United States v. Gridley, E-5029.

• Decision Date: 22 October 1943
• Docket Number: No. E-5029.,E-5029.
• Parties: UNITED STATES et al. v. GRIDLEY et al.
• Court: U.S. District Court — District of New Jersey

52 F. Supp. 398

UNITED STATES et al. v. GRIDLEY et al.

No. E-5029.

District Court, D. New Jersey.

October 22, 1943.

Charles M. Phillips, U. S. Atty., of Trenton, N. J., for the United States.

Evans, Bayard & Frick, by Philip H. Strubing, all of Philadelphia, Pa., for Reconstruction Finance Corporation.

Frederick M. P. Pearse, of Newark, N. J., Catesby L. Jones, of New York City, and George S. Pearse, of Newark, N. J., for Minerva Spruance Bailey.

FORMAN, District Judge.

This is a representative suit brought by plaintiffs to enforce the liabilities of certain stockholders of Central Republic Trust Company, an Illinois state bank, arising under Section 6 of Article XI of the Illinois constitution, Smith-Hurd Stats., and Section 6, Chapter 16½ of the Illinois Bank Act, Smith-Hurd Stats. The original action was commenced in the United States District Court for the Northern District of Illinois where the majority of the stockholders were residents. The defendants in this action are residents of New Jersey.

A detailed statement of facts upon which the action is based is set forth in Reconstruction Finance Corporation v. Central Republic Trust Company et al., D. C., 17 F. Supp. 263.

This is a motion for summary judgment as to the defendant, Minerva Spruance Bailey. The defendant does not dispute the liability of the stockholders of Central Republic Trust Company which has been determined by several courts.¹ The defendant sets up as an affirmative defense which is made the subject of a counterclaim that she is not obligated to the plaintiffs because the stock was not registered in her name, but in the name of Central Republic Trust Company as Trustee, and that the bank as trustee was negligent in retaining the stock in the trust at the time when the precarious position of Central Republic Trust Company was known to it. The defendant argues that she was not a stockholder, but a beneficiary of a trust, and that the creditor of the bank, the Reconstruction Finance Corporation, did not rely on defendant's liability as a stockholder when it loaned money to the bank. The defendant seeks to set off a claim against Central Republic Trust Company as Trustee in this proceeding.

The facts may be briefly stated as follows: The defendant created a trust of certain securities and real estate on January 15, 1927, with the Chicago Trust Company as Trustee, of which she was the sole beneficiary, reserving the right to revoke and to withdraw any part of the assets held in the trust estate during her lifetime. Certain shares of stock of the Chicago Trust Company were a part of the trust property. Through several consolidations the Chicago Trust Company became the Central Republic Trust Company which issued new shares of stock in place of those held in the trust to the name of "Central Republic Bank & Trust Company, Trustee U/Tr/A dated 1/15/27 Trust #1690". These shares were transferred on the books of the Central Republic Trust Company to the aforesaid name. On August 29, 1934, shortly before the main stockholders' action was commenced, the defendant exercised her power of revocation and thereafter the assets held in the trust were returned to her. The bank stock was endorsed in blank by Central Republic Trust Company.

The contention of the plaintiffs, that the sole beneficiary of a trust of the nature of the one involved here is the real or beneficial owner of stock held in the trust so as to render the beneficiary liable in a stockholders' action under the Illinois Constitution, is sound. The case of Gahagan et al. v. Whitney, 359 Ill. 419, 194 N.E. 581, 582, is in point. In that case a widow, the sole heir of her deceased husband, accepted in her individual capacity stock in the name of her husband and did not account for money which she received as dividends on the stock as part of the estate, of which she was administratrix. She was held to be personally liable in an action to enforce the liability of the stockholders of an insolvent bank. The court said: "The Constitution contemplates that the actual owner of the stock shall bear the liability arising thereon. It is not necessary to the establishment of stock liability of the actual owner of the stock that the shares be transferred on the books of the company. It is a rule recognized in this state and elsewhere that where it is sought to hold the real owner of the stock though his name does not appear upon the transfer books of the bank, the court will determine who is the real owner and decree accordingly." This case was followed in Flanagan et al. v. Madison Square State Bank et al., 302 Ill.App. 468, 24 N.E.2d 202, and has been cited with approval in several other cases.²

The defendant here is admittedly the sole beneficiary of the trust and is in actual fact the owner of the stock. By the terms of the trust agreement itself the defendant could withdraw the stock from the trust at will and divest herself of it.

The defendant argues that the plaintiff, the Reconstruction Finance Corporation, did not rely on defendant's liability as a stockholder when it loaned money to Central Republic Trust Company, since she was not registered as a stockholder of record nor did her name appear on the stock certificates. The remarks of the court in Flanagan v. First National Bank of Chicago, 307 Ill.App. 495, 30 N.E.2d 786, 789, fully answer this argument. There the plaintiffs, representing creditors of the Madison Square State Bank which closed, brought a suit to enforce the liability of the stockholders...