Tcherepnin v. Franz

• Decision Date: 14 April 1975
• Docket Number: No. 64 C 1285.,64 C 1285.
• Citation: 393 F. Supp. 1197
• Parties: Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

393 F. Supp. 1197

Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants.

No. 64 C 1285.

United States District Court, N. D. Illinois.

April 14, 1975.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Steven L. Bashwiner, Don. H. Reuben, Kirkland & Ellis, Chicago, Ill., for cross-plaintiff (Receiver for City Savings Assn.).

John F. Schlafly, Alton, Ill., Raymond F. McNally, Jr., St. Louis, Mo., for cross-defendant Estate of Knight.

MEMORANDUM AND ORDER

ROBSON, Chief Judge.

This matter comes before the court on the motion of cross-plaintiff City Savings Association (City Savings), by its receiver Samuel Berke, and pursuant to Rule 56 of the Federal Rules of Civil Procedure for entry of summary judgment on Counts I, II and III of its Amended First Cross-Complaint against cross-defendant First National Bank & Trust Company of Alton, Illinois, executor of the estate of Joseph E. Knight (Estate of Knight). In addition, the Estate of Knight has moved to dismiss Counts I, II and III of the Amended First Cross-Complaint. Cross-defendant Justin Hulman has joined in the motion to dismiss and has adopted the Estate of Knight's memorandum in support thereof. For the reasons set forth below, the motions to dismiss shall be denied and the receiver's motion for summary judgment shall be granted as to Counts I and II and denied as to Count III.

This complex and protracted litigation involves the events surrounding the collapse of City Savings Association, a savings and loan association chartered by the State of Illinois and presently under the control of federal receivers. The history of City Savings and its mentor, C. Oran Mensik, is a chronicle of political intrigue and corruption perhaps unmatched in Illinois history. It is replete with examples of official misconduct and chicanery and permeated with a blatant disregard by both state and City Savings officials for the rights of the unfortunate depositors. The result of these defalcations was a massive fraud which milked the depositors of nearly $23,000,000.

To fully comprehend the allegations made in the Amended First Cross-Complaint, the history of City Savings and of this litigation must first be reviewed in some detail.

Events Prior to the Commencement of This Litigation

City Savings Association was founded in 1908 in Chicago, Illinois. It issued to its depositors withdrawable capital shares, as authorized by the Illinois Savings and Loan Act, Ill.Rev.Stat.1963, ch. 32, §§ 701-944. City Savings was located in and serviced an area known as the Chicago-Ashland business district, a focal point for various Chicago ethnic groups. The Failure of the City Savings Association, a report to the Illinois General Assembly, Illinois Legislative Investigating Commission, January, 1972 (hereinafter referred to as Legislative Report), p. 1.

In 1942, C. Oran Mensik, the principal manipulator of this fraud, first became associated with City Savings. Mensik's emergence as president and director of City Savings, six months later, marked the beginning of an astounding period of economic growth. When Mensik joined City Savings there were 348 shareholders and $147,000 in assets. By 1952, the reported assets of City Savings had reached $12,000,000 and in the next five years this figure climbed to over $35,000,000. Mensik remained in control of City Savings until at least 1964. Legislative Report, p. 1.

On July 18, 1956, the Auditor of Public Accounts for the State of Illinois, the public official then charged with the supervision of state-chartered savings and loan associations, ordered state examiners to conduct an examination of the books and records of City Savings. Subsequent examinations were made in October 1956 and February 1957. The last examination report was sent to the management of City Savings on April 16, 1957, and was accompanied by a letter from the Auditor outlining the State's criticisms and recommendations. On April 23, these examinations were released to the press. The resulting publicity caused a run on City Savings. On April 25, 1957, the Auditor declared an "emergency," took custody of City Savings and closed its doors to the public. Ill.Rev.Stat.1955, ch. 32, § 848; Legislative Report, pp. 3-8.

The examination findings upon which the Auditor relied revealed: that the capital of City Savings was severely impaired; that certain favored companies staffed and operated by Mensik's associates and relatives had received a disproportionate amount of mortgage loans; that properties securing mortgage loans were greatly overappraised; and that Mensik was involved in two other guarantee associations which were both in financial straits. Legislative Report, p. 7.

In response, Mensik filed suit in the Circuit Court of Cook County charging that the Auditor and five of his associates were engaged in a conspiracy to "steal" Mensik's associations from him. The matter was referred to Nathan M. Cohen as Master in Chancery. After an extensive hearing, the Master concluded that the responsibility for the emergency was chargeable to the Auditor because of his untimely release of the confidential report and that the state seizure was therefore illegal. On December 6, 1957, Judge Cornelius Harrington adopted the Master's findings and ordered that control of City Savings be returned to Mensik. This decision was ultimately affirmed by the Supreme Court of Illinois in 1960. Mensik v. Smith, 18 Ill.2d 572, 166 N.E.2d 265 (1960).

Judge Harrington, however, also found that some of the criticisms registered by the Auditor were valid and retained supervisory jurisdiction over City Savings to oversee the implementation of certain suggested remedial measures. One of these suggestions was the institution of a system of limited and restricted withdrawals pursuant to Section 773(b) of the Illinois Savings and Loan Act, Ill.Rev.Stat.1963, ch. 32, § 773(b). Legislative Report, pp. 8-11.

On December 19, 1957, City Savings was reopened to the public. On February 3, 1959, Judge Harrington determined that the conditions which the court directed to be remedied had been in fact corrected and terminated all judicial supervision of City Savings. Legislative Report, p. 11.

The rapid growth experienced by City Savings prior to its 1957 closing declined sharply due both to the damaging publicity it had received and to its decision to operate under the provisions of Section 773(b). Legislative Report, p. 14.

On July 9, 1959, the Illinois General Assembly enacted Section 773(h) of the Illinois Savings and Loan Act. Ill.Rev. Stat.1959, ch. 32, § 773(h). It provided:

(h) An association while operating under this Section may accept additional withdrawable capital from its present shareholders as well as accept new withdrawable capital accounts and such withdrawable capital accounts shall not be subject to the provisions of subsection (b) of this section but shall be subject to withdrawal at will so long as the association is operating under the provisions of subsection (b) of this section.¹

Mensik seized the unique advantages offered by this new law and embarked on an extensive advertising campaign, offering expensive prizes such as television sets and radios to new depositors. He also blazoned the maxim "Under State Government Supervision" on his letterheads and circulars. Legislative Report, p. 14.

In January 1964, the State Department of Financial Institutions, to whom supervisory authority over state-chartered savings and loan associations had been transferred, began an examination of the affairs of City Savings. The examination included an audit by Peat, Marwick, Mitchell & Co., independent public accountants, whose report dated June 15, 1964, showed a capital impairment of approximately $14,000,000. Tcherepnin v. Franz, 316 F.Supp. 714 (N.D.Ill.1970). On June 26, 1964, the State of Illinois took custody of City Savings and on June 30, 1964, City Savings was closed to the public. Legislative Report, pp. 14-17.

On July 28, 1964, a meeting of the depositors of City Savings was held at which a plan of voluntary liquidation, agreed upon between Mensik and the State of Illinois, was put forward and approved by the depositors. Pursuant to the plan, three voluntary liquidators were appointed, one nominated by Mensik and the other two by the State of Illinois. Legislative Report, pp. 17-18.

The Federal Litigation

On July 24, 1964, four days prior to the depositors' meeting called to solicit approval of the plan of voluntary liquidation, the plaintiffs' complaint was filed by Alexander Tcherepnin and certain other holders of withdrawable capital shares of City Savings. Their complaint named Joseph E. Knight, then Director of the Department of Financial Institutions of the State of Illinois; Justin Hulman, then Supervisor of the Savings and Loan Division of the Department; certain officers and directors of City Savings; and Louis Kwasman, Harry Hartman and Dennis Kirby, the voluntary liquidators of City Savings, as parties defendant. Defendants Hartman and Kirby were savings and loan examiners and employees of the Department of Financial Institutions; Kwasman was a business associate and nominee of Mensik.

Plaintiffs alleged in their complaint that their withdrawable capital shares in City Savings were securities within the purview of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and were purchased in reliance upon false and misleading solicitations made in violation of that act. The plaintiffs sought rescission of their purchases and recovery of their investment.

No wrongdoing was alleged by, and no relief was sought against, the named state officials or the State of Illinois. Nonetheless, on November 20, 1964, the Attorney General of the State of Illinois moved to strike and dismiss the complaint.

On January 17, 1966, Judge Campbell, before whom the matter was then pending,² denied all motions to dismiss plaintiffs' complaint and held that plaintiffs owne...