Welton v. 40 East Oak St. Bldg. Corporation

• Decision Date: 17 May 1934
• Docket Number: No. 5089.,5089.
• Citation: 70 F.2d 377
• Parties: WELTON et al. v. 40 EAST OAK ST. BLDG. CORPORATION et al.
• Court: U.S. Court of Appeals — Seventh Circuit

70 F.2d 377 (1934)

WELTON et al. v. 40 EAST OAK ST. BLDG. CORPORATION et al.

No. 5089.

Circuit Court of Appeals, Seventh Circuit.

April 9, 1934.

Rehearing Denied May 17, 1934.

Harold Beacom, James H. Cartwright, and Arthur D. Welton, Jr., all of Chicago, Ill., for appellants.

Walter H. Eckert and Chilton P. Wilson, both of Chicago, Ill., for appellee receiver.

Horace A. Young, Carroll A. Teller, John R. Nicholson, and James I. Johnson, all of Chicago, Ill., for other appellees.

Before EVANS, SPARKS, and FITZ HENRY, Circuit Judges.

EVANS, Circuit Judge.

This controversy is between the corporate owner of a twenty story apartment building (appellee and its receiver and preferred stockholders' committee) and the owners of two adjoining four story apartment building (appellants).

The history of the litigation in the Federal court begins with the receivership proceedings. The Chicago Title and Trust Company's suit to foreclose a mortgage was consolidated with the receivership suit, as was the instant civil suit which sought a mandatory injunction to compel the reconstruction of appellees' large building to conform to the requirements of the zoning ordinance of the City of Chicago. The District Court denied the prayer for injunction, holding that without a showing of special damage an individual has no right to have the zoning ordinance enforced. It also held, in granting or refusing relief, that the courts should balance equities and, where the defendant has acted in good faith and the granting of the injunction will cause great loss to defendant and little benefit to plaintiff, deny injunctive relief.

Appellants' property backed upon the offending building, known as "40 East Oak Street," being separated therefrom by an alley, 16 feet wide. On March 12, 1928, application for a permit was made to the Commissioner of Buildings, which application was denied the same day. An appeal was taken on March 14 to the Zoning Board of Appeals, which held a hearing on March 20, at which appellants appeared and objected. On March 27, the Board granted the application for the permit, and it was issued the next day by the Commissioner. On April 26, appellants filed a petition in the Superior Court of Cook County for certiorari. The petition was granted, but after hearing the Superior Court quashed the writ on July 2. An appeal was taken to the Supreme Court of Illinois. That court held (344 Ill. 82, 176 N. E. 333) on October 19, 1929, that the part of section 3 of the zoning statute (Smith-Hurd Rev. St. 1927, c. 24, § 68) which gave the Zoning Board power to vary the requirements of the zoning act was unconstitutional. Petitions for rehearing were filed by appellees, and final disposition of the appeal was postponed until April, 1931. Notwithstanding the litigation, the erection of the building was begun at once and was completed December 20, 1928. All legal action by appellants was taken within the time allowed by law.

The corporate structure of the appellee building corporation included a bond issue of $1,200,000, with the Chicago Title and Trust Company as trustee of the mortgage, and six thousand shares of preferred stock of $100 par value.

The parties stipulated that the bondholders and stockholders had no actual knowledge of the alleged violation of the zoning ordinance. The court found that the building corporation acted in good faith, reasonably relying on the statute and reasonably believing that the building did not violate the state statute. It also found that the erection of that portion of the building which was in violation of the zoning ordinance did not increase the hazard of fire or insurance rates on appellees' buildings nor cause them to suffer any material diminution of light and air such as could be measured in damages. It found that the loss which would result from destruction and reconstruction of the building known as 40 East Oak Street would be $343,837.07, of which $129,587.07 was for rebuilding; that appellants did not offer any evidence of any benefit which they would receive if the illegal portion of the building were removed.

The building in question violates the act in that it does not have a one foot set back for every nine feet it rises above a height of 72 feet (Sec. 19, Par. c, of the Zoning Act). The set backs in this case should have been made on the alley side of the building.

Appellees called physicists and realty men who testified to the effect of the illegal structure on appellants' property. The physicists testified that the increase of light which would be received by appellants, if the construction of the Oak Street building complied with the legal requirements, varied from no increase at all to the highest increase of 12.9 per cent. when tested from another point. The average increase, considering the twenty points tested, was about 2.14 per cent. They also testified that air currents would be increased in volume around appellants' property because of deflection of the currents by the large building.

Several reasons are advanced in favor of the decree, any one of which, if sustained, would necessitate an affirmance. The various grounds may be briefly stated thus: (a) absence of special damage suffered by appellants; (b) appellants' laches; (c) enforcement of zoning ordinance rests with municipal authorities, not with neighborhood lot owner; (d) finding that appellees acted in good faith is supported by evidence and is invulnerable to attack on appeal; (e) a court of equity will not grant an injunction when, on balancing equities, it is found that such relief will injure one party much more than it will aid the other.

The two serious objections to the granting of relief are those which question appellants' right to maintain this suit in the (alleged) absence of any showing of special damage and the impropriety of granting relief which will result in tremendous injury to appellees with only inconsequential benefit to appellants.

We are not seriously impressed by the argument that appellants have been guilty of laches or that the findings are not subject to successful attack. It may be seriously questioned whether good faith is a matter of fact or a conclusion. It is ordinarily a question of fact, it is true, and, assuming it is one in this case, the real controversy turns upon what is meant by good faith. According to the decision of the Supreme Court of Illinois (344 Ill. 82, 176 N. E. 333), the building was constructed in defiance of Chicago's zoning ordinance. It was erected in the face of determined attack by appellants who voiced their protests before the Building Commissioner and persistently and continuously thereafter in court. It is impossible for a court or jury to correctly say that a building erected in the face of a city ordinance and in spite of litigation which sought to prevent its erection was nevertheless undertaken in good faith and so carried through. What the learned District Court meant to find was that individuals purchased stock in the company or bought its bonds without any actual knowledge of the illegal conduct of those who originated the enterprise and carried it through in the face of hostile litigation waged against the project in court and before the Building Commissioner. It is only on the theory that individual bondholders did not actually know that which was available to them had they investigated that it can be said they acted in good faith. As to the company and its officers, they acted knowingly, defiantly, and in reckless disregard of the warnings which the pending litigation effectively proclaimed.

When the application for a permit was rushed with much speed through the Building Commissioner's office, appellants protested. When their protests were overruled, they sought redress in court. In the face of this legal and other opposition those engaged in the stock and security part of the undertaking proceeded to finance the venture, promptly sold the bonds, and began the erection of the building. If there was unusual delay in the final disposition of the case brought by appellants, it was no more chargeable to the latter than to appellees. The decision of the Supreme Court, though postponed for some time, was decisive, and the rights of the parties were fixed with finality therein.

The promoters, however, had accomplished their object. The building was erected. Although erected in defiance of law, it was completed. More important to the promoters was the fact that they had sold the stock of the corporation and its bonds. Their profits had been secured, and the venture was ready for a court of bankruptcy or an equity court receivership. They defiantly and somewhat tauntingly asked their adversary "What can you do about it?"

It was to the court of equity that the company promptly proceeded, and a receiver was appointed. It thus left the child of its iniquity in the lap of that court.

The bondholders ask that the consequences of the company's misdeeds be not visited on them, because of their asserted innocence and good faith. Even the stockholders, whose interests are apparently theoretical rather than real, also disclaimed moral and legal responsibility for the company's delinquency. The trustee named in the mortgage, though possessed of actual knowledge of appellants' challenge, professes to occupy a preferred position because of its asserted innocence and good faith.

Briefly stated, our conclusion is that we reject this claim of innocence and good faith to all claiming under the company which was guilty of affirmative misconduct. The trustee had actual as well as constructive notice. The stockholders are liable for the action of the officers and directors whom they selected. The bondholders, had they investigated, would have discovered the frailty of their mortgagor's rights.

The inevitable conclusion, therefore, is that none of appellees is in a position to assert that it occupies the position of innocent party or that it...