United States v. Earling

• Decision Date: 19 June 1941
• Docket Number: No. 4511.,4511.
• Citation: 39 F. Supp. 864
• Parties: UNITED STATES et al. v. EARLING et al.
• Court: U.S. District Court — Eastern District of Wisconsin

39 F. Supp. 864

UNITED STATES et al. v. EARLING et al.

No. 4511.

District Court, E. D. Wisconsin.

June 19, 1941.

Lee Walker, M. O. Hoel, and William S. Allen, all of Reconstruction Finance Corporation, all of Chicago, Ill., and B. J. Husting, U. S. Dist. Atty., and E. J. Koelzer, both of Milwaukee, Wis., for plaintiffs.

Miller, Mack & Fairchild, of Milwaukee, Wis., for defendants Church and others.

Bloodgood, Passmore & Kemper, of Milwaukee, Wis., for defendant First Wisconsin Trust Co. and another.

A. L. Nash (of Nash & Nash), of Manitowoc, Wis., for defendant Maritime Securities Co.

George A. Burns and Niven & Mullaney, all of Milwaukee, Wis., for defendant, Walter B. Braun.

George A. Burns, of Milwaukee, Wis., for defendant Arthur Sandner, deceased, ex'r of estate substituted.

Charles L. Goldberg, of Milwaukee, Wis., for defendant Henry Solomon.

Jeffris, Mouat, Oestreich, Wood & Cunningham, of Janesville, Wis., for defendants Robert Wieland and Leonard P. Eager.

John M. Campbell (of Bundy, Beach & Holland), of Eau Claire, Wis., for defendant Elinor Conover Owen.

A. F. Rankin (of Nash & Nash), of Manitowoc, Wis., for defendant Charles C. West.

DUFFY, District Judge.

This is a representative suit brought by the plaintiffs to enforce the payment of liability of certain stockholders of the Central Republic Trust Company, an Illinois banking association. Detailed statements of the facts upon which the action is based are set forth in reports of a similar action brought in the United States District Court for the Northern District of Illinois. Reconstruction Finance Corp. v. Central Republic Trust Co., 11 F.Supp. 976; Id., 17 F. Supp. 263; and Reconstruction Finance Corp. v. McCormick et al., 7 Cir., 102 F.2d 305, certiorari denied 308 U.S. 558, 60 S.Ct. 90, 84 L.Ed. 469.

Plaintiffs predicate their standing here upon a loan made in 1932 by the Reconstruction Finance Corporation (hereinafter called R.F.C.) to Central Republic Trust Company for $80,000,000. The earliest date when the R.F.C. became a creditor of the Trust Company was June 27, 1932. At the time when this action was commenced on December 21, 1934, large amounts of principal and interest of said loan remained unpaid. About ninety defendants residing in Wisconsin were designated in the original complaint filed herein. These defendants were either stockholders of the Central Republic Trust Company on June 27, 1932, or those who became stockholders at a later date. Other defendants were thereafter added by subsequent amendments to the complaint.

The alleged liability is based on Sec. 6 of Article 11 of the Illinois Constitution which 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."

It appears that Central Republic Trust Company was organized on July 25, 1931, pursuant to a plan of reorganization which involved the Central Trust Company of Illinois and the National Bank of the Republic of Chicago. The amendments to the complaint largely concerned defendants who had been stockholders of the latter two banking concerns. Thirty-six defendants have filed motions to dismiss the complaint.¹ It is the determination of these motions which is now before the court.

Motion to Dismiss Upon Behalf of Elinor C. Owen

In December, 1938, an amended complaint was filed herein alleging that Elinor C. Owen and certain other defendants therein named had been stockholders of the National Bank of the Republic of Chicago on July 25, 1931, and that they thereby became entitled to receive shares of the said Central Republic Trust Company, under a plan of reorganization, and thereafter received such shares. It is not alleged nor claimed that Mrs. Owen was a stockholder of the Central Republic Trust Company at the date when the liability to the R.F.C. was created. Plaintiffs contend, however, that they are entitled to bring a representative suit in behalf of all creditors, and allege upon information and belief that there were certain creditors of the Trust Company on July 25, 1931, whose claims are unpaid. No such creditors are mentioned by name, nor is there any allegation as to the amount of any such claim. It may be very doubtful if any such creditor can be established, as at the time when plaintiffs herein filed their briefs, which was about seven years after the action was originally commenced, plaintiffs had no definite information on that subject.

Under Illinois law, Mrs. Owen, as a stockholder on July 25, 1931, is liable to unpaid creditors of the Trust Company whose claims accrued during the time she was the owner of the stock in the Trust Company. She is not liable to creditors whose claims accrued after she ceased to be a stockholder. The stockholder's liability under Illinois law is primary, several, and individual on the part of each stockholder to each creditor. It accrues at the time that the liability of the bank is incurred.

Counsel for Mrs. Owen earnestly contends that the R.F.C. should not be permitted to bring a representative action when under no circumstances could Mrs. Owen be liable to the R.F.C. It certainly is the general rule that the person who brings such an action must have an interest in the controversy, common with those for whom he sues. 47 C.J., p. 44. It is Mrs. Owen's contention that the R.F.C., having no claim which it could enforce against her, does not have a common interest with other creditors who might have a claim against her.

The complaint asks that this court determine and declare what persons within its jurisdiction were stockholders, commencing July 25, 1931; the duration of their respective periods of stock holdings; and the extent of the liabilities which they are called upon to pay; and asks further that the court require each of such stockholders to pay into court the full amount of their respective liabilities. There also is a prayer for a Receiver and other relief.

The point raised by Mrs. Owen's motion to dismiss was passed upon by Judge Wilkerson in his opinion in Reconstruction Finance Corp. v. Central Republic Trust Co., D.C., 11 F.Supp. 976. He states (page 985): "It is urged that the suit should be dismissed as to defendants holding stock on dates other than the dates of the accrual of the liabilities to plaintiff. It is alleged in the bill that there are creditors other than plaintiff. If the stockholders not liable to plaintiff are liable to other creditors, plaintiff has the right to have the claims of such creditors satisfied out of the liabilities of the stockholders not liable to plaintiff before they are permitted to share with plaintiff in that part of the fund realized from stockholders liable to it. If a stockholder is not liable to any creditor, the defense should be made in the answer and not by motion to dismiss."

This holding apparently has the approval of the Circuit Court of Appeals. Reconstruction Finance Corporation v. McCormick et al., 7 Cir., 102 F.2d 305.

If the fund to be collected will be distributed to creditors as indicated in the foregoing quotation from Judge Wilkerson's opinion, then the R.F.C., does have a real interest in the collecting of Mrs. Owen's stockholder's liability. Any creditors whose claims antedate the claim of the R.F.C. might have those claims satisfied or partially paid by money collected from Mrs. Owen, and those in like situation. To that extent the R.F.C. would be directly benefited.

On the motion to dismiss, we must assume the truth of the allegations in the complaint that at the time Mrs. Owen was a stockholder, there were creditors of the Trust Company whose claims remain unpaid. If such proof is not forthcoming at the trial, of course Mrs. Owen cannot be held. But assuming the truth of such allegation, as we must upon the motion to dismiss, the defense of Mrs. Owen must be presented by answer and upon the trial upon the merits.

Motions Upon Behalf of First Wisconsin Trust Company, as Trustee

The complaint and amended complaint name the First Wisconsin Trust Company as defendant, under the designation of "trustee", three times under three separate trusts, namely, (1) co-trustee under agreement of May 9, 1932, with Inter State Post Graduate Medical Association of North America; (2) as co-trustee under agreement of June 2, 1921, known as the "Fitch Trust"; and (3) under the will of James C. Reynolds. The organization of trust company banks was provided for in Chapter 223, Wis.Stats. of 1931. Also Sec. 223.01, Wisconsin Statutes, provides that trust company banks are subject to the provisions, requirements, and liabilities of Chapter 221, Wisconsin Statutes, entitled "State Banks".

The public policy of this State with reference to the liability of stockholders of banks excluded any purpose to make executors, administrators, guardians, or trustees liable except to the extent of the funds in their hands. The 1931 Statutes contained the following provisions: "221.42 * * * But persons holding stock as executors, administrators, guardians or trustees, and persons holding stock as collateral security, shall not be personally liable as stockholders, but the assets or funds in their hands constituting the trust shall be liable to the same extent as the testator, intestate, ward or person interested in such trust fund would be, if living, or competent to act, * * *."

A trust company bank might purchase stock in its capacity as a trustee for the purpose of particular trusts, but it would have no power to purchase, for its own purposes, stock in any other State bank wherever organized. Under Wisconsin Statutes, § 223.05 it was required to keep its trust accounts separate from its own books of account. It was required at all times to keep separate from its corporate funds, the property...