Wis. Trust Co. v. Cousins

• Decision Date: 16 November 1920
• Parties: WISCONSIN TRUST CO. v. COUSINS, BANKING COM'R, ET AL.
• Court: Wisconsin Supreme Court

172 Wis. 486

179 N.W. 801

WISCONSIN TRUST CO.

v.COUSINS, BANKING COM'R, ET AL.

Supreme Court of Wisconsin.

July 17, 1920.

Rehearing Denied Nov. 16, 1920.

Appeal from Circuit Court, Milwaukee County; Oscar M. Fritz, Judge.

Action by the Wisconsin Trust Company, as administrator de bonis non of the estate of Morgan P. Williams, deceased, against Marshall Cousins, Commissioner of Banking, impleaded with the Citizens' Savings & Trust Company, and Henry Johnson, State Treasurer. From so much of the judgment as was to the effect that certain items became proper charges against assets, either in the hands of the Commissioner of Banking or the State Treasurer, defendant Commissioner of Banking appeals. Judgment reversed, and case remanded for modification of the judgment.

Rehearing denied, with $25 costs.

Siebecker and Rosenberry, JJ., dissenting.

In this as well as in the following cases, the appeals present questions arising out of transactions involved in the liquidation proceedings of the Citizens' Savings & Trust Company, commenced October 2, 1913. The respective actions were brought, after filing claims and the disallowance thereof to have certain claims allowed, and when allowed to be permitted to share in the assets in the hands of the commissioner, and, as to certain of the claims, to be allowed to participate in certain securities placed by the trust company in the hands of the state treasurer. A large number of items were involved in these several actions other than those here presented. The disposition of such other items by the trial court is not questioned on these appeals.

Many of the facts in the following statement are applicable to the situations involved in the subsequent cases, and will not be there repeated. (For convenience the Citizens' Savings & Trust Company, impleaded defendant, is hereafter referred to as the trust company; the commissioner of banking, whether the former commissioner, A. E. Kuolt, or the present commissioner, Marshall Cousins, as commissioner; the Kaukauna Gas Electric Light & Power Company, as the Kaukauna Company.)

The general nature of the transactions involved in this and the other actions, and the relationship of the various parties, is shown in the following recitals:

For a long time prior to 1903 the law firm of Nathan Pereles & Sons conducted and carried on in the city of Milwaukee the business of lending and investing money for their clients. In 1903 James M. Pereles and Thomas J. Pereles were the sole members. In July, 1897, the Citizens' Loan & Trust Company was incorporated under the laws of the state of Wisconsin, with a capital stock of $100,000, by said James M. and Thomas J. Pereles. In 1903 it took over the said loaning and investment business of said Nathan Pereles & Sons, and its name was then changed to Citizens' Trust Company, and the capital stock increased to $300,000. It then deposited with the state treasurer of Wisconsin securities to the amount of $101,000, under the provisions of the then statutes relating to trust companies and trust company banks, and such securities thereafter remained in the hands of such state treasurer, substantially as so deposited, until after the liquidation proceedings were commenced.

In December, 1909, the necessary steps were taken by which such Citizens' Trust Company accepted the provisions of chapter 186 of the Laws of 1909 relating to trust company banks, and thereafter remained under the provisions of said law. December 1, 1911, the name was changed to Citizens' Savings & Trust Company.

On October 2, 1913, said trust company was declared to be insolvent, and was taken possession of by A. E. Kuolt, then state banking commissioner, and remained in his possession as such until December, 1918, when he was succeeded, as such commissioner, by the defendant and appellant Marshall Cousins, who since such time has continued such possession and control.

Shortly after October 2, 1913, due notice was given by the then commissioner to all persons who might have claims against said trust company so that due proof thereof might be made. The time fixed for filing and presenting such claims terminated February 26, 1914.

Pursuant to order of the circuit court for Milwaukee county a dividend of 25 per cent. on the claims then presented and allowed was made in April, 1914, and a further dividend of 20 per cent. in the same manner on or about September, 1918. Certain of the claims presented and filed with the commissioner were by him rejected and disallowed. Thereafter and in apparent compliance with section 2022, subd. 5, these actions were begun in the circuit court by certain of such claimants. The general facts as to certain particular transactions follow:

Edward Zohrlaut Loan.

June 19, 1899, the trust company made a loan to one Edward Zohrlaut, of Milwaukee, known on its records thereafter as loan No. 371, for $100,000, taking Zohrlaut's promissory note, with a pledge of 1,930 shares of the stock of the Herman Zohrlaut Leather Company. At the same time Edward Zohrlaut gave to his father another note for $100,000, secured by other shares of stock in the same corporation. Edward Zohrlaut at such time had substantially no other property than such stock, and it was wholly inadequate security for the loan by the trust company. This note was renewed from time to time by the giving of new notes until August 2, 1909, and the last of such renewal notes was surrendered and marked on the loan register of the trust company, “Canceled by new note Nos. 3706 and 3707 August 2/ 09.” A new record was then made in the loan register; one of loan No. 3706 by the Zohrlaut promissory note for $25,000, secured by a mortgage on his homestead; another as loan No. 3707, covering two notes, one of $25,000 and the other of $50,000--thus making by the three notes the $100,000 of the original transaction. These two notes, thus aggregating $75,000, were secured by the pledge of the same 1,930 shares of the stock of the leather company, which had been pledged in the first transaction. There was no material change in Edward Zohrlaut's financial condition between 1899 and August 2, 1909.

No payments were made on the principal of these three notes, but interest was paid on them until May 1, 1913. The Edward Zohrlaut Leather Company and Edward Zohrlaut were, in March, 1914, adjudicated bankrupts, and no substantial payments, if any, were made to their respective creditors.

Kaukauna Gas Electric Light & Power Company Transaction.

Some features of this transaction were presented and disposed of in the case of Connell v. Kaukauna, 164 Wis. 471, 159 N. W. 927, 160 N. W. 1035, Ann. Cas. 1918A, 247.

April 10, 1906, the Kaukauna Gas Electric Light & Power Company, a Wisconsin corporation (on whose board of directors was one of the Pereles, then and thereafter a principal officer and director of the trust company), obtained a loan from the trust company of $75,000, and issued a series of bonds, secured by a trust deed upon its plant and property. The trust company was named, and acted as trustee for the holders of such bonds, and distributed them among its clients in similar manner to that above recited. The value of the plant and property did not, at that time, exceed $50,000, as was known to such officers of the two companies, and it was not adequate security for the $75,000 issue of bonds, which were thus parceled out by the trust company.

Subsequently the city of Kaukauna in appropriate proceedings obtained control and ownership of the public utility and property of the Kaukauna Company, and as consideration therefor paid to the trust company, July 11, 1912, the sum of $45,294.40 on account of the then outstanding bonds of the Kaukauna Company. Instead of applying such amount in proportionate payments to its clients then holding such outstanding bonds or interest in the original investment of $75,000, the trust company converted such payment to its own use.

Clark Realty Loan.

March 1, 1905, the trust company loaned $150,000 to the Clark Realty Company, and took as security therefor a mortgage, conveying about 17 parcels of real estate, but the value of which did not exceed $120,000. The trust company in the exercise of ordinarycare should have known, at such time and continuously thereafter, that such security was inadequate for the $150,000 loan, and the trust company was negligent in its investing of funds of its clients in such loan. Interest appears to have been paid up to May, 1913. The mortgage has been foreclosed, and the Clark Realty Company has been adjudicated a bankrupt, with no assets available for any deficiency judgment. The loss to those whose moneys were invested in this particular loan will be about 35 per cent. of the principal.

The method pursued by the trust company with reference to these particular transactions and many of the others involved was to make the entries upon its loan register of the names of the respective clients whose moneys were invested in such respective loans, and corresponding entries were made in passbooks issued to such clients, and in which the accounts were continued as to such transactions and of the interest paid thereon; such entries in the passbooks customarily being made semiannually, in some of the loans a form of so-called participating certificates were given by the trust company.

Particular Items Involved in the Appeal in This Action.

First. In the Zohrlaut Loan. The trust company invested during Williams' lifetime, on June 19, 1899, $4,000 in the original Edward Zohrlaut loan No. 371, and on May 1, 1905, $3,000 in the same, these two items being carried on the loan register and passbook as part of the original loan No. 371. (These two items were disallowed by the trial court as being barred by the statute of limitations.) The trial court did, however, allow the total of these two items, on the ground that there was an improper reinvestment of the total thereof by the transaction as to the...