Appendix — First National Bank & Trust Co. in Alton v. Berke
Supreme Court brief1978
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IN THE
SUPREME COURT OF THE UNITED STATES
OGTOBER TERM, 1977
MEY 4 1620
FIRST NATIONAL BANK AND TRUST COMPANY IN ALTON,
Executor of the Estate of Joseph £. Knight,
Petitioner,
VS.
SAMUEL BERKE, Receiver of City Savings Association,
Respondent.
APPENDIX SUPPORTING PETITION FOR WRIT OF
CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE SEVENTH CIRCUIT
J. F. SCHLAFLY
P. 0. Box 190
Alton, Illinois 62002
(618) 465-7733
RAYMOND F. McNALLY, JR.
611 Olive Street
St. Louis, Missouri 63101
(314) 621-1614
EDWARD S. MACIE
111 West Washington Street
Chicago, Wlinois 60603
(312) 372-6242
Attorneys for Petitioner
St. Louis Law Printing Co., Inc., 812 Olive Street 63101 314-231-4477
ee eee ee es
INDEX TO APPENDIX
Page
App. A., Opinion of Court of Appeals, dated January 23,
ED cio dd. scaled au oe bake ene OS Meee hee eanods A-l
App. B., Memorandum and order of District Court, dated
Agel 14, 1907S 2.2... cece cece esse scecccnececes A-14
App. C., Memorandum and order of District Court, dated
a.) Sere A-57
App. D., Judgment of District Court, dated December 20,
RR eee rrr rere ere rer A-65
App. E., Memorandum and order of District Court, dated
ae ee rr Tr A-67
App. F., Judgment of Court of Appeals, dated January 23,
ER Pe NY ee ee es ee. te A-70
App. G., Order of Court of Appeals denying petition for re-
hearing, dated February 24, 1978 ..........-..--.- A-72
App. H., Excerpts from Illinois Savings and Loan Act ... .A-74
App. I, Counts I and II of Receivers’ First Amended
oe PPP PETT TTT TTT T TTT Tee ee A-87
App. J., Answer of Estate to Counts I and II of Receivers’
First Amended Cross-Complaint ..............---. A-93
App. K., Rule 9 (b), Federal Rules of Civil Procedure ... .A-96
App. L., Excerpts from Illinois Financial Institutions Code A-97
>_<
APPENDIX A
In the
United States Court of Appeals
for the Seventh Circuit
No. 77-1582
Alexander Tcherepnin, et al.,
Plaintiffs,
Vv.
Robert Franz, et al.,
Defendants.
Samuel Berke, Receiver of City Savings Association,
Cross-Plaintiff, Appellee,
Vv.
First National Bank and Trust Company in Alton, Executor of
the Estate of Joseph E. Knight,
Cross-Defendant, Appellant.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division
No. 64 C 1285—Edwin A. Robson, Judge
Argued October 26, 1977—Decided January 23, 1978
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 consideraticn of the
appellant’s arguments, however, we must first review the factual
and statutory background of the proceedings below.
I. Background
Because the history o: this affair is fully set forth in the lower
court’s opinion, Tcherepnin v. Franz, 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 joans
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.' These inflated mortgage loans,
together with several other illegal acts of mismanagement,? 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 con-
ducted by Peat, Marwick, Mitchell & Co. revealed the full ex-
tent 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 vol-
untary 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 as-
sociation’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 of-
ficials, the voluntary liquidators and others had violated the Se-
curities Exchange Act of 1934.* When the plaintiffs subse-
quently moved for the appointment of a receiver, Judge Camp-
! n City Savings was closed on June 30, 1964, the outstand-
ing hwy. id balance of the Apple Orchard loans was $14,827,-
415.20 the outstanding net uupaid balance of thc Howie-in-the-
Hills loans was $5,675,047.14. Tcherepnin v. Franz, 316 F. .
714, 718 (N.D. Tl. 1970). A subsequent appraisal indicated that
the true value of the subdivision properties was $6,391 ,751.31.
2 See discussion infra at (A. 8-10).
* On December 18, 1967, the Supreme Cou: held that the piain-
tiffs’ withdrawable shares were “securities” within the meaning of the
Securities Act of 1934, 15 U.S.C. § 78(a) et seq. Tcherep-
nin v. Knight, 389 U.S. 332 (1967).
* +
Sat ee
= A-§ ...
bell, finding the state-supervised plan of veluntary liquidation
to be “tainted with fraud from its inception,” entered an order
terminating the liquidation and appointing two receivers for the
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 re-
ceivers entered into settlement negotiations which culminated
in the legislative appropriation of $12,467,500 for the reim-
bursement 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, alter-
natively, negligently breached certain ministerial duties in con-
nection 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 De-
partment of Financial Institutions by the Illinois Savings and
Loan Act, Ill. Rev. Stat. ch. 32, §§ 701-944 (1963). In es-
sence, 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
_—* a
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 busi-
ness 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 Depart-
ment of Financial Institutions a statemen’ of its financial con-
dition 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 associa-
tion’s capital is seriously impaired, or its business is being con-
ducted in a “fraudulent, illegal, or unsafe manner.”
In sum, then, the comprehensive powers granted to the Di-
rector of the Department of Financial Institutions are all de-
signed 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.
Ill. 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 endors-
ing 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.
— A-§6 —
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 of-
ficial’s negligent conduct in the performance of ministerial duties
Or malicious and corrupt conduct in the performance of dis-
cretionary 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 liabil-
ity if, as the court also found, he negligently breached certain
ministerial duties in permitting the adoption of the plan of volun-
tary liquidation.
In this connection, however, the Estote makes two additional
claims: first, that Knight's Statutory duties were owed only to the
public-at-large—that is, to the State of Ilinois—and not to the
depositors of City Savings; and second, that Count I of the re-
ceivers’ complaint did not allege Knight's conduct to be “mali-
cious” 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 mak-
ing repeated references to the “protection of the Association”
in defining the duties of the Director,‘ indicates that the Associa-
tion—and, more specifically, its depositors—have a vested right
in the duties therein prescribed. See Mills v. American Surety
Co. of New York, 26 Idaho 652, 145 P. 1097 (1914).
* See e.g., Ill. Rev. Stat. ch. 32, §§ 747, 848 (1963).
—< =
Nor can we agree that Count I of the receivers’ complaint
charged Knight with mere negligence in the performance of dis-
cretionary duties. The complaint, it is true, did not specifically
characterize Knight's conduct as “malicious” or “corrupt.” But
this can be of no significance if the allegations necessarily entail
malicious conduct, that is, the wanton and deliberate commis-
sion of a wrongful act.” See State v. Dixon, 80 Kan. 650, 103
P. 130 (1909). Such is the case here, for to allege, as the plain-
tiffs did, that Knight intentionally ignored or concealed examina-
tions indicating that City Savings was not conducting its business
in accordance with the Illinois Savings and Loan Act is neces-
sarily to claim that Knight willfully and wantonly—in short,
“maliciously’—breached his official duty to supervise the af-
fairs of that institution. Thus, it is our conclusion that Joseph
Knight, as Director of the Department of Financial Institutions
for the State of Illinois, owed a statutory duty to the depositors
of City Savings; that the intentional breach of that duty would
constitute a malicious act; and that such malicious conduct would
override his qualified immunity as a public official.
The central question posed by Count I, then, is whether the
district court was correct in finding that the evidence could sup-
port but one conclusion, namely, that Joseph Knight did in fact
maliciously disregard his statutory duty to supervise the affairs of
City Savings. On this point, the Estate argues that Knight's con-
duct prior to taking custody of City Savings was reasonable in
light of the written reports that were available to him on City
Savings’ financial condition. In particular, the Estate emphasizes
that the examinations of three independent auditors conducted
in late 1963 and early 1964 all showed City Savings to be
solvent. And, according to the Estate, it was not until June
5 For definitions of “malice,” see Fromm v. Seylier, 245 Ill. App.
392 (2d Dist. 1927); Kaplan v. Williams, 245 Il. App. 542 (ist
Dist. 1927); Smith v. Moran, 43 Ill. App. 2d 373, 193 N.E.2d 466
(2d Dist. 1967).
_—
1964, shortly before Knight took custody of City Savings, that
he received @ written report (the Peat, Marwick audit) indicating
the capital impairment of more than $14,000,000.
This argument, however, proceeds on the assumption that the
auditors’ reports of solvency, all of which accepted as true the
grossly inflated book values of Property owned by City Savings
somehow neutralized the mounting evidence of massive irrege-
larities, which, according to the undisputed testimony of state
Officials including Knight himself, came to the Director from
other sources. Perhaps most important in this regard were the
reports of Justin Hulman, an advisor to Knight, who in late 1963
and early 1964 investigated several financially troubled savings
and loan institutions. According to his own testimony, Knight
asked Hulman to examine the records of City Savings on file
with the Department of Financial Institutions after learning of its
financial straits in late 1963. In the course of his investigation,
Hulman uncovered evidence strongly suggesting that City Sav-
ings had made inflated mortgage loans on overvalued property in
the Apple Orchard and Howie-in-the-Hills projects. He also dis-
covered that City Savings had recorded as “income” commis-
sions on refinanced loans that were in fact never collected; that
City Savings had listed among its assets $779,000 in promotional
expenses which, if accorded proper accounting treatment, would
have left the association without sufficient funds to cover even a
minor loss; that City Savings had incurred excessive expenses in
maintaining its accounts; and that City Savings’ contingent
reserves were low. These findings, together with Hulman’s con-
clusion that City Savings was “in trouble,” all were reported
to Knight in January 1964.
They did not stand alone, however, for there were other facts
at hand in January 1964 that should have alerted Knight to the
need for immediate action, and all the more so after Hulman’s
dire report. Knight admitted, for example, that he knew in 1963
——.
that City Savings’ contingent reserves were less than the statutory
minimum of 7% percent.* He also learned in 1963, again by
his own admission, that most of City Savings’ loans were made
to corporations having the same group of individuals as officers
and directors—entities that were controlled, as it turned out, by
Mensik and his brother-in-law, both of whom were officers of
City Savings.? In addition, Knight was well aware that City
Savings had been closed by the State of Illinois in 1957, that it
had been unable to secure insurance from the Federal Savings
and Loan Insurance Corporation, and that any losses it suf-
fered would therefore fali directly on the depositors. Finally,
Knight knew, too, that Mensik had been convicted of mail fraud
in Maryland in November 1963.
And yet, despite all this—the inability to obtain insurance,
the evidence of excessive loans on overvalued property, the re-
ports of improper accounting methods and dangerously low
reserves, the troubled history of both Mensik and City Savings
—despite all this and more, Knight failed to take any corrective
action until June 26, 1964.* This failure to act decisively in
6 As the district court noted, even though Knight knew in 1963
and 1964 that the contingent reserves of City Savings were less than
the statutory minimum of 7/4 percent, he permitted the association
to declare a dividend in December 1963 in clear violation of Section
780(b)(1) of the Illinois Savings and Loan Act.
7 This, too, was in violation of the [Illinois Savings and Loan Act,
as the lower court noted. Section 801 prohibits loans by an associa-
tion “to any corporation of which a majority of the stock is owned or
controlled . . . by any one or more of the directors [or] officers
_ . Of such association.”
In this connection, it is also significant that the annual statements
of City Savings filed with the of Financial institutions and the associ-
ation’s books and records revealed that more than eighty percent of
its mortgage loans were “secured” by property in the Apple Orchard
and Howie-in-the-Hills developments alone in 1963.
S The first action of any kind that Knight took came on April 30,
1964—four months after learning of the overvalued loans and other
irregularities—when he requested the Peat, Marwick audit.
— A-10 —
the face of mounting evidence of Statutory violations and finan-
cial mismanagement can only be characterized as a willful
breach of Knight's official duties as Director of the Department
of Financial Institutions. Thus, on the basis of these facts, none
of which are in dispute, we must agree with the district court
that Knight maliciously breached his statutory duty to supervise
the affairs of City Savings, and that his Estate is therefore liable
to the depositors for all losses resulting therefrom.
IV. Count II
The district court also held the Estate liable for Knight's
role in the adoption of the so-called plan of voluntary liquida-
tion in July 1964. Under this plan, Knight relinquished control
of City Savings’ assets to three voluntary liquidators—one nom-
inated by Mensik and the other two by the State of Illinois—on
September 11, 1964. The voluntary liquidation thus left City
Savings with no judicial supervision from June 26, 1964 until
September 7, 1968, when Judge Campbell terminated the lig-
uidation and appointed federal receivers.
The lower court concluded that Knight could be found liable
for permitting the adoption of the plan under either of two
theories: (1) fraud or (2) the breach of ministerial duties. On
the first theory, the Estate argues that Count II of the receivers’
complaint did not allege Knight’s conduct to be fraudulent and
thus violated Rule 9(b) of the Federal Rules of Civil Pro-
cedure. We need not decide this question, however, for we find
ample grounds to affirm Summary judgment on Count II in what
the lower court termed the “statutory violation theory.”
At issue here are the duties imposed on the Director of the
Department of Financial Institutions by Sections 921 and 922
of the Illinois Savings and Loan Act, III. Rev. Stat. ch. 32, §§
921-922 (1963). Section 921 provides:
— A-ll —
If the Director, after taking custody of an association
. . . finds that any one or more of the reasons for taking
custody continues to exist through the period of his custody,
then he shall appoint any qualified person, firm or corpora-
tion as receiver or co-receiver of such association or trust
for the purpose of liquidation.
Section 922 provides:
After so appointing a receiver, the Director of the De-
partment of Financial Institutions] shall direct the Attorney
General to file a complaint in equity in the name of the
Director in the circuit or superior court of the county in
which such association or trust is located and against the
association or trustees or liquidators, as the case may be,
for the orderly liquidation and dissolution of the associa-
tion or trust and for an injunction restraining the officers,
directors, trustees, or liquidators, from continuing the op-
eration of the association or trust.
If these duties can be properly characterized as “ministerial,”
and if Knight did in fact breach them in permitting the adoption
of the voluntary liquidation plan, then the Estate is liable for
any injuries to the depositors caused by Knight's negligent con-
duct.* People ex rel. Munson v. Bartels, 138 Ill. 322, 27 N.E.
1091 (1891); Thiele v. Kennedy, 18 Ill. App. 3d 465, 309
N.E.2d 394 (3d Dist. 1974).
It is clear to us that the duties prescribed by Sections 921
and 922 are indeed “ministerial” as the Illinois Supreme Court
has defined that term:
* As discussed supra at (A. 6), Knight's statutory duties were
owed to the depositors of City Savings.
— A-12 —
Official duty is ministerial when it is absolute, certain and
imperative, involving merely the execution of a set task,
and when the law which imposes it prescribes and defines
the time, mode, and occasion of its performance with such
certainty that nothing remains for judgment or discretion.
People ex rel. Munson v. Bartels, supra at 328. Section 921]
States that if the Director finds that “any one or more of the
reasons for taking custody continues to exist through the period
of his custody,” he “shall appoint any qualified person, firm or
corporation as receiver.” Similarly, Section 922 states that after
appointing a receiver, the Director “shall direct the Attorney
General” first to file a complaint in equity against the association
to insure an orderly dissolution, and second to seek an injunction
restraining the officers and directors of the association from
continuing operations. Clearly, then, Sections 921 and 922 call
for the execution of set tasks and define the “time, mode and
occasion of [their] performance with such certainty that nothing
remains for judgment or discretion.” People ex rel. Munson vy.
Bartels, supra at 328.
It is equally apparent that Knight breached the ministerial
obligations of Sections 921 and 922. By his own admission,
none of the conditions that finally compelled him to take cus-
tody of City Savings on June 26, 1964 were cured when he
relinquished control of the association on September 11, 1964.
But in disregard of Sections 921] and 922, Knight failed to (1)
appoint a receiver for City Savings, (2) direct the Attorney
General to file a complaint against City Savings, or (3) direct
the Attorney General to seek an injunction restraining the of-
ficers and directors of City Savings from continuing operations.
This failure of a public official to perform acts required by
Statute constitutes an actionable breach of a ministerial duty.
See People ex rel. Pope County v. Shelter, 318 Ill. App. 279, 47
N.E.2d 732 (4th Dist. 1943). Thus, we agree with the district
court that the Estate is liable to the depositors of City Savings
— A-13 —
for all damages resulting from Knight's acquiescence in the adop-
tion and implementation of the voluntary liquidation plan.
We have examined the Estate’s other arguments and find
them to be without merit. The judgment of the district court is
therefore
Affirmed.
— A-14 —
APPENDIX B
United States District Court
Northern District of Illinois
Eastern Division
Alexander Tcherepnin, et al., .
Plaintiffs,
vs.
‘ No. 64 C 1285
Robert Franz, et al.,
Defendants. :
MEMORANDUM AND ORDER
(Dated April 14, 1975)
This matter comes before the court on the motion of cross-
plaintiff City Savings Association (City Savings), by its re-
ceiver Samuel Berke, and pursuant to Rule 56 of the Federal
Rules of Civil Procedure for entry of summary judgment on
Counts I, 1 and ii} of its Amended First Cross-Complaint
against cross-defendant First National Bank & Trust Company
of Alton, Illinois, executor of the estate of Joseph E. Knight
(Estate of Knight). In addition, the Estate of Knight has moved
to dismiss Counts I, II and III of the Amended First Cross-
Complaint. Cross-defendant Justin Hulman has joined in the
motion to dismiss and has adopted the Estate of Knight's memo-
randum in support thereof. For the reasons set forth below, the
motions to dismiss shall be denied and the receiver's motion for
summary judgment shall be granted as to Counts I and IT and
denied as to Count III.
This complex and protracted litigation involves the events
surrounding the collapse of City Savings Association, a savings
and loan association chartered by the State of Illinois and pres-
— A-15 —
ently under the control of federal receivers. The history of City
Savings and its mentor, C. Oran Mensik, is a chronicle of po-
litical intrigue and corruption perhaps unmatched in [Illinois
history. It is replete with examples of official misconduct and
chicanery and permeated with a blatant disregard by both state
and City Savings officials for the rights of the unfortunate de-
positors. The result of these defalcations was a massive fraud
which milked the depositors of nearly $23,000,000.
To fully comprehend the allegations made in the Amended
First Cross-Complaint, the history of City Savings and of this
litigation must first be reviewed in some detail.
Events prior to the Commencement of This Litigation
City Savings Association was founded in 1908 in Chicago,
Illinois. It issued to its depositors withdrawable capital shares,
as authorized by the Illinois Savings and Loan Act, Ill.Rev.
Stat. 1963, ch. 32, §§ 701-944. City Savings was located in
and serviced an area known as the Chicago-Ashland business
district, a focal point for various Chicago ethnic groups. The
Failure of the City Savings Association a report to the Illinois
General Assembly, Illinois Legislative Investigating Commission,
January, 1972 (hereinafter referred to as Legislative Report),
p. 1.
In 1942, C. Oran Mensik, the principal manipulator of this
fraud, first became associated with City Savings. Mensik’s
emergence as president and director of City Savings, six months
later, marked the beginning of an astounding period of economic
growth. When Mensik joined City Savings there were 348
shareholders and $147,000 in assets. By 1952, the reported as-
sets of City Savings had reached $12,000,000 and in the next
five years this figure climbed to over $35,000,000. Mensik re-
mained in control of City Savings until at least 1964. Legisla-
tive Report, p. 1.
— A-16 —
On July 18, 1956, the Auditor of Public Accounts for the
State of Illinois, the public official then charged with the super-
vision of state-chartered savings and loan associations, ordered
state examiners to conduct an examination of the books and
records of City Savings. Subsequent examinations were made
in October 1956 and February 1957. The last examination re-
port was sent to the management of City Savings on April 16,
1957, and was accompanied by a letter from the Auditor outlin-
ing the State's criticisms and recommendations. On April 23,
these examinations were released to the press. The resulting
publicity caused a run on City Savings. On April 25, 1957, the
Auditor declared an “emergency,” took custody of City Savings
and closed its doors to the public. Ill.Rev.Stat. 1955, ch. 32,
§ 848; Legislative Report, pp. 3-8.
The examination findings upon which the Auditor relied re-
vealed: that the capital of City Savings was severely impaired;
that certain favored companies staffed and operated by Men-
sik’s associates and relatives had received a disproportionate
amount of mortgage loans; that properties securing mortgage
loans were greatly Overappraised; and that Mensik was involved
in two other guarantee associations which were both in financial
Straits. Legislative Report, p. 7.
In response, Mensik filed suit in the Circuit Court of Cook
County charging that the Auditor and five of his associates were
engaged in a conspiracy to “steal” Mensik’s associations from
him. The matter was referred to Nathan M. Cohen as Master
in Chancery. After an extensive hearing, the Master concluded
that the responsibility for the emergency was chargeable to the
Auditor because of his untimely release of the confidential report
and that the state seizure was therefore illegal. On December 6,
1957, Judge Cornelius Harrington adopted the Master's find-
ings and ordered that control of City Savings be returned to
Mensik. This decision was ultimately affirmed by the Supreme
Court of Illinois in 1960. Mensik v. Smith, 18 I11.2d 572, 166
N.E.2d 265 (1960).
— A-17 —
Judge Harrington, however, also found that some of the criti-
cisms registered by the Auditor were valid and retained super-
visory jurisdiction over City Savings to oversee the implementa-
tion of certain suggested remedial measures. One of these sug-
gestions was the institution of a system of limited and restricted
withdrawals pursuant to Section 773(b) of the Illinois Savings
and Loan Act, Ill.Rev.Stat. 1963, ch. 32, § 773(b). Legislative
Report, pp. 8-11.
On December 19, 1957, City Savings was reopened to the
public. On February 3, 1959, Judge Harrington determined
that the conditions which the court directed to be remedied had
been in fact corrected and terminated all judicial supervision of
City Savings. Legislative Report, p. 11.
The rapid growth experienced by City Savings prior to its
1957 closing declined sharply due both to the damaging pub-
licity it had received and to its decision to operate under the
provisions of Section 773(b). Legislative Report, p. 14.
On July 9, 1959, the Illinois General Assembly enacted Sec-
tion 773(h) of the Illinois Savings and Loan Act. IIl.Rev.Stat.
1959, ch. 32, § 773(h). It provided:
(h) An association while operating under this Section
may accept additional withdrawable capital from its pres-
ent shareholders as well as accept new withdrawable capital
accounts and such withdrawable accounts shall not be sub-
ject to the provisions of subsection (b) of this Section but
shall be subject to withdrawal at will so long as the associa-
tion is operating under the provisions of subsection (b) of
this Section. '
' The Legislative Re concluded that there was “no satisfactory
exptunation Tar its aon 773(h)] resurrection at precisely the
time it became vital to Mensik’s operations, for there was no other
savings and loan in the State of Illinois which stood to benefit from
its re-enactment.” Legislative Report, p. 13.
— A-18 —
Mensik seized the unique advantages offered by this new
law and embarked on an extensive advertising campaign, offer-
ing expensive prizes such as television sets and radios to new
depositors. He also blazoned the maxim “Under State Govern-
ment Supervision” on his letterheads and circulars. Legislative
Report, p. 14.
; In January 1964, the State Department of Financial Institu-
tions, to whom supervisory authority over state-chartered sav-
ings and loan associations had been transferred, began an exami-
nation of the affairs of City Savings. The examination included
an audit by Peat, Marwick, Mitchell & Co., independent public
accountants, whose report dated June 15, 1964, showed a capital
impairment of approximately $14,000,000. Tcherepnin vy.
Franz, 316 F. Supp. 714 (N.D.Ill. 1970). On June 26, 1964,
the State of Illinois took custody of City Savings and on June
30, 1964, City Savings was closed to the public. Legislative
Report, pp. 14-17.
On July 28, 1964, a meeting of the depositors of City Savings
was held at which a plan of voluntary liquidation, agreed upon
between Mensik and the State of Illinois, was put forward and
approved by the depositors. Pursuant to the plan, three volun-
tary liquidators were appointed, one nominated by Mensik and
= two by the State of Illinois. Legislative Report, pp.
The Federal Litigation
On July 24, 1964, four days prior to the depositors’ meeting
called to solicit approval of the plan of voluntary liquidation
the plaintiffs’ complaint was filed by Alexander Tcherepnin and
certain other holders of withdrawable capital shares of City
Savings. Their complaint named Joseph E. Knight, then Di-
rector of the Department of Financial Institutions of the State
— A-19 —
of Illinois; Justin Hulman, then Supervisor of the Savings and
Loan Division of the Department; certain officers and directors
of City Savings; and Louis Kwasman, Harry Hartman and Den-
nis Kirby, the voluntary liquidators of City Savings, as parties
defendant. Defendants Hartman and Kirby were savings and
loan examiners and employees of the Department of Financial
Institutions; Kwasman was a business associate and nominee of
Mensik.
Plaintiffs alleged in their complaint that their withdrawable
capital shares in City Savings were securities within the purview
of the Securities Exchange Act of 1934, 15 U.S.C. § 78(a),
et seq., and were purchased in reliance upon false and misleading
solicitations made in violation of that act. The plaintiffs sought
rescission of their purchases and recovery of their investment.
No wrongdoing was alleged by, and no relief was sought
against, the named state officials or the State of [ilinois. None-
theless, on November 20, 1964, the Attorney General of the
State of Illinois moved to strike and dismiss the complaint.
On January 17, 1966, Judge Campbell, before whom the
matter was then pending,’ denied all motions to dismiss plaintiffs’
complaint and held that plaintiffs owned “securities” as defined
by federal law, and certified his ruling for an interlocutory ap-
peal. Tcherepnin v. Franz, 277 F. Supp. 472 (N.D.Ill. 1966).
On January 20, 1967, the United States Court of Appeals for
the Seventh Circuit reversed Judge Campbell’s order and, with
one Judge dissenting, held that the plaintiffs were not in fact
holders of “securities.” Tcherepnin v. Knight, 371 F. 2d 374
(7th Cir. 1967).
* This case was originally assigned to the late Judge Michael Igoe.
The matter was reassigned to then Chief Judge William J. Campbell
in 1965. After extensive proceedings before Judge Campbell and
his taking senior status on August 29, 1972, the Executive Committee
of this court reassigned this case to myself.
— A-20 —
On December 18, 1967. the United States Supreme Court
reversed the order of the court of appeals and held that plain-
tiffs’ withdrawable capital shares were “securities” within the
meaning of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78 (a), ef seq. Tcherepnin v. Knight, 389 US. 332 (1967).
The matter was remanded to this court for further proceedings.
On February 9, 1966, the plaintiffs first moved for the ap-
pointment of a receiver to replace the state-supervised voluntary
liquidators. Judge Campbell denied this motion but indicated
that he would reconsider his decision after appellate review of
his order sustaining plaintiffs’ complaint. Tcherepnin v. Franz,
277 F. Supp. 472 (N.D.II. 1966).
On May 29, 1968, upon remand from the Supreme Court,
plaintiffs renewed their motion for the appointment of a receiver.
From August 19, 1968, to August 23, 1968, a full hearirg on
the motion was held.
On September 7, 1968, Judge Campbell entered an order ap-
pointing Leonard B. Ettelson and William J. Friedman receivers
of City Savings.* In this order Judge Campbell found that the
state-supervised plan of voluntary liquidation was:
- . . tainted with fraud. . . . No reasonable person could
have concluded, and I specifically find that Justin Hulman
did not believe on June 15, 1964, that the liquidation of
City Savings Association . _ . could ever result in any-
thing but an enormous loss to the depositors. Nevertheless
the State, while in custody of City Savings Association, al-
lowed C. Oran Mensik . . . to’call a meeting of the share-
holders {fraudulently} soliciting proxies... . Commissioner
—_.
Hulman was aware of these misrepresentations before, dur-
ing and after the fact and at no time did he prevent or cor-
rect these lies although he had the power and duty to do
SO... . )
I find and conclude that the representations made to the
shareholders of City Savings Association were false, mis-
leading and deceptive. . . . I therefore hold the voluntary
liquidation is void because it was tainted with fraud from
its inception.
Order of September 7, 1968.
This order was subsequently appealed and affirmed. Tcherepnin
v. Kirby, 416 F.2d 594 (7th Cir. 1968).
On October 10, 1968, Judge Campbell entered an order tenta-
tively delineating two classes of depositors—the plaintiffs con-
sisting of post-July 9, 1959 depositors and the intervening de-
fendants consisting of pre-July 9, 1959 depositors. On March
10, 1970, Judge Campbell held that the plaintiffs were entitled
to a preference in the distribution of the assets of City Savings.
This order was affirmed on appeal. Tcherepnin v. Franz, 461
F.2d 544 (7th Cir. 1972).
Thereafter, in November 1974, the plaintiffs, intervening de-
fendants and the receiver entered into a settlement agreement
whereby the plaintiffs were dismissed from the case and any fur-
ther recovery of assets would run to the benefit of the interven-
ing defendants. The plaintiffs had recovered approximately 100
per cent of their investment in City Savings.
On August 6, 1970, Judge Campbell entered an order impos-
ing a constructive trust on certain property located in the Chi-
cago-land area for the benefit of City Savings and its depositors.
Tcherepnin v. Franz, 316 F. Supp. 714 (1970). That order was
also affirmed on appeal. Tcherepnin v. Franz, 485 F.2d 1251
(7th Cir. 1973).
— A-22 —
On January 15, 1969, the receivers filed their First Cross-
Complaint, naming Joseph E. Knight, Justin Hulman and Dennis
Kirby as cross-defendants. On September 23, 1969, the re-
ceivers amended the cross-complaint to name Chris Stolfa, former
Supervisor of Savings and Loan Associations of the State of
Illinois, Louis Kwasman, Harry Hartman, William DeWoskin,
Richard Ray and Steven J. Kadlicek, voluntary liquidators of
City Savings, as additional cross-defendants. Cross-defendants
Hartman and Kadlicek were also employees of the Department
of Financial Institutions for the State of Illinois.
The cross-complaint was again amended to add the State of
Illinois and Fidelity and Deposit Company of Maryland as addi-
tional cross-defendants. Fidelity and Deposit Company was the
surety for the individual cross-defendants.
The gravamen of the Amended First Cross-Complaint is that
the named officers and employees of the State of Illinois and the
other voluntary liquidators breached their Statutory duties to City
Savings, thereby rendering themselves, the State of Illinois and
their surety liable for damages to the depositors of City Savings.
On April 6,1972, the State of Illinois moved to dismiss the
Amended First Cross-Complaint and for summary judgment.
The receivers filed a cross-motion for summary judgment. In
a memorandum entered March 12, 1973, this court, with myself
presiding, denied the State’s motions and granted the receiver’s
cross-motion for summary judgment against the State of Illinois.
In that memorandum, it was specifically found that, “The willful
failure of the State through its Officials, agents and employees
to adequately supervise City Savings. . . was. . . willful and
wanton negligence” and that the State was liable to the deposi-
tors of City Savings for the damages they incurred as a result
of the collapse of that institution. Memorandum, Findings of
Fact, Conclusions of Law and Decree entered March 12, 1973,
p. 28.
— A-23 —
Subsequently, the State and the receivers entered into settle-
ment negotiations. On September 10, 1973, the Governor signed
into law a bill passed by the 78th General Assembly appropri-
ating $12,467,500 for the reimbursement of the depositors of
City Savings.
On October 9, 1973, this court entered an agreed order ap-
proving a settlement between City Savings and the State of Mli-
nois and ordering that the State be dismissed with prejudice as a
cross-defendant.
On June 25, 1973, the Estate of Knight filed a motion to
dismiss Counts I, II and III of the Amended First Cross-Com-
plaint.
On November 5, 1973, the receiver filed a motion for sum-
mary judgment against cross-defendants Justin Hulman, Chris
Stolfa, Louis Kwasman, Harry Hartman, Dennis Kirby, William
DeWoskin, Richard Ray, Steven J. Kadlicek and the Estate of
Knight, and on February 25, 1974, the receiver filed a motion
for summary judgment against cross-defendant Fidelity and
Deposit Company of Maryland. Although these motions were
initialiy consolidated for briefing, pursuant to the recuest of the
receiver, the motion for summary judgment against the Estate
of Knight was placed on an accelerated briefing schedule and is
the subject of this memorandum. The Estate of Knight is a
named cross-defendant in the first three counts of the First
Amended Cross-Complaint. These counts deal with events in
chronological order and will be discussed individually.
Count I
Count I of the Amended First Cross-Complaint deals with
events transpiring between 1959 and June 1964, when City Sav-
ings was closed by the State for the second time. Named as
—_s a
cross-defendants are the Estate of Knight, Chris J. Stolfa and
Justin Hulman. Donald Swope, who was originally named as a
cross-defendant, was dismissed pursuant to this court’s order of
October 9, 1973.
Joseph E. Knight was the Director of the Department of
Financial Institutions for the State of Illinois from January
16, 1962, to April 1968. Prior to that appointment, he served
as Secretary to the Illinois Commerce Commission under former
Governor Henry Horner, Supervisor of Loan Companies under
former Governor Adlai Stevenson and Assistant Director of the
Department of Financial Institutions under former Governor
Otto Kerner. Knight, pp. 4-5, 11; Legislative Report, p. 54.*
Chris J. Stolfa was Supervisor of Savings and Loan Asso-
ciations for the Department of Financial Institutions from 1959
(1960?) to November 1963. Stolfa had been a state employee
since 1942. The bulk of his experience was in the area of state
supervision of financial institutions. Stolfa, pp. 3-11; Legisla-
tive Report, p. 57.
Justin Hulman was first employed by the State of Illinois on
January 15, 1964, as a technical advisor to Joseph Knight.
Prior to that, in November and December 1963, Hulman acted
as an unofficial advisor to Knight in connection with the ex-
amination of various savings and loan associations which ap-
peared to be in financial straits. On June 5, 1964, Hulman was
appointed by Knight as Supervisor of Savings and Loan Asso-
ciations for the Department of Financial Institutions. On August
1, 1965, his official designation was changed by statute to Com-
missioner of Savings and Loan Associations, a position he held
until his resignation on October 1, 1969. Hulman, pp. 2-7;
Legislative Report, pp. 55-56.
* References to deposition testimony are indicated by the name
of the witness and the page at which the statement appears.
—_
Donald Swope was acting Supervisor of Savings and Loan
Associations from November 1963 until June 6, 1964, when he
was replaced by Hulman. Stolfa, p. 5; Knight, p. 9.
The Illinois Savings and Loan Act, Ill.Rev.Stai. 1963. ca.
32, §§ 701-944, in effect for the period 1959-63, imposed a
comprehensive duty on the Director of the Department of Fi-
nancial Institutions and the officers and employees of that de-
partment to supervise the affairs of all savings and loan asso-
ciations within the state and to ensure that these businesses were
operated “only by associations organized and conducted in ac-
cordance with the authority provided in this Act.” Il].Rev.Stat.
1963, ch. 32, § 702(b).
Section 842(a) of the Illinois Savings and Loan Act required
the Director of the Department of Financial Institutions to at
least once a year conduct an examination of every savings and
loan association in the state:
(a) The Director, at least once in each year, without
previous notice, shall cause an examination to be made of
the affairs of every association. Such examination shall be
made by competent examiners appointed for that purpose,
who are not officers or agents of, or in any manner inter-
ested in, any association which they examine, except that
they may be holders of withdrawable capital.
Section 842(b) of the Act granted to the Director or his ex-
aminers access to the books and records of every savings and
loan association and empowered them to question the manage-
ment and employees of those associations regarding the conduct
of its affairs:
(b) The officers, agents, or directors of any such asso-
ciation shall cause the books of the association to be
opened for inspection by the Director or his examiners
and otherwise assist in such examination when requested;
:
7
a
t
:
ae
— A-26 —
and for the purpose of examination, the examiner in
charge thereof shall have power to administer oaths and
to examine under oath any officers, employees, agents, or
directors of such association relative to the business of
the association.
Section 842(c) of the Act required the Director of the De-
partment of Financial Institutions to report his findings to the
board of directors of the examined institution and to require
that any necessary corrective action be taken:
(c) The Director shall make a report of each examina-
tion to the board of directors of the association examined,
and if the affairs of the association are not being conducted
in accordance with this Act, he may require the directors,
officers, or employees to take amy necessary corrective
action. In the interests of the members of the association,
the Director may prepare a statement of the condition of
the association, and may mail the same to the members
or may require a single publication thereof.
Section 843 empowered the Director of the Department of
Financial Institutions to order, without prior notice, an audit
by a certified public accountant of the books of any association.
Section 844 required every association to fle with the Depart-
ment of Financial Institutions within 60 days following the close
of the fiscal year a statement showing its financial condition at
the close of the fiscal year iu addition, Section 844 empowered
the Director of the Department of Financial Institutions to re-
quire any other reports he deemed necessary.
Within this statutory framework, the Director of the Depart-
ment of Financial Institutions appointed the Supervisor of Sav-
ings and Loan Associations. The Supervisor was directly answer-
able to the Director and was charged with the responsibility of
overseeing the affairs of savings and loan associations within the
State and reporting any statutory violation or other problems to
the Director.
Pe
—S
Count I of the receiver's Amended First Cross-Complaint al-
leges, and these facts are undisputed, that during the period from
1959 through June of 1964 the affairs of City Savings were mani-
festly not being conducted in accordance with the provisions of
the Illinois Savings and Loan Act. During this period, City
Savings loaned over $21,000,000 to entities controlled by Men-
sik or his nominees. Purportedly securing these loans were two
proposed real estate developments, the so-called “Apple Or-
chard” and “Howie in the Hills” projects. These loans were
based on grossly inflated and fraudulent appraisals. On June 30,
1964, the date City Savings was closed, the outstanding net un-
paid balance of the Apple Orchard loans was $14,827,415.20
and the outstanding net unpaid balance of the Howie in the Hills
loans was $5,675,047.14. Tcherepnin v. Franz, 316 F. Supp.
714, 718 (N.D.Ill. 1970). An appraisal made shortly before the
filing of the Amended First Cross-Complaint in 1969 indicated
that the true value of the Apple Orchard and Howie in the Hills
subdivision properties was $6,391,751.31. These loans were
the greatest single factor in the demise of City Savings.
In addition, many other acts of misconduct occurred at City
Savings including the use of unacceptable accounting and man-
agement practices, self-dealing and questionable advertising prac-
tices.° It is undisputed that these illegal acts occurred and that
they rendered City Savings in a grossly unscund financial condi-
tion with a capital impairment of over $14,000,000. Tcherepnin
v. Franz, 316 F. Supp. 714 (N.D. Ill. 1970); Special Report of
Peat, Marwick, Mitchell & Co. regarding City Savings Associa-
tion dated June 15, 1964; Legislative Report, pp. 36-38, 67-69.
The gravamen of Count I is that the affairs of City Savings
were being so grossly mismanaged during the years 1959-64
that no reasonable person could have made even the most cur-
® These acts of misconduct were brought to the attention of State
of Illinois officials at least six months prior to closing of City Savings
and are discussed at length infra at (A. 35-36).
i
:
— A-28 —
sory examination of City Savings and reasonably have believed
it to be sound or that the management should not be removed.
The receiver further alleges that during the period from 1959-64
there were either no meaningful examinations made by the Di-
rector of the Department of Financial Institutions or that, in the
alternative, the examinations in fact were made and the results
either ignored or concealed. In either event, the reciever charges
that cross-defendants Knight, Stolfa and Hulman breached their
statutory duty owing to City Savings, its members, and creditors
and are liable for damages arising therefrom.
The Estate of Knight asserts that based upon the information
available to Knight, he acted in a manner consistent with his
statutory duties as Director of the Department of Financial
Institutions.
Illinois decisions have consistently held that public officials
vested with discretion and empowered to exercise their judgment
are immune from liability to third persons provided that the
acts complained of are discretionary in nature, done within the
scope of the official’s authority and not resulting from malicious
or corrupt motives. People ex rel. Schreiner v. C ourtney, 380
Ill. 171, 43 N.E.2d 982 (1942); McCormick v. Burt, 95 Ill.
263 (1880); Gilbert v. Bone, 64 Ill. 518 (1872); Anderberg v.
Newman, 5 Ill. App.3d 736, 283 N.E.2d 904 (Ist Dist. 1972);
Paoli v. Mason, 325 Ill. App. 197, 59 N.E.2d 499 (1st Dist.
1945). However, where the duty imposed on a public official
is purely ministerial, that official will be held liable to third per-
sons for the negligent performance of that duty. People ex rel.
Munson v. Bartels, 138 Ill. 322, 27 N.E. 1091 (1891); Thiele
v. Kennedy, 18 Ill. App.3d 465, 309 N.E.2d 394 (3d Dist.
1974); Anderberg v. Newman, supra.
The distinction between ministerial and discretionary duties
was discussed in an early Jllinois Supreme Court opinion, People
ex rel. Munson v. Bartels, supra at 328, where the court said:
}
— A-29 —
Official action is judicial where it is the result of judgment
or discretion. When the officer has the authority to hear and
determine the rights of person or property, or the propriety
of doing an act, he is vested with judicial power. An officer
will be regarded as being clothed with judicial or quasi-
judicial functions, when the powers confided to him are so
far discretionary that he can exercise or withhold them ac-
cording to his own judgment as to what is necessary and
proper. ...
. . . Official duty is ministerial when it is absolute, certain
and imperative, involving merely the execution of a set
task, and when the law which imposes it, prescribes and de-
fines the time, mode and occasion of its performance with
such certainty that nothing remains for judgment or dis-
cretion. Official action is ministerial when it is the result
of performing a certain and specific duty arising from fixed
and designated facts.
In practice, however, Illinois courts have tended to confine
discretionary immunity to fairly high level public officials and to
important decisions by these officials involving determinations
of law or fact or the establishment of significant public policy.
See Kelly v. Ogilvie, 64 Ill. App.2d 144, 212 N.E.2d 279 (ist
Dist. 1965), aff'd, 35 Ill. 2d 297, 220 N.E.2d 174 (1966);
Bush v. Babb, 23 Ill.App.2d 285, 162 N.E.2d 594 (Ist Dist.
1959); Paoli v. Mason, supra; Baum, Tort Liability of Local
Governments and their Employees: An Introduction to the Illi-
nois Immunity Act, 1966 U.Ill. L.F. 981, 997 (1966). A
single public officer may have both ministerial and discretionary
duties.
Public officials are not liable to third persons for the miscon-
duct or negligence of their subordinates provided that the of-
ficial does not direct the acts complained of or personally co-
— A-30 —
Operate in the negligence from which the injury results. Kelly
v. Ogilvie, 35 Ill.2d 297, 220 N.E.2d 174 (1966); 63 Am.Jur.
2d Public Officers and Employees § 295 (1972).
| Finally, the failure to perform a public duty can constitute an
individual wrong only when it is shown that the duty was owed
not only to the State of Illinois but also to the private individuals
seeking redress. People of the State of Illinois v. Maryland
Casualty Co., 132 F.2d 850 (7th Cir. 1942); State v. American
Surety Co., 26 Idaho 652, 145 P. 1097 (i914).
Although the standards of liability enumerated above have
not been applied to state banking officials by Illinois courts, the
courts of other states have applied analogous principles to their
state banking officials. Deatsch v. Fairfield, 27 Ariz. 387, 233 P.
887 (1925); Dunbar v. Faut, 170 S.C. 414, 170 S.E. 460
(1913); State v. American Surety Co., 26 Idaho 652, 145 P.
1097 (1914); Keefe, Personal Tort Liability of Administrative
Officials, 12 Fordham L.Rev. 130, 141-43 (1943).
7 The Estate of Knight contends that the allegations contained
in Count I are insufficient to support a cause of action because:
1) there is no allegation of direct participation or supervision by
Kaight in the wrongful acts; and 2) there are no specific allega-
tions of malice or corruption on the part of Knight.
The short answer to the first contention is that the cross-com-
plaint while not specifically charging Knight with wrongful acts,
does allege that the Director of the Department of Financial In-
stitutions committed these acts and that Knight was the Director
of the Department of Financial Institutions during this period.
In considering the second contention raised by the Estate of
Knight, the court first notes that the cross-complaint need not
specifically characterize Knight’s conduct as being “malicious or
OD ia as start te
Wh hs see's. ae
— A-31 —
corrupt” provided that the acts complained of necessarily in-
volve a malicious disregard of his obligations to the depositors
of City Savings. State v. Dixon, 131 Kan. 650, 103 P. 130
(1909). Thus, the crucial issue is whether Knight's alleged fail-
ure to conduct the required examinations of City Savings or,
after having conducted such an examination, his alleged con-
cealment or ignoring of the results constitutes a malicious breach
of his statutory duty to supervise the affairs of City Savings.
The adjective “malicious” connotes something more than mere
negligence. It has been variously defined as: the intentional
commission of a tortious act; the willful and reckless disregard of
another's rights; and the wanton and deliberate commission of
a wrongful act.®
Knight had a statutory duty to supervise the affairs of City
Savings and to ensure that it was operating in accordance with
the provisions of the Illinois Savings and Loan Act. This ob-
ligation ran directly to the depositors of City Savings. State
v. American Surety Co., supra. The conclusion is inescapable
that if, in fact, Knight intentionally ignored or concealed ex-
aminations indicating that the investments of the City Savings
depositors were being jeopardized by the failure of City Sav-
ings to conduct its business in accordance with the provisions
of the Illinois Savings and Loan Act that, under any of the
accepted definitions, he was “maliciously” breaching his statu-
tory duty owed to those depositors. It is therefore the opinion
of the court that the motion to dismiss Count I of the Amended
First Cross-Complaint must be denied.
68 The cases su ing these definitions are legion. See, ¢.g.,
Fromm v. Seyller, 245 Ill.App. 392 (2d Dist. 1927); Kaplan v.
Williams, 245 Ull.App. 542 (1st Dist. 1927); Smith v. Moran, 43 Ill.
App.2d 373, 193 N.E.2d 466 (2d Dist. 1967); State v. Dixon, 131
Kan. 650, 103 P. 130 (1909); Baer v. Rosenblatt, 106 N.H. 26, 203
A.2d 773 (1964); Maddix v. Gammon, 293 Ky. 540, 169 S.W.2d
594 (1943); McElwain v. Georgia-Pacific Corp., 245 Or. 247, 421
P. 2d 957 (1966); Loucks v. Albuquerque National Bank, 76 N.M.
735, 418 P.2d 191 (1966).
— A-32 —
Having rejected the motion to dismiss Count I, the court now
turns to the receiver's motion for summary judgment. The first
issue to be resolved is the effect this court’s order of March 12,
1973, may have had upon the imposition of the burden of
proof on the motion for Summary judgment. Rule 56 of the
Federal Rules of Civil Procedure clearly imposed on the party
moving for summary judgment the burden of demonstrating
that there is no genuine issue of material fact and that the
moving party is entitled to judgment as a matter of law. Mel-
ancon v. Insurance Company of North America, 482 F.2d
1057 (Sth Cir. 1973): Ashwell & Company v. Transamerica
Insurance Company, 407 F.2d 762 (7th Cir. 1969); 6 Moore’s
Federal Practice € 56.15 [3] and cases cited therein.
This court's order of March 12, 1973 found that “the Super-
visors of Savings and Loan Associations and the Director of
Financial Institutions were to say the least grossly negligent in
their supervision of what has become the notorious City Sav-
ings Association.” Memorandum, Findings of Fact, Conclu-
sions of Law and Decree of March 12, 1973, p. 20. On Oc-
tober 9, 1973, as part of the receiver's settlements with the
State of Illinois, that memorandum was “withdrawn and va-
cated insofar as the rights, liabilities and interests of the State
of Illinois and its present officers and Officials are concerned.”
Order of October 9, 1973, p. 4. No mention was made as
to the effect the findings made in the March 12, 1973 order
would have on the receiver's claims against the cross-defend-
ants other than the State of Illinois. It is the receiver's con-
tention that the findings of fact and conclusions of law con-
tained in this court’s March 12, 1973 order were left intact
insofar as they relate to the cross-defendants other than the
State of Illinois and thus the cross-defendants have the burden
of disproving these findings.
The court is of the Opinion that the burden of proof in the
instant motion for summary judgment lies with the receiver.
— A-33 —
Although findings of fact were made which reflect upon the
conduct of the remaining cross-defendants, these parties were
not given an opportunity at that time to respond to the re-
ceiver’s allegations. In fairness to the remaining cross-defend-
ants, the court cannot impose the additional burden of over-
turning those findings.
Practically speaking, the remaining cross-defendants do have
the burden of coming forward with new evidence or additional
arguments which would persuade the court that it was in error
when it issued its March 12, 1973 order. In any event, the
court has reviewed anew the record in its entirety and has ap-
plied to the evidence the standards set forth in the cases and
treatise cited above.
Applying these standards to the massive record in this case,
the court is of the opinion that Joseph E. Knight willfully and
maliciously disregarded his duty to supervise City Savings dur-
ing the period he was Director of the Department of Financial
Institutions and that his estate is liable to the depositors of
City Savings for the damages arising from these acts. The un-
disputed testimony and admissions of Knight and other state
Officials clearly support this conclusion.
Knight testified that he first learned that City Savings was in
financial straits in the latter part of 1963 when he was advised
by either Justin Hulman or Donald Swope that City Savings had
made excessive loans on both the Apple Orchard and Howie
in the Hills developments. Knight, pp. 21-25. In fact, as was
described above, City Savings made joans exceeding $21,000,000
to develop these real estate projects. The actual estimated value
of these properties at the time City Savings was closed in June
of 1964 was only $2,000,000. Tcherepnin v. Franz, 316 F.
Supp. 714, 718 (N.D.IIl. 1970). Knight testified that the only
corrective measure taken by him at this time was to order that
appraisals be made on the properties. Wigo Juergensen, testi-
SE ee yee
—&—
fying on behalf of Knight, stated that the appraisals were not
ordered until after the Peat, Marwick audit was requested on
April 30, 1964. These appraisals were not prepared until early
June 1964. Juergensen, pp. 6-9. Thus, no action was taken by
Knight until April 30, 1964—four months after he first learned
of the overvalued loans.’
In January 1964, Knight asked Justin Hulman to examine
the records of City Savings that were in the possession of the
Department of Financial Institutions. Knight, pp. 40-41. Since
November 1963, Hulman had been conducting a series of ex-
aminations of financially troubled savings and loan associations
for Knight. Hulman, pp. 11-29. During the period November-
December 1963, Hulman was acting of an unofficial advisor to
Knight.
Prior to investigating City Savings, Hulman had reviewed the
records of both Beverly and Tinley Park Savings and Loan As-
sociations. Hulman, p. 15. In these initial studies, Hulman dis-
cerned a pattern common to both institutions. He found evi-
dence of excessive loans on overvalued properties, loans to offi-
cers, gross mismanagement and some instances of outright fraud.
Hulman, pp. 15-17: Knight, pp. 56-64. These findings were re-
ported to Knight in late November 1963. Hulman, p. 17.
Hulman then commenced an examination of the records of
Marshall Savings and Loan Association. At Marshall he again
found that excessive mortgage loans were being made on over-
* Both Knight and Hulman have testified that the a i
. . . aisal
the Howie in the Hills and Apple Orchard projects wens codened a
ate tee and received in March. Knight, pp.
- .~* . “ls version is accurate, Knight must have known of Ci
Savings severe Capital impairment at least four months prior to rn
ment must accept Juergensen’s statement as accurate.
ub anc ee
Bien:
— A-35 —
valued properties. Hulman, pp. 22-23. He also uncovered in-
stances of mismanagement and faulty credit reporting. Hulman,
pp. 23-24.
On January 15, 1964, Hulman became a salaried technical
advisor to Knight. His continuing investigation of the savings
and loan industry disclosed that the records of several other in-
stitutions showed irregularities similar to those found at Tinley
Park and Beverly. Among the institutions Hulman examined
were Success Savings and Loan Association, Service Savings and
Loan Association, Apollo Savings and Loan Association and
Old Reliable Savings and Loan Association. Hulman, pp. 28-29.
During the course of these examination, Hulman noticed that
the names of Angelo LoMonaco and Frank Sorrentino repeatedly
appeared as appraisors for Tinley Park, Beverly and Marshall.
Hulman, p. 23. LoMonaco and Sorrentino also acted as ap-
praisors for many properties securing mortgage loans issued by
City Savings. Hulman, p. 69.
With this background, Hulman commenced his examination
of the records of City Savings in January 1964. Hulman, p. 40.
In conducting his examination, Hulman relied solely upon the
records on file with the Department of Financial Institutions.®
* On file with the Department of Financial Institutions were the
audit reports of Staniey Mize, a certified public accountant. During
the years 1960 through 1963, Miez filed a series of increasingly crit-
ical audit reports in which the following deficiencies were pointed out:
(a) Lack of control over cash transactions;
(b) Distributions to shareholders in excess of net income;
(c) Sharply increasing expenses for maintaining a relatively sta-
ble amount of deposits;
(d) Excess payouts to holders of withdrawable capital shares
under Section 773 of the Illinois Savings and Loan Act,
Ill.Rev.Stat. 1963, ch. 32, § 773;
(e) The concentration of 69% of all mortgage loans among
fifteen borrowers;
(f) The improper deferment of excessive advertising costs to
to years in which said costs would produce vitrtually no
benefits; and
(g) The transfer of funds from contingent reserves in order to
dividends to the holders of withdrawable capital shares.
— A-36 —
Hulman, p. 40. Later that month he reported his findings to
Knight and Swope. Hulman, p. 50.
Hulman advised Knight that City Savings was “in trouble.”
Hulman, p. 50. He noted that $779,000 listed on the books of
City Savings as an asset represented monies used to purchase
premiums which had already been given away to entice new
depositors. If this asset were written off, as it properly should
have been, the reserves of the association would have been in-
sufficient to cover even a minor loss. Hulman, p. 50; Knight
p. 72. ;
Another matter of concern which was discussed at the meeting
was City Savings’ practice of refinancing loans. In general, City
Savings financed subdivision developments in three phases. In
phase one, mortgage money was loaned for the purchase of raw
farm land. In phase two, the mortgage loans on the same prop-
erty were increased for the Purpose of suddividing the land and
constructing sewers, streets and other improvements. The out-
standing balance of the first loan was repaid from the proceeds
of the second mortgage loan. In phase three, the mortgage loan
was again increased on the same Property for the purpose of
constructing buildings. The unpaid balance of the second loan
was repaid from the proceeds of the third loan. Tcherepnin y.
Franz, 316 F.Supp. 714, 718 (N.D.Ill. 1970). Every time City
Savings refinanced a loan it charged a 4 percent loan commis-
sion. Thus, there was income accruing on the books of City
Savings without the receipt of any actual cash. H
52-53. : Sisal
Another problem area puinted out to Knight was that while
the amount of money deposited in the accounts of City Savings
remained static for several years, the costs of maintaining these
accounts continued to rise and were excessive. Hulman, p. 55. In
addition, Hulman’s examination revealed the now familiar pat-
tern of excessive loans on overvalued Properties. Again the
names of LoMonaco and Sorrentino frequently appeared as ap-
— A-37 —
praisers for City Savings. Hulman, p. 69; Knight, p. 69. Finally,
Hulman advised Knight that the contingent reserve position of
City Savings was dangerously low. Hulman, pp. 55, 62-65;
Knight, p. 72.
Knight’s treatment of City Savings’ contingent reserve situ-
ation is typical of his utter failure to exercise any degree of su-
pervision over the affairs of City Savings . Section 779(a) of the
Illinois Savings and Loan Act, Ill.Rev. Stat. 1963, ch. 32,
§ 779(a), provided:
(a) Each association shall have a contingent reserve to
which the board of directors shall allocate such portion of
the association’s profits as the board may determine; ex-
cept that whenever the total amount of such reserve to-
gether with special reserves for losses and the insurance
reserve of an insured association is less than 742% of the
aggregate withdrawal value of the association's withdraw-
able capital accounts, the allocation to such contingent,
special reserve or the insurance reserve of an insured as-
sociation upon each apportionment of profits shall total
not less than 10% of the profits being appropriated, or such
lesser portion as will increase the aggregate of such re-
serves to the required total amount. In lieu of the re-
quirements specifically set forth in the preceding sentence,
an insured association may make such allocations to the re-
serves as may from time to time be required by the insur-
ance corporation [Federal Savings and Loan Insurance
Corporation]. [Emphasis added. ]
Section 780(b)(1) of that Act provided:
(b) However, the declaration of dividends on capital
shall be subject to the following restrictions:
(1) No dividends shall be declared when the total amount
of the contingent reserve is less than that required by the
section of this Act concerning Reserves [Section 779(a)],
unless the allocation provided by said section has been
made.
|
— A-38 —
Knight has admitted that he knew in 1963 and 1964 that
the contingent reserves of City Savings were less than the statu-
tory minimum of 7% percent. Knight, p. 71. Yet, he per-
mitted City Savings to declare a dividend in December 1963
in clear violation of Section 780(b)(1). Hulman explained that
City Savings had been permitted to operate under the lower
standards established for associations insured by the Federal
Savings and Loan Insurance Corporation. Hulman, p. 65. City
Savings was not and has never been insured by the federal
government. As a result, any losses incurred by City Savings
would fall directly on the depositors. In addition, Section 779%a)
specifically provided that the lower standard could only be
applied to federally insured associations.
Knight's willful and malicious conduct is further exemplified
by his admsision that during 1963 he became aware of the
identities of the officers and directors of the corporation to
which City Savings made loans and that “to a certain extent”
these same individuals were officers and directors of a majority
of the corporations to which City Savings made mortgage loans.
Knight, p. 74. In fact, City Savings had extended vast amounts
of financing to corporations controlled by essentially the same
people. While such financing is not illegal per se, it is certainly
highly unusual and when coupled with the massive irregularities
uncovered by Mize and Hulman it should have alerted Knight
that further investigation was necessary. Knight's failure to
probe into the background of these loans enabled Mensik to
concentrate 82 percent of the entire loan portfolio of City Sav-
ings into the Apple Orchard and Howie in the Hills subdivisions.
These loans totaled over $21,000,000 of the association’s book
assets of $32,000,000. The loans were made to entities con-
trolled by Mensik and Robert Kramer, Mensik’s brother-in-law
and a vice-president of City Savings, or their nominees.
Tcherepnin v. Franz, 316 F. Supp. 714 (N.D.IIl. 1970). This
was in clear violation of Section 80 inoi
and Loan Act which provided, in sn hea saa
a Pee Dahle ess
— A-39 —
No loan shall be made to [an] . . . officer, or director
of an associaiton . . . either for himself or as agent, or as
partner of another, except upon real estate occupied by
such . . . officer, or director as a homestead, or upon the
security of withdrawaLle capital; nor shall any loan be
made by an association to any corporation of which a
majority of the stock is owned or controlled individually
or collectively by any one or more of the directors, [or]
officers . . . of such association.
It is clear from these undisputed facts that Knight was fully
aware of City Savings’ precarious financial position as early as
January 1964. It is also painfully evident that the facts under-
pinning Hulman’s report were readily available to Knight, in
the form of the Stanley Mize audits, prior to the January 1964
meeting. Yet, incredibly, Knight failed to take any action un-
til April 30 when the Peat, Marwick audit was ordered and
did not attempt to correct the massive irregularities pointed out
by Hulman and Mize until City Savings was closed on June
26, 1964.
Knight's failure to act decisively prior to June 1964 is ren-
dered even more inexcusable by the fact that he was aware
throughout this period that Mensik and City Savings had en-
countered serious financial difficulties in 1957-59, that City
Savings had been unable to secure insurance from the federal
government and thus any losses it incurred would fall directly
on the depositors and that Mensik had been indicted and con-
victed for mail fraud 11 Maryland in November 1963." Kaight,
pp. 22, 68-69.
® Mensik was first indicted in Baltimore, Maryland for mail fraud
in 1958. After extended and complex litigation, he was finally con-
victed in November 1963. Moreover, on January 16, 1962, Mensik
was found by the Tax Court of the United States to have engaged
in sundry frauds and irregularities at City Savings. 37 T.C. 703
(1962). This finding of fraud was subsequently affirmed by the Court
of Appeals for the Seventh Circuit on February 10, 1964. Mensik
v. C.LR., 328 F.2d 147 (7th Cir. 1964), cert. denied, 379 U.S. 827
(1964). These public, reported orders and opinions were all filed
before Knight ordered the belated closing of City Savings.
—
In light of all these undisputed facts, the record is crystal
clear, and the court so finds, that Joseph E. Knight willfully
and maliciously breached his Statutory duty to supervise the
affairs of City Savings during the period he served as Director
of the Department of Financial Institutions and that he is liable
to the depositors of City Savings for any losses incurred as a
result thereof. Neither of the parties has addressed the issue of
damages and therefore that question shall be reserved for later
proceedings.
Count I—Fraud Theory
Count II of the Amended First Cross-Complaint deals with
the events surrounding the adoption of the so-called plan of
voluntary liquidation in March-July 1964. Named as cross-de-
fendants are the Estate of Knight and Justin Hulman. Through-
Out this period Joseph E. Knight was Director of the Depart-
ment of Financial Institutions. Justin Hulman served as tech-
nical advisor to Knight regarding savings and loan associations
until June 15, 1964, when he was appointed by Knight as Su-
pervisor of Savings and Loan Associations for the Department
of Financial Institutions.
‘The gravamen of Count II is that Knight and Hulman per-
mitted Mensik to foist a fraudulent and illegal plan of volun-
tary liquidation upon the City Savings depositors. As a result
no judicial supervision over City Savings occurred from June
26, 1964 until Judge C ampbell terminated the voluntary liquida-
tion and appointed federal receivers on September 7, 1968. The
receiver further alleges that the voluntary liquidators committed
many acts of mismanagement during the four-year period they
were in control of the City Savings assets and also that Knight
and Hulman by reason of their Participation in the adoption
of the plan are liable to the deposi
positors of City Sa
; ‘te ty Savings for any
)
|
|
— A-41 —
The receiver asserts that Knight's liability may be independ-
ently based on either of two factual theories. Under the first,
the receiver alleges that Knight, Hulman and Theodore J. Isaacs
fraudulently entered into a secret deal with Mensik to impose
the illegal voluntary liquidation on the City Savings depositors
and that pursuant to that deal the law firm of which Isaacs was a
partner was to receive legal fees of $1,000,000. Under the sec-
ond theory, the receiver contends that even if Knight had been
acting in good faith when he endorsed the plan of voluntary
liquidation, the plan was contrary to Illinois law and thus
Knight is liable for any losses resulting from its adoption.*®
The receiver's first theory is based primarily upon the testi-
mony of C. Oran Mensik, president, board chairman and chair-
man of the Executive Committee of City Savings. Mensik, p.
3. Mensik testified that shortly after Peat, Marwick initiated
its audit of City Savings he met with State Representative Wil-
liam Pollack. Mensik, pp. 9-10. The pending audit was dis-
cussed and Pollack advised Mensik to contact Theodore J.
Isaacs, a private attorney in Chicago and former Director of
the Department of Revenue for the State of Illinois,'' whom
Pollack thought could “work something out.”
10 The rule in Illinois is that public officials are not liable to third
persons for the misconduct or negligence of their subordinates pro-
vided that the official does not direct the acts complained of or per-
sonally cooperate in the negligence from which the injury results.
Kelly v. Ogilvie, 35 l.2d 297, 220 N.E.2d 174 (1966); 63 Am.Jur.
2d Public Officers and Employees § 295 (1972). Con to the
contention of the Estate of Knight, the direct and active ipation
of Knight under both factual bases supporting Count II has been al-
leged in both the First Amended Cross-Complaint and in the memo-
randum filed in support of the motion for summary judgment. There-
fore a motion to dismiss based on this contention must be denied.
11 Isaacs was Illinois Director of Revenue from 1961 to 1963
under former Governor Otto Kerner. On February 19, 1973, Isaacs
and Kerner were convicted of a variety of offenses arising out of their
activities on behalf of certain Illinois racing interests in return for
bribes of more than $150,000. Their convictions were affirmed on
appeal. United States v. Isaacs, 493 F.2d 1124 (7th Cir. 1974).
}
:
4
¢
we
— A-42 —
Several days later, Mensik visited Isaacs at his office. Men-
sik, pp. 11-12. Mensik explained the difficulties City Savings
had encountered with the Department of Financial Institutions
and that Representative Pollack suggested that Isaacs may be
able to work out a solution. Mensik, pp. 13-14. Mensik offered
Isaacs a City Savings check for $5,000 if he would act as the
association's attorney in this matter. Mensik, pp. 65-66. Isaacs
refused, saying that the $5,000 was not enough for “attorney's
fees.” Mensik, pp. 13-14. Isaacs then told Mensik to see Justin
Hulman and that Hulman would have a “deal” for him. Men-
sik, p. 14. Isaacs said, “Don’t worry about anything... . We'll
work it out. . . . You'll get your details from Mr. Hulman.”
Mensik, pp. 13-14.
Subsequent to this conversation, Mensik had four or five
meetings with Hulman, the first occurring in May 1964.'? At
the first meeting, Hulman and Donald Swope discussed City
Savings’ deteriorating financial condition with Mensik and ad-
vised him that they felt that City Savings was in serious trouble.
Mensik, pp. 16-17; Hulman, pp. 78-83. Of particular concern
were the appraisals made on the Apple Orchard and Howie in
the Hills developments and City Savings’ practice of crediting
income to its books each time it refinanced prior loans.
In the second meeting, i0 days to two weeks later, Hulman
handed over to Mensik a copy of the Peat, Marwick audit and
told Mensik that City Savings would have to be closed. Mensik,
pp. 18-19. Hulman rejected the idea of a court-supervised re-
ceivership in favor of placing City Savings in “voluntary liquida-
tion.” Hulman noted that if City Savings was placed into re-
ceivership, a 3 percent fee would have to be paid to the receivers.
Mensik, pp. 19-20. It was at this point that the alleged deal was
proposed by Hulman.
‘2 With the exception of the alleged deal, Hulman’s account of
these conversations generally corresponds with Mensik’s. Hulman,
pp. 78-84; 92-95; 99-102; 106-107.
— A-43 —
There were to be three “voluntary liquidators”, two of whom
would be state examiners and employees of the Department of
Financial Institutions and the third would be a Mensik appointee. _
Mensik, pp. 19-20. The State of Illinois would assume clerical
and other costs of the liquidation, including the salaries of its
own employees. Mensik, pp. 19-20. Mensik was to be respon-
sible for securing the necessary approval from the City Savings
depositors. Mensik, p. 20. The 3 percent fee which normally
would have been paid to receivers was to be paid to the Isaacs
law firm for representing the liquidators. Mensik, p. 20.
In return, Mensik was to retain any income derived from the
placement of property insurance on homes City Savings held
mortgages on—approximately $35,000 per year. In addition,
Mensik would continue to operate the City Safe Deposit Com-
pany, a separate business entity from City Savings which rented
safe deposit boxes to depositors. Mensik, pp. 21-22. When
asked if this was the “deal” Isaacs had referred to, Hulman re-
plied, “This is the deal.” Mensik, p. 20. Mensik told Hulman
that he would think it over and call him in another week or so.
Mensik, p. 20.
At the third meeting, Mensik agreed to the plan of voluntary
liquidation but insisted that $2,000,000 be set aside to complete
the Apple Orchard and Howie in the Hills subdivisions. It is
unclear from Mensik’s testimony whether Hulman agreed to this
additional provision. Mensik, p. 24.
The last two conversations took place in the latter part of
June 1964 when Hulman called Mensik and asked him to come
to his office to discuss further the plan of liquidation. Mensik,
pp. 25-28. Mensik refused on each occasion and on June 26,
1964, state examiners took custody of City Savings. Mensik,
p. 28.
On July 28, 1964, Mensik called a meeting of City Savings
depositors to obtain their approval of the plan of voluntary
liquidation. This meeting was attended by Department of Finan-
;
:
:
:
=_
cial Institutions employees Harry Hulman and Dennis Kirby and
Assistant Attorney General Robert Meersman. Knight, p. 35;
Hulman, p. 137. At this meeting, one of the attorneys for City
Savings told the depositors:
It is the considered opinion of the management and
everybody connected with it that if an orderly liquidation
takes place such as we propose, a voluntary liquidation
under the plan that we have submitted to you, that you
folks will get every nickel of your money and there will
be some money left for the declaration of a dividend.
[Trannscript of Shareholders’ Meeting held July 28, 1964,
p. 33.]
In addition, Mensik personally assured the depositors that they
would receive “100 cents on the dollar” plus interest if the plan
was adopted. Hulman, p. 136; Transcript of Shareholders’ Meet-
ing held July 28, 1964, p. 6.
Although the plan of liquidation was prepared by Robert
Sharfman, an assistant Attorney General of the State of Illi-
nois,'* Sharfman, pp. 35-40, and endorsed by Hulman and
Knight, Hulman, p. 113; Knight, pp. 76-79, when the Depart-
ment of Financial Institutions’ representative at the meeting,
Assistant Attorney General Robert Meersman, was asked by a
depositor to give the State’s view of the plan, he responded,
“The State of Illinois, at this time, takes no interest in this meet-
ing until such time as the liquidation plan is approved. At that
time, the State will take active control.” Transcript of Share-
holders’ Meeting held July 28, 1964, p. 65. Meersman made
no attempt to interrupt, clarify or correct the fraudulent state-
ments made by Mensik and his attorney.
Both Knight and Hulman admittedly read the transcript of
the meeting and heard reports of Mensik’s representations.
'® See (A. 50-52), infra.
;
i
!
3
i
;
3
@ Nie ere
— A-45 —
Hulman, pp. 118-119; Knight, pp. 35-36. Although both real-
ized that the representations were grossly fraudulent, neither
attempted to correct Mensik’s statements or advise the deposi-
tors that they could never receive 100 cents on the dollar plus
interest as a result of the plan. Knight, pp. 37, 79; Hulman
p. 37.
The plan of voluntary liquidation was approved by a majority
of the depositors present at the meeting, with Mensik voting
his fraudulently solicited proxies in favor of the plan. Knight,
pp. 76-77. On September 11, 1964, state custody of City
Savings was terminated. Legislative Report, p. 18.
Pursuant to the plan, Knight appointed two liquidators,
Dennis Kirby and Harry P. Hartman, and Mensik appointed
the third, Louis Kwasman. Kwasman was a business associate
of Mensik and had supplied City Savings with the premiums
which were given away to entice new depositors. Mensik, PP.
66-68. Throughout the liquidation, Kwasman actec .s Mensik’s
persona! representative. Mensik, pp. 29-41. Knight then ap-
pointed Seymour Burton to represent the depositors. ‘At that
time Burton was a partner of Theodore Isaacs. Knight, pp.
47-49.
Mensik claimed that he was “double-crossed” by the state
Officials. He was not permitted to operate the City Safe Deposit
Company nor did he receive any commissions from the place-
ment of property insurance. Mensik, pp. 100-101. Seymour
Burton, however, did receive nearly $450,000 in legal fees for
representing the liquidators prior to the appointment of the fed-
eral receivers. Report of Special Master Milton Gray dated July
25, 1974, p. 72.
Clearly, the receiver has alleged instances of official miscon-
duct committed with Knight's complicity which, if true, were
tainted with fraudulent, malicious and corrupt motives and are
—_~
sufficient to overcome a motion to dismiss. It is also evident
that the commission of these acts breached a statutory duty owed
directly to the depositors of City Savings. State v. American
Surety Co., 26 Idaho 652, 145 P. 1097 (1914).
However, the state officials involved, Joseph Knight and Justin
Hulman, as well as Theodore Isaacs have categorically denied
any participation in a “deal” to defraud the depositors of City
Savings. Hulman, pp. 151-53; Knight, pp. 75-77. Therefore,
for the purposes of the receiver's motion for summary judgment,
the court must determine if Knight's acquiescence in the fraudu-
lent representations made at the July 28, 1964 depositors’ meet-
ing was sufficient to constitute actual fraud on his part.
In order to sustain an action for fraud it must be established
that the defendant made false representations as to a material
fact, knowing or believing it to be untrue, with the intent to de-
ceive the plaintiff and that the plaintiff believed these representa-
tions reasonably relied on them and acted on them to his in-
jury. Johnston v. Shockey, 335 Ill. 363, 167 N.E. 54 (1929):
Davis v. Nehf, 14 Ill.App.3d 318, 302 N.E.2d 382 (ist Dist.
1973).
Fraud may consist of the concealment or suppression of the
truth as well as the positive assertion of a falsehood. Lagen v.
Lagen, 14 Ill. App.3d 74, 302 N.E.2d 201 (1st Dist. 1973). It
is unnecessary that the defendant in an action for fraud have any
interest in the result of the fraud, or should derive any benefit
from it. Bergman & Lefkow Ins. Agency v. Flash Cab Co.,
110 Ill.App.2d 415, 249 N.E.2d-729 (ist Dist. 1969).
In applying these standards to Knight’s conduct, the court is,
of course, mindful of Knight's special status as a public official
and that he cannot be held accountable for his conduct in office
without a showing of malice. However, one of the indispensable
elements of fraud is the existence of fraudulent intent or intent
— A-47 —
to deceive. Lickus v. O'Donnell, 321 Ill.App. 144, 52 N.E.2d
271 (2d Dist. 1943). This element coupled with the requisite
scienter is, in the opinion of the court, sufficient to establish ma-
licious intent.
Although the fraudulent promises upon which the depositors
relied were made by Mensik or his attorneys, the imposition of
the plan of voluntary liquidation coul¢ not have been accom-
plished without the passive acquiescence of the state officials
at the meeting and Knight's subsequent silence. The law is clear
that a person who, by his conduct, contributes to the misappre-
hension of another as to a material matter, and intentionally fails
to correct the misapprehension, is guilty of fraud. Mitchell v.
McDougall, 62 Ill. 498 (1872); Endsley v. Johns, 120 Ill. 469,
12 N.E. 247 (1887); Bell v. Felt, 102 Ill.App. 218 (1st Dist.
1902), modified on other grounds sub nom. Felt v. Belt, 205
Ill. 213, 68 N.E. 794 (1903). See Piff v. Berresheim, 405 Ill.
617, 92 N.E.2d 113 (1950); Creighton v. Elgin, 395 Ill. 87,
69 N.E.2d 501 (1946).
Knight’s failure to correct the misrepresentations of Mensik
and his attorneys is rendered even more culpable by his status as
a public official. As Director of the Department of Financial
Institutions, Knight had at a minimum a duty to ensure that
state-chartered savings and loan associations were operated
“only by associations organized and conducted in accordance
with the authority provided in [the Savings and Loan] Act,”
Ill.Rev.Stat. 1963, ch. 32, § 702(b), and thereby safeguard the
investments of the depositors of those institutions. State v.
American Surety Co., 26 Idaho 652, 145 P. 1097 (1914). By
at least June 26, 1964, the date the State took custody of the
assets of City Savings, the relationship between Knight and the
depositors became that of fiduciary-beneficiary. Whitbeck v.
Ramsay's Estate, 74 Ill.App. 524 (4th Dist. 1896). As a fi-
duciary, Knight had a duty of full and complete disclosure. It
has been held that while mere silence does not usually amount
:
:
:
,
:
— A-48 —
to fraud, where the defendant has a duty to speak his failure
Rese na, material misapprehension constitutes actual fraud.
acine Fuel Co. v. Rawlins, 377 Il. 375, 36 N.E.2d 710
(1941); Forest Preserve Dist. of Cook County v. Christopher
321 Il.App. 91, 52 N.E.2d 313 (Ist Dist. 1944): Equitable
Life Ins. Co. of lowa v. Halsey, Stuart & Co., 112 F.2d 202
(7th Cir. 1940), rev'd on other grounds, 312 U.S. 410 (1941).
For these reasons, the court is of the opinion that the re-
= motion for summary judgment must be granted as to
ount II. This conclusion finds further support in the receiver's
second factual basis for summary jud th ,
lation theory. ary judgment—the statutory vio-
Count [—Statutory Violation Theory
F Section 921 of the Illinois Savings and Loan Act, IIl.Rev.
re 1963, ch. 32, § 921, provided that if any one or more of
€ reasons for taking custody of a savings and loan association
continues through the period of custody, the Director of the De-
partment of Financial Institutions shal] appoint a receiver:
if the Director, after taking custody of an association
- . . finds that any one or more of the reasons for takin
Custody continues to exist through the period of his custod :
then he shail appoint any qualified person, firm or co =
tion as receiver or co-receiver of such assocation pao trust
for the purpose of liquidation.
In addition, Section 922 of that Act provided:
After so appointing a receiver, the Director fof the
Department of Financial Institutions} shall direct the At-
torney General to file a complaint in equity in the nam
of the Director in the circuit Or superior court of the
bs
ae
> Pe
2.
%
— A-49 —
county in which such association or trust is located and
against the association or trustees or liquidators, as the
case may be, for the orderly liquidation and dissolution
of the association or trust and for an injunction restrain-
ing the officers, directors, trustees, or liquidators, from
continuing the operation of the association or trust.
These provisions prescribed a statutory duty owed by the
Director of the Department of Financial Institutions directly
to the depositors of City Savings. State v. American Surety Co.,
26 Idaho 652, 145 P. 1097 (1914).
Hulman and Knight have testified that the State took cus-
tody of City Savings for all the reasons enumerated in Section
848 of the Illinois Savings and Loan Acct, IIl.Rev.Stat. 1963,
ch. 32, § 848. Knight, pp. 37-40; Hulman, pp. 107-111. That
section provided, in relevant part:
The Director {of the Department of Financial Institu-
tions] in his discretion may take custody of the books,
records and assets of . . . any association. . . if it
appears from reports made to the Director, or from ex-
amination made by or on behalf of the Director:
(a) That the directors, officers, trustees, or liquidators
have neglected, failed or refused to take any action which
the Director may deem necessary for the protection of
the association or trust, or have impeded or obstructed
an examination; or
(b) That the withdrawable capital of the association is
impaired to the extent that the realizable value of its
assets is insufficient to pay in full its creditors and holders
of its withdrawable capital; or that its permanent reserve
capital is impaired; or
(c) That the association is unable to continue opera-
tions; or
:
:
— A-50 —
(d) That the business of the association, trust, or asso-
ciation in liquidation is being conducted in a fraudulent,
illegal, or unsafe manner; or
(e) That the officers, employees, trustees, or liquidators
have continued to assume duties or perform acts without
giving bond as required by the provisions of this Act.
Hulman further testified that the State closed City Savings
on June 3, 1964 for two reasons: (1) the Association was un-
able to pay a dividend because of its Capital impairment; and
(2) the Association “had completely run out of money.” Hul-
man, p. 111.
Both Knight and Hulman stated that at the time of the
adoption of the voluntary liquidation plan by the depositors
as well as at the time the assets of City Savings were trans-
ferred to the voluntary liquidators, September 11, 1964, none
of the conditions precipitating the State’s taking custody of
City Savings were cured. Knight, p. 40; Hulman, pp. 88-100.
Yet, in direct contradiction of Sections 921 and 922 of the
Illinois Savings and Loan Act, Knight failed to: (1) appoint
a receiver for City Savings; (2) direct the Attorney General to
file a complaint against City Savings to ensure an orderly dis-
solution; or (3) direct the Attorney General to seek an in-
junction restraining the officers and directors of City Savings
from continuing operations. Knight, pp. 46-47.
Knight contends that he is not responsible for any possible
illegalities contained in the plan of voluntary liquidation because
he is not an attorney and because in recommending the plan he
relied upon the legal advice of the Illinois Attorney General.
Knight, pp. 92-93. In 1964, the Illinois Attorney General was
William G. Clark. Clark has testified that he could not recall
either researching the Illinois Savings and Loan Act to deter-
mine if the plan was legal or discussing the City Savings situa-
— A-51 —
tion with Knight or any other state official. Clark, pp. 14, 29-
7 30. Clark did indicate that Robert Sharfman, then an assistant
_ Attorney General, prepared the plan. Clark, p. 12.
Sharfman testified that he was first employed by the Attorney
General in November 1963. Sharfman, p. 4. Sharfman’s first
contact with the Department of Financial Institutions was in
1964 when he was asked to prepare the plan of voluntary liquida-
tion for City Savings. Sharfman, pp. 6-7. At that me, Shae-
man freely admitted to the Department officials that he “didn bs
have the slightest idea of what a paln involves or what to do.
' Sharfman, p. 7. Sharfman’s actual role in the preparation of the
_ plan came to light during cross-examination by the receiver's
attorney:
By Mr. Serritella:
Q. Did you in fact do more than change the names and
dates of the old plan?
A. I did nothing more than that. If you check the plan
of Beverly or Tinley Park and check the plan here, you will
see they are identical word for word with the exception of
three [liquidators instead of two. ]
Q. You did not decide that City Savings was to have a
voluntary liquidation, is that correct?
A. That wasn’t my decision.
Q. You were just told, prepare the plan and this is the
plan that you were supposed to prepare, is that correct?
A. I think that is my recollection, yes, that is my recol-
lection. Now, I think others would have a different opin-
ion, by the way. I don’t remember ever being asked about
what is proper at that time.
Q. Do you have a recollection of doing any legal re-
search as to whether or not the plan was proper as with
respect to City Savings?
— A-52 —
A. No, I don’t... .
Q. You don’t recall doing any research yourself as to
whether or not the plan was proper with respect to City
Savings?
A. I remember just looking at the section and saying
what should be in the plan, not whether the plan should be
adopted.
Q. You never wrote a legal memo on the subject?
A. I don’t believe I ever wrote—I don’t believe I ever
wrote a legal memo in this case at all . . . (Sharfman, pp.
36-38. ]
The record is clear, and the court so finds, that Knight did
not rely upon the advice of the Attorney General or his assist-
ants in preparing the plan of voluntary liquidation. It is equally
clear that Knight, in permitting the adoption of the plan,
breached his statutory duties prescribed under Sections 921 and
922 of the Illinois Savings and Loan Act.
The law is well established that where a duty imposed on a
public official is purely ministerial, and does not involve the
exercise of discretion, the official is liable for injuries caused
by the negligent performance of that duty. People ex rel. Mun-
son v. Bartels, 138 Ill. 322, 27 N.E. 1091 (1891); Thiele v.
Kennedy, 18 Ill.App.3d 465, 309 N.E.2d 394 (3d Dist. 1974);
Anderberg v. Newman, 5 Ill.App.3d 736, 283 N.E.2d 904
(1st Dist. 1972); Lusietto v. Kingan, 107 Ill.App.2d 239, 246
N.E.2d 24 (3d Dist. 1969); 63 Am.Jur.2d Public Officers and
Employees §§ 292-293 (1972).
It has been held that the failure of a public official to per-
form an act required by statute constitutes an actionable breach
of a ministerial duty and renders him liable for all damages
resulting therefrom. People ex rel. Pope County v. Shelter, 318
Ill.App. 279, 47 N.E.2d 732 (4th Dist. 1943); Button v.
— A-53 —
Nevin, 44 Ariz. 247, 36 P.2d 568 (1934); State v. Title Guar-
anty & Surety Co. of Scranton, 27 Idaho 752, 152 P. 189
(1915); see Fidelity & Casualty Co. of New York v. Bright-
man, 53 F.2d 161 (8th Cir. 1931).
In sum, the court finds that there is no genuine issue of ma-
terial fact; that Knight willfully disregarded his clear statutory
duties set out in Sections 921 and 922 of the Illinois Savings
and Loan Act; and that the Estate of Knight is liable to the
depositors of City Savings for any damages resulting therefrom.
The issue of damages has not been addressed by the parties
and is reserved for later ruling.
Count III
Count III involves two transactions occurring during the
period June-September 1964 when the State was in custody of
City Savings. Named as cross-defendants are the Estate of
Knight and Justin Hulman. Throughout this period Joseph E.
Knight was Director of the Department of Financial Institu-
tions and Justin Hulman was Supervisor of Savings and Loan
Associations for the Department. The receiver has orally with-
drawn his motion for summary judgment as to Count III and
as a result the court need only consider the Estate of Knight’s
motion to dismiss.
Section 853 of the Illinois Savings and Loan Act, Ill.Rev.
Stat. 1963, ch. 32, § 853, required the Director of the Depart-
ment of Financial Institutions to segregate in a separate ac-
count all funds deposited in a savings and loan association
during the period it is in state custody. Section 853 further
provided that before turning over the assets of an association
to a liquidator or receiver the Director “shall” return any mon-
ies collected from depositors during the period of state custody.
—
Count ITI alleges that from June 26 to June 30, 1964, dur-
ing the initial period of state custody, approximately $185,-
000 was deposited in City Savings. Hulman Answer to First
Amended Cross-Complaint, p. 8. Rather than segregate these
funds in a separate account as required by Section 853, Hul-
man, xcting under Knight's supervision, directed that they be
deposited in an existing City Savings account at Manufacturers
National Bank. Hulman, p. 146; Transcript of Proceedings
held on August 19 to 23, 1968, pp. 394-395. Manufacturers
National Bank was a creditor of City Savings; it immediately
exercised its right of set-off and seized these funds.
The Estate of Knight contends that Count III fails to state
a cause of action because: 1) there are no allegations of ma-
licious or reckless conduct; 2) the duties prescribed in Section
853 are owed to the State of Illinois and not to the depositors;
and 3) the payment to Manufacturers National Bank was nei-
ther illegal nor wrongful.
It is well established that the failure of a public official to
perform an act required by statute constitutes an actionable
breach of a ministerial duty and renders him liable for all dam-
ages resulting therefrom. Malicious or reckless conduct need
not be alleged. People ex rel. Pope County v. Shelter, 318 Ul.
App. 279, 47 N.E.2d 732 (4th Dist. 1943); Button v. Nevin,
44 Ariz. 247, 36 P.2d 568 (1934); State v. Title Guaranty &
Surety Co. of Scranton, 27 Idaho 752, 152 P. 189 (1915).
It is clear that, if Knight's failure to segregate the deposits re-
ceived during the state custody of City Savings is established, it
constituted an actionable breach of a ministerial duty. Further,
it is obvious even from a cursory reading of the statute, that the
provisions of Section 853 were enacted to protect the depositors
of seized savings and loan associations. For these reasons, the
Estate of Knight’s motion to dismiss this portion of Count III
must be denied.
—_—.
Count III also alleges that Knight and Hulman in 1964 unlaw-
fully sold various assets of City Savings in order to pay approxi-
mately $150,000 to the Central National Bank of Chicago and
approximately $100,000 to the Oak Park National Bank of
Chicago even though these banks had neither filed claims nor
obtained judgments against City Savings.
The rule in Illinois is that a public official is the insurer of
monies which properly come into his possession. Barrett v. Brad-
ford, 372 Ill. 63, 22 N.E.2d 691 (1939); Ramsay v. Southern
Illinois Penitentiary, 197 Ul. 572, 64 N.E. 549 (1902). This
rule applies equally whether the funds involved are denominated
public or private. Hoyt v. McGrath, 279 Il 560, 117 N.E. 147
(1917).
Thus, if these assets were unlawfully sold, Knight would be
liable for any losses incurred as a result thereof. The receiver,
however, has failed to explain why he contends that the sale of
these assets was unlawful. The court tentatively denies the Estate
of Knight’s motion to dismiss this portion of Count III and
grants the receiver 10 days within which to file a supplemental
brief explaining the legal theory supporting these allegations.
The Estate of Knight is granted 10 days within which to reply.
It is therefore ordered that the Estate of Knight's motion to
dismiss Counts I, II and III of the Amended First Cross-Com-
plaint shall be, and the same is hereby, denied.
It is further ordered that Justin Hulman’s motion to dismiss
Counts I, II and III of the Amended First Cross-Complaint shall
be, and the same is hereby, denied.
It is further ordered that the receiver is granted 10 days within
which to file a supplemental brief explaining the legal theory
supporting certain allegations contained in Count III.
— A-56 —
It is further ordered that the receiver’s motion for summary
judgment against the Estate of Knight on Counts I, II and Il
of the Amended First Cross-Complaint is granted as to Counts
I and II and denied, at this time, as to Count III.
It is further ordered that any issues of damages raised by this
court’s entry of summary judgment on Counts I and II of the
Amended First Cross-Complaint shall be reserved for future
proceedings.
/s/ EDWIN A. ROBSON
Chief Judge
April 14, 1975
—_
2 ee fo ne re ee PE et
A LL CL CL LE A LT CDE LT
—_
APPENDIX C
United States District Court
Northern District of Illinois
Eastern Division
Alexander Tcherepnin, et al., )
Plaintiffs,
| No. 64C 1285
Robert Franz, et al.,
Defendants. |
MEMORANDUM AND ORDER
(Dated November 30, 1976)
This cause is before the court ©. the objections of cross-
defendant First National Bank and Trust Company in Alton,
executor of the estate of Joseph E. Knight, deceased (Estate
of Knight), to the Report of Special Master Milton H. Gray’
and on the motion of the receiver to adopt said Report. For
the reasons hereinafter stated, the Report shall be accepted
and the Special Master’s findings of fact and conclusions of
law shall be adopted as those of this court.
On April 14, 1975, this court entered a memorandum and
order which, inter alia, granted in part the receiver's motion
for summary judgment and held the Estate of Knight liable
under Count I and Count II of the receiver's Amended First
1 On July 9, 1976, Master Gray filed a thirty-three page docu-
ment entitled “Report of Special Master, Milton H. Gray, Including
Findings Of Facts, Conclusions Of Law, And Recommendations In
Respect To The Determination of Damages Against Cross-Defend-
ant First National Bank And Trust Company In Alton, As Executor
Of The Estate of Joseph E. Knight, Deceased.” Same will be re-
ferred to in the text of this opinion as the “Report.”
—_—
Cross-Complaint. Tcherepnin v. Franz, 393 F. Supp. 1197
(N.D. Ill. 1975). The opinion reserved the issue of damages
for future proceedings. 393 F. Supp. at 1213, 1220-21. On
May 8, 1975, an order was entered referring the damage issue
to Special Master Milton H. Gray (Master Gray) for hearing
and report to this court. In accord with this order, hearings
were held, memoranda were filed and on July 9, 1976, Master
Gray filed his Report.
On July 22, 1976, the Estate of Knight filed its objections
to Master Gray’s Report. Six days later, the receiver filed a
motion to adopt the Report. Pursuant to this court’s directive,
the Estate of Knight filed a segregated set of objections to the
Report on August 9, 1976. Thereafter, on August 31, 1976,
the receiver filed a memorandum in support of his motion.
On October 8, 1976, a hearing was held on this matter and
the Estate of Knight filed a memorandum in reply to the re-
ceiver’s.
At issue before Master Gray was the damages recoverable
against the Estate of Knight under Count I of the Amended
First Cross-Complaint.? This court found Knight liable under
this count as he willfully and maliciously disregarded his statu-
tory duty to supervise the affairs of City Savings during the
period in which he served as Director of the Department of
Financial Institutions. 393 F. Supp. at 1213. During the course
of its opinion, the court noted that City Savings loaned over
$21,000,000 secured by the so-called Apple Orchard and Howie
in the Hills real estate developments and further that these
loans, based upon grossly inflated values of the properties,
2 While summary judgment was granted on both Count I and on
Count II of the Amended First Cross-Complaint, the receiver chose
to limit his proof to Count I only as he was satisfied that the dam-
that would be recovered thereunder exceed the value of the
- t estate. Reply Memorandum of the Receiver filed April 9,
1 at 8 n.
— A-59 —
were the single greatest factor in the demise of City Savings.
393 F. Supp. at 1206-07.
Master Gray's Report is divided into nine sections.* The
Estate of Knight objects to all sections of the Report except
sections I and IX. The receiver, on the other hand, has moved
the court to adopt the Report in toto. The receiver's motion
shall be granted.
The Estate’s objections may be conveniently divided into
three areas: liability, joint and several recovery and damages.
The objections as to liability are overruled. The reference to
Master Gray was to the issue of damages. Liability was estab-
lished by this court’s order of April 14, 1975. The Estate of
Knight did not file a motion to reconsider this opinion and
the arguments advanced as to liability are untimely.‘
The court, recognizing that the parties are entitled to a “real
review” of the evidence submitted to Master Gray, Locklin v.
Day-Glo Color Corporation, 429 F.2d 873, 876 (7th Cir.
1970), cert. denied, 400 U.S. 1020 (1971), and that his
conclusions of law carry no weight with this court, further
adopts the Report on this issue of joint and several liability.
The Estate of Knight objects because the receiver did not
allege his cause of action sufficiently so as to apprise cross-
defendant of the charges and because the receiver did not
3 J. Reference and Hearings, 1. Counts I and II, III. a
of Apple Orchard and Howie ini the Hills Real Estate Developments,
IV. Contentions of the Bank, V. Joint and Several Liability, VI.
Findings of Amount of Damages, VII. Recommendations to Over-
rule Certain Motions and Overruling of Certain Other Motions, VIII.
Recommendation of Damages and IX. Submission.
‘ edd leen glimmer oy BAe pe fee faye
that “facts were not made aware of [on liability] until we had a hear-
ing [before Master Gray].” Tr. October 8, 1976 at 9. However, a
review of the Estate’s reply memorandum filed February 4, 1975,
indicates that many, if not all, of these facts were raised before lia-
bility was established.
—S Ee
advise Knight of what must be met on the issue of damages.
Master Gray found these objections to be without merit and
the court must agree. Count I of the Amended First Cross-
Compiaint alleges a breach of official duty by certain cross-
defendants and seeks recovery of damages in excess’ of $14,-
000,000. The nature, size and relevancy of the loans made
against the Apple Orchard and Howie in the Hills projects are
specifically pleaded. Clearly, the Estate has been on notice
not only of the cause of action but also of the damages sought
thereunder.
The Estate of Knight objects because the Special Master
concluded that this cross-defendant is liable in damages jointly
and severally. The Estate complains because the receiver failed
to plead joint and several liability. It further objects because
it suggests that Knight can only be held liable to the extent
that his own acts caused the injury of which the receiver com-
plains. Finally, the Estate of Knight suggests that Master
Gray is in error as he has found that this cross-defendant can
be held liable for a judgment which, at some future date, may
be rendered against an unknown person. Such “conjectural
probability of future loss” is argued by the Estate of Knight to
violate the rules of pleading and the law.
Once again, the court holds the objections of the Estate of
Knight to be without merit. Master Gray found that the receiver's
failure to plead joint and several liability in haec verba did not
preclude recovery under this theory where, as here, the “inter-
play of the separate torts was pleaded with sufficient clarity.”
Report at 21-22. The court concurs. Joint liability may be
charged against a defendant when the pleader alleges that sepa-
rate torts by separate individuals resulted in an indivisible injury,
i.e., the overvalued loans.
Further, the court agrees with Master Gray that the Estate
of Knight must be held jointly and severally liable for the
oo et 5 nee Reh ew et bew wil
rn en
RRA P EL + ee
— A-61 —
losses incurred as a result of the loans made on the Apple
Orchard and Howie in the Hills real estate developments. As
the Estate apparently recognizes, a defendant may be held
jointly and severally liable for the entire loss caused by two or
more tortfeasors when the injury caused is indivisible. Master
Gray specifically found, and the court independently holds, that
the losses which occurred because of the excessive loans on Apple
Orchard and Howie in the Hills resulted in a single, indivisible
wrong to the depositors of City Savings.
The Estate of Knight is in error when it argues that Master
Gray suggested that this cross-defendant can be held liable for
“future loss.” Master Gray merely stated that a joint and sev-
eral judgment could not be entered against the Estate of Knight
and other named joint tortfeasors when, as here, no other in-
dividuals have as yet been held specifically liable for losses
incurred as a result of the Apple Orchard and Howie in the Hills
loans. The court agrees. Nevertheless, when as in the instant
situation, the injury caused by Knight is indivisible, joint and
several liability must be imposed against this cross-defendant
even though others have not as yet been brought to judgment.
Wabash, St. Louis and Pacific Railway Co. v. Shackiet, 105 Ml.
364, 381 (1883); Pearman v. Morris, 15 Ill. App. 2d 486, 494,
146 N.E.2d 589, 593 (3d Dist. 1957).
In his Report, Master Gray made ten findings with respect
to damages. The court has thoroughly reviewed each. They
are clearly supported by the evidence and the law and these
findings shall be adopted by the court.”
5 Master Gray’s damage finding number 2 (Report at 24) refers
to loans ed before or during Knight’s tenure as Director of
Financial Institutions. As Master Gray's reference to Receiver’s Ex-
hibit 2 makes clear, these amounts represent the outstanding balances
of authorized loans as shown by the records of City Savings on Sep-
tember 7, 1968. See Tr. July 8, 1975 at 44-8 and Receiver’s Ex-
hibit 2.
— A-62 —
The Estate of Knight has made “formal objection” to six of the
ten findings at issue. Objections to findings 3, 4, 5 and 6 must
be summarily overruled. These findings were made by this
court in its memorandum and order of April 14, 1975. They
were, and are, clearly supported by the record in this cause and
could not be ignored by Master Gray as the Estate seems to
Suggest. Further, as the receiver notes in his memorandum, find-
ings 4-6 were not used by Master Gray in the calculation of
damages.
The Estate of Knight objects to Master Gray's findings that
City Savings and its depositors were damaged in the amount
of $14,274,304 as a result of the loans made on the Apple
Orchard and Howie in the Hills projects and that the Estate of
Knight is liable therefor. The Estate asserts, inter alia, that
these findings are speculative. The court disagrees. Master
Gray based the damage amount on: (a) an actual realized book
value loss; and (b) precise figures of book value and proceeds
of sale as of these same dates. Report at 28. This figure is
clearly supported by the testimony and evidence submitted to
Master Gray. Tr. June 23, 1975 at 12-13; Price Waterhouse &
Co. Report of June 9, 1975, Note 4.
The Estate of Knight further objects to this figure because the
properties at issue were not sold until 1973-74 during a period
of recession. As Master Gray noted, however, the intervening
years were in part a result of the judicial appellate process and,
in any event, apparently worked to the benefit of the Estate. Re-
port at 29.
In addition, the Estate of Knight argues that it should not
be held liable for the damages resulting from these loans as
Knight's first written knowledge of City Saving’s insolvency
was received in June 1964. This argument, however, is irrele-
vant. Knight was found liable as he willfully and maliciously
breached his statutory duty to supervise the affairs of City Sav-
ings. Tcherepnin v. Franz, 393 F. Supp. 1197, 1210-13 (N.D.
ss
ee = SS
_—
1 eh eS Cede > oii.
Se <
— A-63 —
Ill. 1975). Further, Knight had knowledge of the overvalued
loans no later than January 1, 1964. 393 F. Supp. at 1210.
Master Gray found that between this date and June 30, 1964,
City Savings disbursed $1,172,623.33 in loans in respect to
Apple Orchard and Howie in the Hills. Report at 22-23. That
finding is specifically adopted by the court as it is clearly sup-
ported by the record. See Report at 22-24 and evidence cited.
Finally, the Estate objects because no appraisals were intro-
duced before Master Gray. The court fails to see the relevance
of this objection. In any event, the record reveals that appraisals
were in fact ordered by Judge Campbell in April 1972 and that
same were filed with the court on May 22, 1972 and on June 20,
1972. Thereafter the properties at issue were sold only after
court approval.
Master Gray recommended damages in the amount of $14,-
274,304 in the Report of July 9, 1976. For the reasons hereto-
fore stated, that figure is hereby adopted by the court. However,
the subsequent Price Waterhouse & Co. Report of September 10,
1976, filed with the court on October 4, 1976, indicates that the
book loss on the Howie in the Hills property has been reduced
by $224,800 as of December 31, 1975. Price Waterhouse &
Co. Report of September.10, 1976, Note 4. In addition, this
court ordered that an additional $80,000 be released to City
Savings from the Howie in the Hills escrow on July 28, 1976.
Accordingly, Master Gray's recommendation of July 9, 1976,
has been reduced by $304,800 and judgment is entered against
the Estate of Knight in the amount of $13,969,504.
Finally, in section VII of his Report, Master Gray has recom-
mended that his rulings on certain motions be confirmed. The
receiver has also recommended that these rulings be adopted by
the court. The Estate of Knight, while objecting to certain
rulings in its memoranda, has apparently withdrawn all objec-
tions save one. Tr. October 8, 1976 at 22.
— A-64 —
In any event, the court has reviewed the rulings of Master
Gray at issue and hereby confirms same. Master Gray granted
the receiver leave to reopen his proof solely to complete the
record left open by the Estate of Knight while denying the
Estate’s objections and motion for leave to file a supplemental
answer. Report at 29-32. Clearly Master Gray’s rulings in this
area were well within his discretion. Fed. R. Civ. P. 53(c).
Master Gray further has recommended that the motion of the
Estate of Knight to suppress the deposition testimony of C.
Oran Mensik be denied. Report at 32. Finally, he has recom-
mended overruling the motions of the Estate that the Special
Master “make a finding and recommendation of no damages
caused by said Joseph E. Knight.” Report at 33. The recom-
mendations of the Special Master are hereby confirmed by this
court. The Mensik testimony is irrelevant on the damage issue
and the recommendations of “no damages caused by said Joseph
E. Knight” are overruled on the basis of Master Gray’s Report
herein adopted.
For the reasons stated, it is therefore ordered that the Report
of Special Master Milton H. Gray, filed July 9, 1976, shall be,
and the same is hereby, accepted and the Speciai Master's find-
ings of fact and conclusions of law are adopted as those of this
court.
It is further ordered that final judgment shall be, and the same
is hereby, entered against the First National Bank and Trust
Company in Alton, as executor of the estate of Joseph E. Knight,
deceased, in the amount of $13,969,504.
/s/ EDWIN A. ROBSON
Senior Judge
November 30, 1976
4b 0) oe ie etebes hale bhi Mlle ae
ee a ed Cts wet om
— A-65 —
APPENDIX D
In the United States District Court
For the Northern District of Illinois
Eastern Division
Alexander Tcherepnin, et al.,
Plaintiffs,
He > No. 64 C 1285
Robert Franz, et al.,
Defendants. /
JUDGMENT
This cause having come on to be heard on motion of Samuel
Berke, Receiver of cross-plaintiff City Savings Association, to
enter final judgment against the First National Bank and Trust
Company in Alton, as executor of the estate of Joseph E. Knight,
deceased, pursuant to Rule 54(b) of the Federal Rules of Civil
Procedure, the Court having granted the Receiver’s motion for
summary judgment as to the Bank’s liability on Counts I and
II of the Receiver’s Amended First Cross-Complaint on April
14, 1975 and the Court having adopted the Report of Special
Master Milton H. Gray, filed July 9, 1976, with respect to
damages to be assessed against the Bank and having ordered
that judgment be entered against the Bank in the amount of
$13,969,504 on November 30, 1976, and it appearing to the
Court that there is no just reason for delay in entering final
judgment.
It Is Hereby Ordered and Expressly Directed that final judg-
ment be entered against the First National Bank and Trust
— A —
Company m Alton, as executor of the estate of Joseph E. Knight.
deceased, in the amount of $13,969,504.
EDWIN A. ROBSON
Semor Judge
Dated: December 20, 1976
(Dated March 1. 1977)
This cause is before the court on the motion of the First
National Bank and Trust Company im Alton, executor of the
estate of Joseph E. Knight. deceased, (“Estate of Knight”) for a
be demed
The court will not repeat all of the alleged errors raned by
the Estate of Knight im its motion filed December 27. 1976, and
m its supporting memoranda Many of these contentions have
been previously considered by the court and expressly rejected.
In sum, no new material facts have been raised im either the
Estate’s motion or in its memoranda. The order granting the
receiver's motion for summary judgment cannot be altered on
The Estate of Knight has raised three matters in ts motion
for the first time which the court must address as they might
appear to have some merit absent clarification. The Estate
complains because no hearing was beid on the receiver's sum-
—_vy
mary ,udgment movon although hearing dates were allegedly
set. The Estate further maintains thet the court was in error
m assessing damages against it without first deducting the $12.-
467,500 received from the State of Mlinois im settlement
Finally, the Estate contends that the liability judgment is er-
romeous as the cour: considered matter outside the scope of
Rule S6ic) of the Federal Rules of Civil Procedure.
The Estate of Knight has not called the court's attention to
amy request on the record for a hearing on the receiver's mo-
ton for summary judgment prior to the court's decision of
April 14, 1975. Rather, it is clear that the Estate was aware
ment pursuant to Local General Rule 13 and consented thereto
See Transcript of January 13, 1975. It appears that the further
objection of the Estate is thot Rule 56 requires a hearing as 2
matter of law and that the court erred im not holding one even
though same was not requested. This proposition is incorrect.
Sarelas v. Porikos, 320 F 24 827, 828 (7th Cir. 1963). cert.
denied, 375 US. 985 (1964).
The Estate of Knight further maintaims that the court erred
m pot reducing the damages assessed against 1 by the amount
received in settlement with the State of Illinois. There are at
Uement with the State of Imo provides that amy excess mon-
wes recovered by the receiver are to be returned to the State of
iinet. See Order of Octoher 9, 1973, at 7-8. Two, the Es-
tate has represented to the court “that the marketable assets
of Joseph E Kaught Estate arc substantially less than one mil-
hon dollars,” affidavit of John J. Gaimer filed December 27.
1976. thus negating the possabuty of 2 dupbcatrve recovery,
Finally, the Estate of Knight contends that this court com-
mutted error im granting the receiver's motion for summary
judgment when t consadered the IIlinos Legusianve Investigat-
—Ao—
ing Commission Report, “The Failure of the City Savings Asso
ciation, a Report to the Illinois General Assembly (Leguie-
tive Report”) and its prior order of March 12, 1973, as evidence
against the Estate. In fact, however, the court did not rely at
all on either the Legislative Report or its order of March 12,
1973, im support of the receiver's motion. Tcherepnin v. Franz.
393 F.Supp. 1197 (ND. TL 1975). Rather. summary judg-
ment was premised upon the record consisting primarily of the
deposition testimony of Knight and other state officials. /¢ at
1209-20.
For the reasons stated, x is therefore ordered that the mo-
tion of the First National Bank and Trust Company m Alton.
executor of the estate of Joseph E. Knight. deceased. for 2
s EDWIN A ROBSON
Semor Judge
March 1, 1977.
This cause came on to be heard on the transcript of the record
of Hismoss, Eastern Divison. and was argued by counsel.
—ATIi—
On considerahon whereof, mt is ordered and adjudged by ths
court that the judgment of the said District Court im this cause
appealed from be. and the same is hereby, Affirmed, with costs.
in accordance with the opimion of this court filed this date.
_ *
mgs Association, . — ar
Cross-Plaintufl. Appellee. Rehearing
vs. Es Banc.
On consideration of the petit 1. for rehearing and suggestion
for rehearing en banc filed im the above entitled cause by First
National Bank and Trust Company in Alton, Executor of the
— A-73 —
Estate of Joseph E. Knight, Appellant, no judge in active service
has requested a vote thereon,* and all of the judges on the origi-
nal panel have voted to deny a rehearing. Accordingly,
It Is Ordered that the aforesaid petition for rehearing be, and
the same is hereby, Denied.
— A-74—
Excerpts From Illinois Savings and Loan Act.
Ill. Rev. Stat. 1963, Vol. 1, Ch. 32, pp. 1262-1288 provides
in part:
ILLINOIS SAVINGS AND LOAN ACT
AN ACT to revise and codify the laws in relation to Savings and
Loan Associations and to provide penalties for the violation
thereof, and to repeal an Act therein named. Approved
July 5, 1955. L. 1955, p. 849.
Be it enacted by the People of the State of Illinois, represented
in the General Assembly:
ARTICLE 1. GENERAL PROVISIONS
701. (p. 1262). § 1-1. Short Title. This Act shall be known
and may be cited as the “Illinois Savings and Loan Act.”
702. (p. 1263). § 1-2. Policy of Act. The General Assembly
has found and declares:
(a) That the savings and loan business, otherwise known as
the building, loan, and homestead business, which is within the
scope of this Act, has so expanded in recent years, and has be-
come so integrated with tie financial institutions of this State and
is sO important as a method of promoting home ownership and
thrift, that such business, to an even greater extent than hereto-
fore, is affected with a public interest and should continue to
be supervised as a business affecting the economic security and
general welfare of the people of this State;
— A-75 —
(b) That such business should be operated only by 2:socia-
tions organized and conducted in accordance with the authority
provided in this Act;
(c) That the number and minimum size of the associations
conducting such business should be controlled in the interest of
securely and efficiently serving the needs of the localities in
which they operate;
(d) That the public interest requires the promotion and foster-
ing of the savings and loan, or building, loan, and homestead
business and the assurance of its financial stability;
(e) That in order to further the policies herein expressed, the
provisions of this Act shall be liberally construed to promote and
foster the purposes of savings and loan associations.
710. (p. 1263). § 1-10. Definitions. The following words
and phrases have the following respective definitions for the pur-
pose of this Act, except to the extent that any such word or
phrase is specifically qualified by its context:
. * . > > . .
(d) “Director”: The Director of Financial Institutions, or some
person authorized by him to act in his stead.
(p. 1280) ARTICLE 7. SUPERVISION
848. (p. 1281). § 7-8. Director's Authority to Take Custody.
The Director in his discretion may take custody of the books,
records and assets of every kind and character of any associa-
tion, trust, or association *.. liquidation, for any of the purposes
hereinafter enumerated, if it appears from reports made to the
— A-76 —
Director, or from examination made by or on behalf of the Di-
rector:
(a) That the directors, officers, trustees, or liquidators have
neglected, failed or refused to take any action which the Director
may deem necessary for the protection of the association or trust,
or have impeded or obstructed an examination; or
(b) That the withdrawable capital of the association is im-
paired to the extent that the realizable value of its assets is in-
sufficient to pay in full its creditors and holders of its withdraw-
able capital; or that its permanent reserve capital is impaired, or
(c) That the association is unable to continue operations; or
(p. 1282) (d) That the business of the association, trust, or as-
sociation in liquidation is being conducted in a fraudulent, il-
legal, or unsafe manner; or
(e) That the officers, employees, trustees, or liquidators have
continued to assume duties or perform acts without giving bond
as required by the provisions of this Act.
Unless the Director finds that an emergency exists which
may result in loss to members or creditors and requires that he
take custody immediately, he first shall give written notice to
the directors, trustees, or liquidators specifying the conditions
criticized and state a reasonable time within which correction
may be made. As amended by act approved July 24, 1959.
L.1959, p. 2396.
849. (p. 1282) § 7-9. Purposes of Taking Custody. The
purposes of taking such custody of an association or trust may
be examination; further examination; conserving of its assets;
restoration of impaired capital; the making of any necessary or
equitable adjustment deemed necessary by the Director under
any plan of reorganization; or liquidation; or the maturing of
the obligation of the insurance corporation. As amended by
act approved June 4, 1957. L.1957, p. 433.
—_
850. (p. 1282) § 7-10. Director's Powers During Custody.
During the period in which the Director has such custody, the
Director has all powers which are necessary or appropriate to
accomplish the purposes of taking custody, including (but not
limited to) the authority:
(a) To operate the business of the association, except as
limited by the other subsections of this section; exercising for
that purpose all of the rights, powers, and privileges possessed
by the officers and directors, liquidators, or trustees,
854. (p. 1282) § 7-14. Redelivery of Possession. If after
examination of the association and consideration of all condi-
tions affecting its affairs, the Director finds that the cause or
causes for taking custody have been removed, he shall relin-
quish custody of the association and redeliver the same and
all assets, books and records thereof to the directors of the
association or to the trustees or liquidators qualified to accept
the same. As amended by act approved June 4, 1957, L.1957,
p. 433.
855. (pp. 1282-83) § 7-15. Limitations Upon Custody. The
custody of an association by the Director may be continued
for a reasonable period not to exceed six (6) months, unless
further extension shall be agreed upon by a vote of two-thirds
(34) of the directors of the association or upon application for
such extension and by order entered in a court of competent
jurisdiction. As amended by act approved June 4, 1957. L.
1957, p. 433.
— A-78 —
ARTICLE 9. VOLUNTARY LIQUIDATION
901. (p. 1285) § 9-1. Authority to Liquidate. An associ-
ation may liquidate voluntarily in accordance with a plan of
voluntary liquidation which has been adopted in the manner
provided in this article.
902. (pp. 1285-86) § 9-2. Decision as to Liquidation; Adop-
tion of Plan. (a) At any annual or special meeting of the mem-
bers, the members may vote to liquidate the association, and
may adopt a plan of liquidation which has been approved by
the board of directors, or proposed by one or more sharehold-
ers, or submitted by the Director; or may elect a committee of
three (3) persons to prepare and submit a plan, and there-
after may adopt such plan. However, no plan except one sub-
mitted by the Director shall be adopted unless it has been filed
with the Director at least five (5) days before the vote of the
members is taken thereon.
(b) A plan will be adopted upon receiving in the affirma-
tive two-thirds (34) or more of the total number of votes which
all members of the association are entitled to cast. As amended
by act approved June 4, 1957. L.1957, p. 433.
903. (p. 1286) § 9-3. Plan of Voluntary Liquidation. The
plan of voluntary liquidation shall provide for the full liquida-
tion of the association, setting forth the powers, duties, man-
ner of filling vacancies, and succession of the liquidators and
authorizing them to:
(a) Advance funds of the association to preserve, protect,
or purchase at any sale any asset in which the association has
an interest.
(b) Sell, convey, lease, mortgage, or exchange any assets
for other assets.
— A-79 —
(c) Sell and dispose of any assets at public sale to the high-
est and best bidder or at private sale for the highest price ob-
tainable.
(d) Accept withdrawable capital of the association to apply
upon the purchase price of any assets, but only for such rela-
tive values as may be approved by the Director from time to
time. Notice by single publication or by mailing, stating the
time, place, and terms of the sale, shall be given to all holders
of withdrawable capital prior to the sale.
(e) Pay out of the proceeds of liquidation all expenses and
services necessary to the liquidation, and also compensation
of the liquidators; but such compensation of the liquidators,
exclusive of compensation for legal services and other special-
ized employment, shall not exceed in the aggregate three (3)
per cent of the proceeds of liquidation. As amended by act
approved June 4, 1957. L.1957, p. 433.
904. (p. 1286) § 9-4. Election of Liquidators, Report, and
Supervision. Upon adoption of a plan of voluntary liquidation,
the members shall proceed to elect (with cumulative voting
permitted as in elections of directors) not more than three (3)
liquidators, who shall have full power to execute the plan; and
the procedure thereafter shall be as follows:
(a) A report of proceedings at the meeting of members, cer-
tified by the presiding officer of the meeting and attested by
the secretary of the meeting, and setting forth the notice given
and time of mailing thereof, the vote on the plan of voluntary
liquidation, the total number of votes which all members of
the association were entitled to cast thereon, and the names of
the liquidators elected, shall be filed in triplicate with the Di-
rector, together with the plan.
(b) If the Director finds that the plan and proceedings are
in accordance with this Act, that the bonds of the liquidators
are sufficient, and that the plan is not unfair to any person
— A-30 —
affected, he shall attach his certificate of approval to the plan
and shall forward one copy to the liquidators, and in the case
of an insured assoctahon, one copy to the insurance corporation
(c) The plan shall become effective upon the recording of
the Director's certificate of approval in the manner required
by this act for the recording of articles of incorporation.
(d) The liquidation of the association shall be subject to the
supervision and examination of the Director, As amended by
act approved June 4, 1957. L.1957, p. 433.
905. (p. 1286) § 9-S. Protection and Liquidation of As
sets. The liquidators are authorized to advance funds of the
association and to take such other action as ss advisable to pre-
serve, protect, or purchase at any sale any real estate or other
asset upon which the association may hold any ben or encum-
brance or in whach it may have an interest. The bquidators may
sell, convey, lease, mortgage or exchange any assets so pur-
chased or other assets, and im furtherance of the bquidaton of
the association, may sell and dispose of any of its assets at pub-
lic sale to the highest and best bidder; or may sell any such
assets at private sale for the highest price obtainable. No pu -
chaser shall be required to ascertain the application of the
906. (p. 1286) § 9-6. Notice to File Claims. The lqui-
dators shall fix a time for all persons having claims against the
association, other than as members thereof, to present such
claims, and shall cause notice to be published. requiring all
persons to present the claims on or before such date, and within
five (5) days after the first publication shall mail a copy of
such notice to cach person whose name appears on the asso-
ciation’s records as having a claim. Each claim shall be im
writing and verified by the claimant or a duly authorized agent.
A claim may be presented at any time on or before the date
fixed im the published notice, but any claim not so presented
— A-81 —
shall be barred. Upon the disallowance of any claim, the qui-
dators immediately shall noufy the clamant of such fact. and
the claumant may imsutute suit to establish such clam af any
t me before the final distmbuvon
907. (p. 1286) § 9-7. Claims of Members. Whether «
member files or docs not file a claim with respect to an inter-
est which he has as such member, the liquidators shall deter-
mine from the records of the association the amount of such
member's claim. Any such member may cxamuine the associa-
tion's records pertaining to his own claim. The records of the
association shall be prima facie evidence of cach such clam
or imterest. and no member shall be cnutied to a greater clam
of proporbonate interest in the associapon unless and unnl the
liquidators shall have agreed to a correction of the records
pertaining to such claim c+ interest. or shall be ordered to cor-
rect such records by a court of competent jurisdiction. The
bquidators shall require all members to present thew ceruficates
or account books, if any. for verification and endorsement upon
payment of any bquidanng dimdend or distmbunon. and upoa
final distribution. such certificates or account books, if any.
shall be surrendered to the bquidators.
908. (p. 1286) § 9-8. Payments and Distribution. Clams
having a preference im law shall be given preference im pay-
ment. except that no payment of less than ten dollars ($10.00)
need be made until final distributon No distnbubon shall be
claims have been paid or provided for im full. or dumng the
pendency of any suit unless sufficient funds are segregated to
pay any judgment which may be rendered im such suit. Ratable
payments and distributions on withdrawable capital may be
made at any ume after the ume fixed for the presentment and
allowance of clams has clapsed Holders of permanent reserve
capital, if any, shall participate im the liquidation of the re-
A-82 —
been made im full to all creditors, holders of sithdrawabie cap-
ital. and any claims which the holders may have mm the balance
of any segregated reserves. Final dsstribupon shal] be made mm
accordance with the next succeeding section of this artck As
amended by act approved July 11, 1957. L.1957, p. 2535.
909. (pp. 1286-87) § 9-9. Final Distribution and Dissolu-
non by Director When all assets have been bquidated and ail
abon shall be accomplished im the following manner
(a) The liquidators shail file with the Director the duly veri-
fied final report of ther acts and proposed final d:stnbubon.
(b) Upon the Director's approval of the final report, the
bquidators shall publish nonce of the proposed distribution.
and shail allow any shareholder to examine the records of the
association to ascertain hss prover share of such distnbuton
Any shareholder who fails to commence, before the date fixed
for final drstmbubon. appropmate judicial proceedings to con-
test such distribunoa, shall be barred from contesmng the same
thereafter The liquidators shall proceed to make final distr
buon on the date fixed therefor, except that such distbubon
shall be deferred unul final disposrpon of amy pending judicial
acon affecting the drstnbupon. and payment of any judgment
entered there:
(c) When final distributon has been made, except a5 to any
moncy due to but unclaimed by any creditor, shareholder, or
money with the Director, for payment to the person of per-
sons entitled thereto epon application and proof of might as
provided by law
(d) The hquidators also shall deliver to the Director all books
of account and other records of the association, for preserve-
tion for at least two (2) years and destruction thereafter as
provided by law
ostifiian
(¢) Upon compienon of the foregomg procedure, the bqui-
dators shail be discharged. the Director shall msue a ceruficate
of dissolution of the association and shall record same im the
manner required by this act for the recording of articles of
be cflective. As amended by act approved June 4, 1957. L.
1957. p. 433.
ARTICLE 10. INVOLUNTARY LIQUIDATION
921. (p. 1287) § 10-1. Director to Appoint Receiver. Uf
the Director, after taking custody of an association under the
section of this act concerning Director's Authority to Take
Custody.’ finds that any one or more of the reasons for taking
custody continues to exist through the period of his custody,
then he shall appomt any qualified person. firm or corporation
as receiver or co-receiver of such association or trust for the
purpose of liquidation. In the case of an imsured association,
he may appoint the insurance corporation or its somince as
such receiver or as a co-receiver, and the imsurance corpors-
tion may be permitted to serve without bond. The receiver
shall take possession of and title to the books, records, and
assets of every description of the association or trust. As
amended by act approved June 4, 1957. L_1957, p. 433.
' Section $48 of this chapter.
922. (p. 1287) § 10-2. Filing of Complaint by Attorney
General. After so appointing a receiver, the Director shall d-
rect the Attorney General to file a complaint in equity m the
name of the Director im the circuit or superior court of the
county m which such association or trust 1 located and against
the association or trustees or liquidators, as the case may be,
for the orderly hquidaton and drssoluton of the associabon or
trustees, or liquidators, from continuing the operation of the
esiiita»
association of trust. No complaunt shall be filed nor shall other
be commenced im amy court for the dissoluton or
winding up of the affairs of the association or trust except im
the name of and by authority of the Director represented by
the Attorney General. As amended by act approved June 4,
1957. L.1957, p. 433.
923. (p. 1287) § 10-3. Receiver's Powers; Court Supervi-
son Upon order of the court in which the Director's com
plaint for dissolution and winding up of the affairs of the as
shall be charged with the duties and responsibilities as follows:
(a) To sell and compound all bad or doubtful debts on
such terms as the court shall direct.
(b>) To sell the real and personal property of the association
on such terms as the court shall direct,
(c) To petition the court for authority to borrow moncy to
protect assets or to facilitate liquidaton and distribuvon, and
to pledge assets as security therefor, which petition shall be
id) To make and carry out agreements with the msurance
corporation or with any other financial institution for the pay-
ment or assumption of the associations liabilities, in whole or
im part, and to sell, convey, transfer, pledge or assign assets
as security or otherwise, and to make guaranhes m connection
therewith. As amended by act approved June 4. 1957. L.
1957, p. 433.
924. (p. 1287) § 10-4. Expenses of Custody and Receiver-
ship. All expenses incurred by reason of the examination.
aiii=es
custody, and receivership, including compensation to such re-
ceiver, accountants, or clerical assistants, and reasonable so-
licitors’ and attorneys’ fees, approved by the Director or the
court, shall be paid out of the assets of such association or
trust. As amended by act approved June 4. 1957. L.1957, p.
433.
925. (p. 1287) §10-S. Notice to Creditors. The receiver
shall cause notice to be published calling on all persons who
may have claims against such association of trust to present
the same to such receiver and to make legal proof thereof,
and the said claims shall be presented to the court, and the
allowance or disallowance of such claums by the court m con-
nection with sand proceeuings shall be deemed an adjudication
m a court of competent jurisdiction. After the expiration of
with the Director and with the clerk of the court 4 correct
list of all creditors and all members of the association or bene-
by any parties interested therein within such time as shall be
fixed by the court and such notice of application for adjudi-
cation of such claims shall be given as the court may direct.
As amended by act approved June 4, 1957. L.1957, p. 433.
926. (pp. 1287-88) § 10-6. Distribution by Receiver. Claims
having a preference im law shall be given preference m pay-
ment. except that no payment of less than ten dollars ($10.00)
shall be made until final distribution. No distribution shall be
made on claims for capital until such preferred creditors have
been paid or provided for in full, or during the pendency of
any suit unless sufficient funds are segregated to pay any judg-
ment which may be rendered im such suit. At any time after
—_v =
the expiration of the published claim date and from ume to
time, the receiver may make ratable distribution on all such
claims as may have been proven to the satisfaction of the re-
ceiver, or adjudicated im a court of competent jurisdictios.
Final distribution shall be made im accordance with the next
succeeding section of this article.
927. (p. 1288) § 10-7. Final Distribution and Dissolution
by Court. When all assets have been bquidated and al! claims
dissolution of the association shall be accomplished in the fol-
lowing manner
(a) The receiver shall file with the court the final report of
(>) Upon the court's approval of the final report. the re-
distribution, in such manner as the court may direct.
(c) When final distribution has been made cacept a5 to any
unclaumed moncy. the receiver shall deposit such unclaimed
money with the Director and shall deliver to the Director all
books of account and other records, in the manner and for
the purpose prescribed im the section of this Act concerning
Final Distribution and Dissolution by Director.’
(é) Upon completion of the foregoung procedure, and upon
the petition of the Director (represented by the Attorney Gen-
eral) and the receiver, the court may find that the association
or trust should be dissolved: and after such publicanon of no
tice of dissolution as the court may direct, the court may
enter a decree of dissolution. As amended by act approved
June 4, 1957. L.1957, p. 433.
Section 909 of this chapter.
— A-87 —
AMENDED FIRST CROSS-COMPLAINT
OF THE RECEIVERS
(Filed September 25, 1969)
Now comes the Defendant and Cross-Plaintiff, City Savings
Association, by its Receivers, Leonard B. Ettelson and William
J. Friedman, by and through their counsel, Don H. Reuben,
and complains against Cross-Defendants Joseph E. Knight,
Justin Hulman, Chris Stolfa and Donald Swope as foilows:
1. From February, 1961 through December, 1961, Defendant
Joseph E. Knight was Assistant Director of Financial Institu-
tions for the State of Illinois. From January, 1962 through 1965,
said Cross-Defendant Knight was Director of Financial Institu-
tions for the State of Illinois. As such, Cross-Defendant Knight
was vested with the responsibility of making annual examina-
tions imto the affairs of every Illinois Savings and Loan Associa-
tion for the purpose of establishing that the affairs of each state-
chartered imstitution were being conducted in accordance with
the provisions of the Illinois Savings and Loan Act.
2. From 1959 through 1962, Cross-Defendart Chris Stoifa
was the Supervisor of Savings and Loan Associations for the
State of IMlimois. During 1963, Defendant Donald Swope was
the acting Supervisor of Savings and Loan Associations. Dunng
1964, Cross-Defendant Justin Hulman was the Supervisor of
Savings and Loan Associations. Cross-Defendants Stolfa, Swope
and Hulman were appointed by and responsible to the Director
of Financial Institutions and administratively responsible for all
savings and loan associations in the State of Illinois. As such,
it was their duty to insure that all savings and loan associations
were operated and conducted in accordance with the Illinois
Savings and Loan Act.
— A-88 —
3. During the period from 1959 through June of 1964, the
affairs of Defendant City Savings Association were manifestly
not being conducted in accordance with the provisions of the
Illinois Savings and Loan Act. Specifically, City Savings As-
sociation during this period loaned over $21,000,000—approxi-
mately 74% of its assets—purportedly secured by the alleged
collateral of two proposed developments, the so-callec “Apple
Orchard” and “Howie in the Hills” projects. At all relevant
times, the mortgaged realty in question was worth only a small
fraction of the amounts loaned by City Savings. Many other
acts of misconduct occurred at City Savings Association, such as
self dealing, questionable advertising and premium practices,
etc. All of these irregularities rendered City Savings Association
in grossly unsound condition; its capital was substantially im-
paired and it was in law insolvent. Ultimately, albeit belatedly,
custody of City Savings Association was taken on or about June
26, 1964, by Director Knight and Supervisor Hulman pursuant
to /ll.Rev.Stat., Ch. 32, § 848.
4. The extent of the flagrant acts of mismanagement that oc-
curred at City Savings between 1959-1964 is readily discerned
by a reference to City Savings’ collateral position in the Apple
Orchard and Howie in the Hills projects. A recent appraisal of
the true value of the Apple Orchard and Howie in the Hills Sub-
division properties mortgaged to City Savings is $6,391,751.31.
The loss that City Savings will likely suffer as a result of its in-
vestment therein is approximately $14,110,711.00.
5. Cross-Plaintiff asserts that the affairs of City Savings were
being so grossly mismanaged during the years 1959-1964 that
no reasonable person could have made any kind of examina-
tion (even of a cursory nature) of City Savings Association and
reasonably have believed City Savings to be sound or that the
management should not be removed. Thus, during the period
from 1959-1964, there were either no meaningful examinations
whatsoever by the Director or, in the alternative, examinations
in fact were made but the truth about the institution's dire con-
— A-89 —
dition was ignored or concealed. Nor was there any proper
supervision by Cross-Defendant Stolfa, Swope and Hulman of
the affairs of City Savings Association from 1959-1964. In
either event, whether no supervision or examinations took place,
or the results of the supervision and examinations were ignored
or concealed, Cross-Defendants Knight, Stolfa, Swope and Hul-
man have violated official duties owing to City Savings Asso-
ciation, its members and creditors and are liable to said City
Savings Association for damages arising therefrom.
6. As a proximate result of the aforementioned breaches of
official duty to City Savings Association, its creditors and
members, by Cross-Defendants Knight, Stolfa, Swope and Hul-
man, City Savings Association has suffered damages in the
amount of $14,110,711.
7. Cross-Defendants Knight, Stolfa, Swope and Hulman
have given bonds conditioned upon the faithful performance
of their official duties, and the aforementioned violations of
their official duties are breaches of the conditions thereof.
Wherefore, City Savings Association seeks judgment against
Cross-Defendants Knight, Stolfa, Swope and Hulman for its
damages, $14,110,711; Cross-Plaintiff prays therefor and for
such other relief as is appropriate.
Count fl
Now comes the Defendant and Cross-Plaintiff, City Savings
Association, by its Receivers, Leonard B. Ettelson and William
J. Friedman, by and through their counsel, Don H. Reuben,
and complains against Cross-Defendants Joseph E. Knight and
Justin Hulman as follows:
1. During the year 1964, Cross-Defendant Joseph E. Knight
was the Director of Financial Institutions of the State of Illi-
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nois. Among his duties as Director was his duty to supervise
state-chartered savings and loan institutions.
2. During the year 1964, Cross-Defendant Justin Hulman
was Supervisor of Savings and Loan Associations in the De-
partment of Financial Institutions. Cross-Defendant Hulman
was appointed by and responsible to Director Knight.
3. On or about June 26, 1964, Director Knight, acting
through and by Supervisor Hulman, took custody of the assets
of City Savings Association upon a determination that it was
the Director's statutory duty to do so. /Il.Rev.Stat. 1963, Ch.
32, §848. Under Illinois law, the cross-defendants in their
official capacity were required to take custody of City Savings
Association due to the following circumstances: Through mis-
appropriation and mismanagement, the officers and directors
of City Savings Association had impaired the capital position
of the institution, making the seizure of custody necessary for
the protection of its members and creditors. A copy of the
Notice pursuant to which Cross-Defendant Knight took cus-
tody is attached hereto as Exhibit “A”.
4. The statutes of the State of Illinois allowed a restoration
by the State of custody of a savings and loan association to
the institution’s management only if all the causes for the
seizure had been eliminated. The relevant statute (//I.Rev.Stat.
1963, Ch. 32, §854) provided:
“Redelivery of Possession. If after examination of the as-
sociation and consideration of all conditions affecting its
affairs, the Director finds that the cause or causes for taking
custody have been removed, he shall relinquish custody of
the association and redeliver the same and all assets, books
and records thereof to the directors of the association or
to the trustees or liquidators qualified to accept the same.”
In the event that the causes for the seizure were not eliminated,
Illinois law required the appointment of a receiver and liquida-
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tion of the institution under the aegis of a court of equity. /ll.
Rev.Stat., 1963, Ch. 32, §§ 921-923.
5. In the instant case, at no time after seizure by the Cross-
Defendants were the reasons for the seizure of City Savings
eliminated; to the contrary, they existed in whole or in part from
the date of seizure through September 10, 1964. Nevertheless,
on or about September 10, 1964, at a time when the causes for
taking custody persisted and when, therefore, it was the statutory
duty of the Director of Financial Institutions to appoint a re-
ceiver and commence involuntary liquidation proceedings, Cross-
Defendants Knight and Hulman relinquished control of the assets
of City Savings Association to so-called “voluntary liquidators™
selected by the Association’s management with the consent and
cooperation of Cross-Defendants Knight and Hulman.
6. The so-called voluntary liquidators committed many acts
of mismanagement while they had possession and control of the
assets of City Savings Association, including but not limited to
the payment of excessive costs and fees, failure to notify de-
positors as to the course of the liquidation, failure to keep ade-
quate records or even take any inventory of the assets of City
Savings Association and failure to seek to recover hidden assets
of City Savings Association. Various other acts of mismanage-
ment took place during the course of the liquidation which cross-
plaintiff, through its Receivers, will attempt to uncover by means
of discovery.
7. By the aforementioned unlawful transfer of the assets of
City Savings Association to so-called “voluntary liquidators”,
Cross-Defendants Joseph E. Knight and Justin Hulman flag-
rantly breached statutory and fiduciary duties owing to City
Savings Association, its members and creditors.
8. Because of the aforementioned unlawful transfer of the
assets of City Savings Association to so-called “voluntary liqui-
dators” by Cross-Defendants Hulman and Knight, and the waste
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and mismanagement that occurred as a direct result thereof, City
Savings Association has suffered damages in the amount of
$20,000,000.
9. Cross-Defendants Knight and Hulman have given bonds
conditioned upon the faithful performance of their official
duties; the aforementioned violations of their official duties are
breaches of the conditions thereof.
Wherefore, City Savings Association seeks judgment against
Cross-Defendants Joseph E. Knight and Justin Hulman for its
damages, $20,000,000. Cross-Plaintiff prays therefor and for
such other relief as is appropriate.
Pe ws A
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