the defendants in this suit which resulted in a decree for the plaintiff. Central was also named as defendant. The numerous appeals were consolidated and heard together.

Plaintiff, in this suit, seeks to recover money decrees against stockholders of Central, in amounts equal to the par value of their stock holdings. About one-half of the stockholders have paid a liability similar to that asserted in this suit.

All the defendants deny any and all liability.

Plaintiff's right to bring this suit is traceable to, or grows out of, its loan of $90,000,000 to Central, a state bank organized under the laws of the state of Illinois, with 140,000 shares of stock of $100 par value per share outstanding.

Liability of holders of bank stock is fixed by section 6 of Article 11 of the Constitution of the State of Illinois, Smith-Hurd Stats., and by section 6 of the Illinois Banking Act.

Section 6, Article 11, of the Illinois Constitution reads:

"Every stockholder in a banking corporation or institution shall be individually responsible and liable to its creditors, over and above the amount of stock by him or her held, to an amount equal to his or her respective shares so held, for all its liabilities accruing while he or she remains such stockholder."

Section 6 of the Illinois Banking Act, Sec. 6, Chap. 16½, Smith-Hurd Ill.Stats. Ann., reads:

"Every stockholder in any bank or banking association organized under the provisions of this Act shall be individually responsible and liable to its creditors, over and above the amount of stock by him or her held, to an amount equal to his or her respective shares so held, for all its liabilities accruing while he or she remains such stockholder. * * *"

This statute has frequently been before the Illinois courts.¹

The defendants have divided into groups, and these different groups raise different, as well as common, defenses.

The District Court made detailed findings of fact and discussed at length, in a carefully prepared opinion, and in a manner befitting the importance of the case, the various objections of the different groups. The court covered separately and fully all the issues of fact and disputed legal issues which are here presented. Its findings of fact and opinion appear in Reconstruction Finance Corp. v. Central Republic Trust Co., D.C., 17 F.Supp. at page 263. This discussion greatly simplifies our task and shortens this opinion. We refer to Judge Wilkerson's findings and opinion for a complete statement of the material facts, as well as of the legal questions involved.

In fact, we might well adopt both the findings and the opinion as our own, and thus end this opinion. While inclined so to do, we have hesitated because we would not thus fairly meet the criticisms of them, which are set forth in the exhaustive briefs which have been submitted by the various defendants on these appeals. The importance of the case, as well as the earnestness and ability with which counsel have pressed their defenses, is our justification for going into the case so fully.

The issues: Either collectively, or as a group or groups, defendants deny:

1. The R. F. C.'s authority to sue under the Act of its creation;

2. The existence of the necessary creditor status to permit it to maintain an action to collect stockholder's liability;

3. The R. F. C.'s reliance upon the bank stockholder's liability in making the loan without which no recovery may be had;

4. The R. F. C.'s claim of a single loan transaction evidenced by an R. F. C. commitment of $90,000,000;

5. The validity of the reorganization and transfer of assets of the Central Republic Trust Company to the City National Bank because not approved by the Illinois auditor under section 15 of the Illinois Banking Act, Ch. 16½, Smith-Hurd Ill.Rev.Stats.;

6. The validation of the reorganization through ratification by the stockholders;

7. The banking status of the Central Republic Trust Company when it ceased receiving deposits on October 5;

8. The soundness of plaintiff's differentiation of the case of Continental Illinois National Bank & Trust Co. v. Peoples Trust & Savings Bank, 366 Ill. 366, 9 N. E.2d 53, upon which defendants rely for construction of section 15 of the Illinois Banking Act;

9. The recoverability of loans made malum prohibitum by Federal statute, Title 15 U.S.C.A. § 605d, section 207 of the Reconstruction Finance Corporation Act of 1932; and

10. The right of the R. F. C. to apply proceeds from the sale of pledged securities to the last and allegedly void loan ($50,000,000) in preference to the earlier loan ($30,000,000).

To these defenses, one group adds another, a factual defense. They assert that the stockholders were misled into any ratification they may have made in the belief that the reorganization was to relieve them of the threat of double liability and add, there was a fraudulent conspiracy between the R. F. C., and certain officers of the old bank and of the new bank, which resulted in great loss to the old bank and profit to the new and of which conspiracy the stockholders of the old bank were the victims.

From a study of the questions presented for our determination, it is apparent that attacks on certain findings of fact must first be met. Several of the defendants' contentions are predicated upon the assumption that the court's findings of fact are erroneous.

A general fact statement, the correctness of which, we believe, will not be challenged by either side, is herewith attempted. It is made to supply a necessary background to various questions presented to us.

The report of Central on July 25, 1931 showed: loans, $154,000,000; cash, including amounts due from other banks, $63,000,000; deposits, $240,000,000. (Sums less than one million dollars are not given.) Eleven months later the bank loans were reduced to $101,000,000; cash to $18,000,000; and deposits were $128,000,000. The fall in deposits necessitated a reduction in the loans and in cash. In view of the declining security prices in 1932, heavy losses in the sale of securities were unavoidable.

Although the eleven months' record just detailed was discouraging and worrisome, the withdrawals for June, 1932, were paralyzing. From June 1 to June 25, the deposits declined $20,000,000. From June 20 to June 25, the decline was over $13,500,000; on June 25, $4,500,000 was withdrawn.

Charles G. Dawes, formerly active in Central's affairs, became a member of the Board of Directors of plaintiff, February 2, 1932. His resignation on June 6 was effective June 15, 1932. He immediately went to Chicago and played a leading role in the activities of the bank from then on. At 1 A. M., June 27, 1932, he was elected a director. At a special meeting of the Board of Directors at 1:15 A. M., he became Chairman of the Board. Before assuming important government positions to which he was called during the preceding eight years, he had been Central's principal stockholder and its recognized head. Dawes promptly announced that Central would not open its doors the next day. The situation was serious and seemingly hopeless. Only prompt, decisive and bold action could avoid closing and other equally serious consequences. Remaining open was quite as serious and dangerous as closing. What followed in the next twenty-four hours evidenced promptness and decisiveness. The wisdom of its action raises disputatious questions. Even now, years afterwards, when judgment is benefited by a rear view of the facts, unanimity of opinion is absent.

It is unnecessary for us, on this phase of the R. F. C.'s activities, to cast the weight of our opinion, or speculation, upon the scales. The important fact is that action was taken. Financial help came to Dawes and his bank. It came from Washington through the R. F. C., of which Mr. Dawes had a few weeks before been the president. In twenty-four hours a loan of $90,000,000 was arranged. $5,000,000 more was to be advanced by friendly banks of Chicago, who had faith in the integrity of Dawes. $90,000,000 was to be advanced by R. F. C., of which $10,000,000 was to be furnished by the large banks of New York. As the New York banks repudiated their agreement the next day, the R. F. C. had to carry the entire...