Tcherepnin v. Franz

• Decision Date: 24 February 1978
• Docket Number: No. 77-1582,77-1582
• Parties: Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants. Samuel BERKE, Receiver of City Savings Association, Cross-Plaintiff, Appellee, v. FIRST NATIONAL BANK AND TRUST COMPANY IN ALTON, Executor of the Estate of Joseph E. Knight, Cross-Defendant, Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 187

570 F.2d 187

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

Samuel BERKE, Receiver of City Savings Association, Cross-Plaintiff, Appellee, v. FIRST NATIONAL BANK AND TRUST COMPANY IN ALTON, Executor of

the Estate of Joseph E. Knight, Cross-Defendant, Appellant.

No. 77-1582.

United States Court of Appeals Seventh Circuit.

Argued Oct. 26, 1977.

Decided Jan. 23, 1978.

Rehearing and Rehearing En Banc Denied Feb. 24, 1978.

J. F. Schlafly, Jr., Alton, Ill., Raymond F. McNally, Jr., St. Louis, Mo., Edward S. Macie, Chicago, Ill., for cross-defendant, appellant.

Don H. Reuben, Chicago, Ill., for cross-plaintiff, appellee.

Before SWYGERT, CUMMINGS and BAUER, Circuit Judges.

BAUER, Circuit Judge.

This appeal represents the latest stage in the complex and protracted litigation spawned by the 1964 collapse of the City Savings Association, a Chicago-based savings and loan institution. Styled by the district court as a "chronicle of political intrigue and corruption perhaps unmatched in Illinois history," the failure of city Savings was in no small measure the handiwork of its president and director, C. Oran Mensik, who milked the association of millions of dollars through inflated mortgage loans and other fraudulent schemes. The central figure in this case, however, is Joseph Knight, Director of the Illinois Department of Financial Institutions from 1962 to 1968. More specifically, in this appeal, the Estate of Knight challenges the district court's finding that Knight was liable to the depositors of City Savings for his official conduct in connection with the association's demise. Before turning to a consideration of the appellant's arguments, however, we must first review the factual and statutory background of the proceedings below.

I. Background

Because the history of this affair is fully set forth in the lower court's opinion, Tcherepnin v. Franz, D.C., 393 F.Supp. 1197 (1975), we need only briefly recount the central events in both the collapse of City Savings and the litigation that it engendered.

After encountering a serious capital impairment which prompted the State of Illinois to close its doors, the City Savings Association was reopened to the public on December 19, 1957. The association remained under judicial supervision until 1959 when, under the direction of its president and director, C. Oran Mensik, it embarked upon an aggressive promotional campaign to attract new depositors. From 1959 to 1964, it is now clear, the affairs of City Savings were not conducted in accordance with the provisions of the Illinois Savings and Loan Act. Most importantly and these facts are not in dispute City Savings made loans of more than $21,000,000 to entities controlled by Mensik or his nominees, loans that were "secured" by fraudulently overvalued property in the so-called "Apple Orchard" and "Howie-in-the-Hills" development projects. ¹ These inflated mortgage loans, together with several other illegal acts of mismanagement, ² left City Savings in a precarious financial condition with a capital impairment of more than $14,000,000.

Although the Department of Financial Institutions began examining the affairs of City Savings in January 1964, it was not until June of that year, when an independent audit conducted by Peat, Marwick, Mitchell & Co. revealed the full extent of City Savings' capital impairment, that Joseph Knight, Director of the Department of Financial Institutions, closed the association. Following the closing, in a meeting held on July 28, 1964, the depositors of City Savings approved a plan of voluntary liquidation which placed the assets of the association in the hands of three voluntary liquidators, one nominated by Mensik and the other two by the State of Illinois.

The beginning of the lengthy litigation that followed the association's collapse came on July 29, 1964, when Alexander Tcherepnin and other holders of withdrawable capital shares of City Savings filed a complaint alleging that various state officials, the voluntary liquidators and others had violated the Securities Exchange Act of 1934. ³ When the plaintiffs subsequently moved for the appointment of a receiver, Judge Campbell, finding the state-supervised plan of voluntary liquidation to be "tainted with fraud from its inception," entered an order terminating the liquidation and appointing two receivers for the association.

The receivers proceeded to file their First Cross-Complaint on January 15, 1969, which, as amended, charged named state officials, including Joseph Knight, with breaching their statutory duties to City Savings, thereby rendering themselves, the State of Illinois and their surety liable for damages to the depositors. In the course of the subsequent litigation, the State and the receivers entered into settlement negotiations which culminated in the legislative appropriation of $12,467,500 for the reimbursement of the City Savings depositors. The receivers then filed a motion for summary judgment against the remaining cross-defendants on November 5, 1973. On April 14, 1975, the district court granted summary judgment on Counts I and II of the receivers' complaint against the Knight Estate, finding (1) that Joseph Knight had maliciously breached a statutory duty to supervise the affairs of City Savings; and (2) that Knight had either fraudulently participated in foisting the illegal plan of voluntary liquidation upon the City Savings depositors, or, alternatively, negligently breached certain ministerial duties in connection with the adoption of that plan. It is from this judgment that the Estate now appeals.

II. The Statutory Framework

Counts I and II of the receivers' complaint were premised on certain statutory duties imposed on the Director of the Department of Financial Institutions by the Illinois Savings and Loan Act. Ill.Rev.Stat. ch. 32, §§ 701-944 (1963). In essence, the Act charges the Department of Financial Institutions and its Director with supervising the affairs of all savings and loan associations within the state to insure that those businesses are operated "only by associations organized and conducted in accordance with the authority provided in this Act." Ill.Rev.Stat., ch. 32, § 702(b) (1963). To this end, Section 842 of the Act gives the Director access to the books of every savings and loan association within the state and requires him to conduct an examination of every association at least once a year. That same section also empowers the Director to require the officers and directors of any association that is not conducting its business in accordance with the Act to take corrective action. In addition, Section 843 empowers the Director to order, without prior notice, an audit of the books of any association, while Section 844 requires every association to file with the Department of Financial Institutions a statement of its financial condition at the close of the fiscal year. Finally, under Section 848, the Director is empowered to take custody of the books, records and assets of any association if, among other reasons, the association's capital is seriously impaired, or its business is being conducted in a "fraudulent, illegal, or unsafe manner."

In sum, then, the comprehensive powers granted to the Director of the Department of Financial Institutions are all designed to enable him to supervise the affairs of savings and loan associations within the State of Illinois, and thus insure that every association is being conducted in accordance with the provisions of the Illinois Savings and Loan Act. With this in mind, we now turn to the appellant's arguments.

III. Count I

The Knight Estate's initial argument on appeal invokes the doctrine of official immunity. Pointing to Knight's special status as a public official, and citing state and federal decisions endorsing the policy of official immunity, the Estate claims that Knight acted within the scope of his statutory authority in the years 1962-1964, and was thus immune from liability to the City Savings depositors.

It is true that a widely accepted principle of the common law holds that public officials are immune from liability for errors in judgment in the performance of their duties. See Nagle v. Wakey, 161 Ill. 387, 392-94, 43 N.E. 1079, 1081 (1896). But in Illinois, as in other jurisdictions, the immunity conferred on public officials is a qualified one, one that is displaced by an official's negligent conduct in the performance of ministerial duties or malicious and corrupt conduct in the performance of discretionary duties. People ex rel. Munson v. Bartels, 138 Ill. 322, 27 N.E. 1091 (1891). Clearly, then, Knight was not immune from liability if, as the lower court found, he maliciously breached a discretionary duty to supervise the affairs of City Savings. By the same token, Knight was not immune from liability if, as the court also found, he negligently breached certain ministerial duties in permitting the adoption of the plan of voluntary liquidation.

In this connection, however, the Estate makes two additional claims: first, that Knight's statutory duties were owed only to the public-at-large that is, to the State of Illinois and not to the depositors of City Savings; and second, that Count I of the receivers' complaint did not allege Knight's conduct to be "malicious" or "corrupt." Neither argument is persuasive. While we agree that official misconduct can constitute an individual wrong only if a duty is owed to the party seeking redress, People of the State of Illinois v. Maryland Casualty Co., 132 F.2d 850 (7th Cir. 1942), we find nothing in the Illinois Savings and Loan Act to suggest that Knight was charged with responsibilities only to the State of Illinois. On the contrary, the Act, by making repeated references to the "protection of the Association" in defining the duties of the Director, ⁴ indicates that the Association and, more specifically, its depositors have a vested...