Appendix — Aiken v. Insull

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APPENDIX A.

Portion of Memoranda of Holdings of District Court

dealing with the issue involved in this petition for certiorari

(R. 298-299) :

Mortons To Dismiss.

Allegations re payment of dividends.

In the St. Johns case [ Aiken, et al. v. Insull, et al.)

this subject is covered by Paragraphs 41 to 45, inelu-

sive, of the complaint. Paragraph 43 avers that on

January 9, 1932, at a meeting of the Board (all present

except two) a resolution was unanimously adopted rati-

fying, confirming and approving the action of the Ex-

ecutive and Finance Committees, directing the payment

of a dividend to stockholders of record December 15,

1931, such dividend being payable January 2, 1932.

Taking this allegation most strongly against the

pleader, I assume that the ratification and approval of

the Board was given seven days after the dividend had

been paid. This obviously is an insufficient allegation

to charge the directors because the wrong had been

consummated before the action of the directors. (Lewis

v. Montgomery, 145 Ill. 30; Slater v. Taylor, 241 Il.

102.)

Paragraphs 44 and 45 allege that the company had

no surplus at any time during the years 1929, 1930, 1931

and 1932, but paid cash dividends during each of these

three years (which three I do not know); that the

Board of Directors authorized or ratified the action

of the Finance or Executive Committee, authorizing

such payment of dividends. There are 15 defendants

named in this suit and elsewhere in the complaint ap-

pears an allegation that each of the defendants was a

member of the Board of Directors from January 14,

1929, to April 16, 1932. How many and which ones

were present at the meeting where the action of the

committee was ratified we are not told by the complaint.

The liability under the statute must be predicated upon

the individual director having declared or assented to

a dividend and it is not enough to say that the ecom-

pany or the board or the committee declared a dividend.

It would be a dangerous theory of law if an individual

director were to be held liable for some misfeasance

or malfeasance related to his conduct as a director

without the assertion of some fact to show wrong on

the part of the specific director involved.

The allegations concerning payment of dividends in

contravention of Section 23 of the 1919 Corporation

Act are insufficient to charge any individual defendant

with such responsibility. (Lewis vy, Montgomery,

supra.)

In the De Mets ease the allegations on this subject

are in part similar to the St. Johns case, but not quite

so full as the St. Johns case, hence, likewise, obnoxious

to the motion. ee

In view of the conclusion reached on this allegation

of the complaint, it is unnecessary to pass upon the

constitutionality of Section 23.

Section 23 of the 1919 Illinois Corporation Act provided

in full as follows:

APPENDIX B.

The directors shall jointly and severally be liable

for the debts and contracts of the corporation in the

following cases:

(1) For assenting to an indebtedness in excess of

the amount of the capital of the corporation, to the

amount of such excess; provided no director shall be

liable under this clause (1) of this section if at the

time such indebtedness is incurred, the value of the

assets of the corporation as a going concern is greater

‘than the amount of such indebtedness, including in

such assets the assets acquired with or resulting from

the incurring of such indebtedness; but not including

in such assets good will or any sum therefor.

(2) For declaring or assenting to a dividend if

the corporation is, or is thereby, rendered insolvent,

or its capital is thereby impaired, to the extent of

such dividend;

(3) For debts contracted between the time of mak-

ing or assenting to a loan to a stockholder or director

and the time of its repayment, to the extent of such

loan.

For the purposes of this section the capital of the

corporation ‘shall be considered as the aggregate

amount paid in on its shares of capital stock issued

and outstanding.

Unless a director was absent from the meeting at

which such dividend was declared or loan made, or

unless his dissent therefrom shall be entered on the

corporate records, he shall be conclusively presumed

to have assented thereto.

‘DEC 30 ie

IN THE

SUPREME COURT OF THE UNITED STATES

Ar THe Ocroser Tzrm, 1941

Cross-Petitioners,

SAMUEL INSULL, JR., et al, |

Vs.

THOMAS D. AIKEN, et al.,

Cross-Respondents.

CROSS-PETITION.

CONRAD H: POPPENHUSEN,

EDWARD R. JOHNSTON,

FLOYD E. THOMPSON,

11 South LaSalle St., Chicago,

WALTER BREWER,

EDWARD J. F

231 South LaSalle St., Chicago,

Solicitors for Cross-Petitioners.

PRINTED BY CHICAGO LAW PRINTING CO.

INDEX.

“sn actmuitat ER Ae

Summary or Argument.

I. The complaint did not state a cause of action

IT.

III.

IV.

against the defendants for alleged wrongful

payment of dividends...

The complaint fails to allege facts which show

that the requisite jurisdictional amount is in-

sisardatane EL. el PE

The plaintiffs were collusively selected to create

an appearance of diversity of citizenship which

does not in fact exist.

Plaintiffs’ attorneys failed to sustain the bur-

den of showing that they had authority to com-

mence this suit against former directors of I.U.1.

A suit commenced without authority cannot be

prosecuted even where plaintiffs ratify the com-

mencement of the suit...

The second motion for summary judgment

should have been allowed. The settlement with

and release of the four co-defendant directors

against whom exactly the same charges were

made as are made against these remaining de-

fendants effected a discharge of all defendant

directors for all causes of action alleged. The

fact that the settlement agreement took the

form of a covenant not to sue is immaterial.

They paid $50,000.00 for the release, the suit

was dismissed and the Statute of Limitations

barred commencing another...

Prayer for Writ... SavhudenidibauSicnirkiaamemsbtamiceat once.

Sachromenccmacyie Se ale

PAGE

TABLE OF Cases.

Allis-Chalmers Mfg. Co. v. Chicago, 297 Ill. 444, 449 13, 23

Bell v. Farwell, 189 Ill. 414, 407.0000... ccccccecccccceos--- 11, 29

Board v. Blodgett, 155 Ill. 441, 446.00 13, 24

Carolene Products Co. v. McLaughlin, 365 Tl. 62, 70 21

Cashman v. A. & S. Canal Co., 118 U. 8. 58, 61.......... 12, 27

Cerri v. A. P. Tel. Co., 219 Fed. 285........................---.. 12, 27

Chicago Daily News Co. v. Siegel, 212 III. 617, 629 14,18

Chicago Motor Club v. Kinney, 329 Tll. 120, 134....... 22

Chick v. Fuller, 114 Fed. 22, 29.0000 21, 22

City of Chicago v. Babeock, 143 Tl. a ee 12, 34

Davis v. Va. Ry. & Power Co., 229 Fed. 633, 639........ 23

Dawson v. Columbia Trust Cx, 197 U. S. 178, 180,

pene Cede SRAM DLs rata SIU At eRe Le RR CE 12, 27, 28

Detroit v. Dean, 106 U. S. 537, 541... 12, 27

Frye v. County of Calhoun, 14 Ill. 131, 132.0... 11, 29, 31

Graham v. Railroad Co., 102 U. S. 148, 153... 14,18

Gwin v. Breedlove, 43 U. S. 29, 37.00.0000 22

Hall v. Woods, 336 Ti. 134 1K. 22

Hanley v. Waters, 255 Ill. App. 239.0... 24

Hanford v. Davies, 163 U. S. 273, 280... 14, 24

Heiner v. Donnan, 285 U. S. 312, 329... 22

Hutchinson Box Board and Paper Co. v. Van Horn,

Ss es cult See eee 25

Kankakee v. K. & I. R. Co., 115 Ill. 88, 92... 11, 29

Lewis v. Montgomery, 145 III. 30, 46, 47....... 11, 16, 18, 22, 23

Loverin v. McLaughlin, 161 Ill. era 22

Lyons v. Reinecke, 10 Fed. (2nd) 3, 7............... 14, 25

Matter of Reisenberg, 208 U. S. 90, 111... 25

Mutual Life Ins. Co. v. Thompson, 27 Fed. (2nd)

WE UIE scihantpobithataniciacnai te gate oS 13, 14, 24, 25

National Bank v. Carpenter, 101 U. S. 967, 568........ 13, 23

SEARLE RNR ELE LEE LE INDE OTE LEI DEINE ATI EBA ILE Sra ne LSE a

ill

PAGE

Taste or Cases (continued).

New Albany Waterworks v. Louisville Banking Co.,

ne ts 25

Norton v. Larney, 266 U. S. Se 14, 24

Patterson v. Thompson, 86 Fed. coe, ee 22

People v. Rose, 207 Ill. 352, 361... 22

Petroyeanis v. Pirola, 205 Ill. App. 310, 312.............. 12, 34

Pollard v. Bailey, 20 Wall. Ere 19

Pueblo of Santa Rosa v. Fall, 273 U.S. 315, 319......13, 29, 32

Quincy v. Steel, 120 U. S. 241, 248.00 12, 27

Robson v. Doyle, 191 Ill. 566, 570... 22

Ryerson & Son v. Peden, 303 III. Sees 19

Seegmiller v. Day, 249 Fed. EN Bi 19

Sherman v. Gassett, 4 Gilman kale 22

Smith v. McCullough, 270 U. S. a6, 470... 14, 24

Southern Rity. Inv. Co. v. Walker, 211 U.S. 603........ 12, 27

Springfield Gas Co. v. Springfield, 292 Ill. 236, 243 22

Stanley v. Leahy, 87 III. ae 7, 12, 34

Sutherland v. Int. Ins. Co., 43 Fed. (2nd) 969, 972 13

N. & G. Taylor Co. v. Anderson, 275 U. S. 431, 439 13, 23

United States v. First Wis. Tr. Co., 92 Fed. (2nd)

GE I stdin ) Be Mel 13, 23

United States v. Linn, 42 U. 8. Se |: LO Oe 14, 25

Vestal Co. v. Robertson, 277 IIl. ey Wikis. 22

Vigeant v. Seully, 35 Il. SS ae a 12, 34

Wallner v. Chicago Traction Co., 245 Ill. 148, 151...... 12, 35

Watkinson vy. Adams (Okla.), 103 Pae. (2nd) 498,

sp he i ei BO COR Ree 17

Western Mtge. & Guar. Co. v. Grey, 215 Calif. 191,

7 ee Se a 17

White-Wilson-Drew Co. v. Lyon-Ratcliff Co., 268 Fed.

so ag EF TT SND ae 13, 17, 22

EIR PA RNS RE RNR URN NNR PIR Bae: Soy Se IN Sa. SEERA ESPRESSO IE AI TC

PAGE

TasLe or Cases (continued).

L. E. Whitham Const. Co. v. Remer, 105 Fed. (2nd)

BFA, BI acscsiccnesewtee nn escennnsva<eesetsantrnenicomnasmnbsoonionentoaneetn 23

Wolfe v. Hartford L. & A. Ins. Co., 148 U.S. 389........ 24

Iuurnois Statutes Cirep.

Business Corporation Act of 1933, Smith-Hurd Stat.

ROB, gh TTB seinen aneputicernmnsnbicentnroratnincninseinahamennes 15

General Corporation Act of 1919, Section 23, Smith-

Hurd Stat. 1931, p. 749...............-.-.-.-c.secscsessenseonsenenees 3, 5, 15

ConstituTIoNns CITED.

Illinois State Constitution, Article II, Section 2, and

Me TG icc snecesicinienccsanenssivdnsacontsnrneeninanieincemavannoenbense 21

U. S. Constitution, Amendment XIV...................-.----- 21

LOLE EAE LTO SIOE DEPOT ILLS LOLITA SN aN eke see

IN THE

SUPREME COURT OF THE UNITED STATES

At THE OcroBer Term, 1941

Bs Siciseenai,

SAMUEL INSULL, JR., et al.,

Cross-Petitioners, Cross-Petition for Writ

vs. of Certiorari to the

United States Circuit

Court of Appeals for

THOMAS D. AIKEN, et al. the Seventh Circuit.

Cross-Respondents.

Cross-Petition for Writ of Certiorari.

To the Honorable the Supreme Court

of the United States:

Samuel Insull, Jr.. H. L. Stuart, Edward J. Doyle,

George F. Mitchell, Philip J. McEnroe and Stuyvesant

Peabody respectfully pray that a writ of certiorari issue

to the United States Circuit Court of Appeals for the Sev-

enth Circuit directing that Court to certify to this Hon-

orable Court the record in the case of Thomas D. Aiken

et al., Plaintiffs-Appellants, v. Samuel Insull, Jr., et al.,

Defendants-Appellees, No. 7430 in that Court, in order

that the decision and judgment of said Court rendered

October 1, 1941, may be reviewed in so far as the Cireuit

Court of Appeals reversed the decree of the District Court

for the Northern District of Illinois.

On this day, Thomas D. Aiken and others filed their

petition for a writ of certiorari to said Cireuit Court of

SEES I LE OEE TPS LEI MELLEL NITED SUE MEE AC BN

Appeals in this case accompanied by a transcript of the

record from said Court seeking to have this Court review

that portion of the decision and judgment of said Court

which affirmed the decree of the District Court. These

cross-petitioners will oppose the petition of Thomas D.

Aiken and others on the ground that the Circuit Court of

Appeals was right in so far as it affirmed the District

Court.

Jurisdiction.

The jurisdiction of this Court is invoked under Section

240 of the Judicial Code as amended by the Act of Febru-

ary 13, 1925. (28 U.S. C. A., See. 347.) This cause orig-

inated in the United States District Court for the Northern

District of Illinois and was reviewed on appeal by the

United States Cireuit Court of Appeals for the Seventh

Circuit. The opinion of the Cireuit Court of Appeals was

filed August 22, 1941, but petitions for rehearing were filed

and denied, and final judgment was rendered October 1,

1941. R. 351, 461.

Statement of the Case.

The complaint was filed February 3, 1933, in the names

of twenty-nine holders of Series B Debentures issued by

Insull Utility Investments, Inc. (hereinafter called “i:

U. I.’’) on behalf of themselves and all other holders of

such debentures similarly situated, and all other creditors

who desired to join and share the costs and expenses of

the suit. (R. 2.) When the complaint was filed it purported

to allege five causes of action,—(1) an action for wrongful

declaration of dividends in violation of statute, (Pars. 41-

45) (2) an action for wrongful pledging of assets in viola-

tion of debenture covenants, (Pars. 23-40) (3) an action

for improper use of corporate funds in settlement of

claims, (Par. 46) (4) an action for purchasing securities in

CUBIS De eee eng nro

deviation from the advertised purpose of the corporation,

(Par. 47) and (5) an action for wrongful investment of

funds in stock of Corporation Securities Co. of Chicago.

(Pars. 21-22.) Plaintiffs (cross-respondents here) have

abandoned all but the first two alleged causes of action.

In so far as the complaint relates to the alleged cause of

action for declaration of dividends in violation of the Tli-

nois statute, it alleges* that there was in force during the

period involved Section 23 of the 1919 General Corporation

Act of Illinois which provides that directors shall be

jointly and severally liable for ‘‘declaring or assenting to

a dividend’’ if the corporation is or is thereby rendered

insolvent or its capital is thereby impaired (Par. 41);

that on December 13, 1931, the liabilities of I. U. I. ex-

ceeded the ‘‘market value”’’ of its assets, and that on that

date and ever since the corporation was and has been

insolvent (Par. 42); that on January 9, 1932, a resolution

was adopted by the board of directors ‘‘ratifying’’ a reso-

*41. During all of the period of the existence of Insull

Utility Investments, Inc., there has been in full force and

effect a certain statute of the State of Illinois known as

Section 23 of the General Corporation Act, which is in

words and figures as follows:

‘*The directors shall jointly and severally be liable for

the debts and contracts of the corporation in the follow-

ing cases:

(1) For assenting to an indebtedness in excess of the

amount of the capital of the corporation, to the amount of

such excess; provided no director shall be liable under this

clause (1) of this section if at the time such indebtedness

is incurred, the value of the assets of the corporation as a

going concern is greater than the amount of such indebted-

ness, including in such assets the assets acquired with or

resulting from the ine: .rring of such indebtedness; but not

including in such assets good will or any sum therefor;

(2) For declaring or assenting to a dividend if the cor-

poration is, or is thereby, rendered insolvent, or its capital

is thereby impaired, to the extent of such dividend;

(Footnote continued on pages 4 and 5)

FONE BS SAN Wg BOR RT AA Nn NO

PM OR BEDS pS ON ee NR MERE EL ICID EP ION IOS 8 Ne BBLS RE ROE ICA ANGER OL PLEO, Li OLB IEE EY a

lution of the Executive and the Finance Committees

‘‘authorizing and directing’’ the payment of a dividend

on January 2, 1932 to stockholders of record on December

15, 1931, (Par. 43); that the corporation had no surplus at

any time during the years 1929, 1930, 1931 and 1932, but

the ‘‘corporation’’ paid cash dividends during each of

these three years on its preferred stock, the exact amounts

of which are unknown to plaintiffs (Par. 44); and that the

‘‘board of directors authorized or ratified’’ the action of

the Finance or Executive Committee authorizing the pay-

ment of said dividends, thereby rendering ‘‘themselves”’

jointly and severally liable within the purview of the stat-

ute to the plaintiffs and all other creditors and holders of

contracts of the company. Par. 45.

This case was presented to the District Court and is now

before this Court as to the cause of action relating to

alleged wrongful payment of dividends on the amended

motion to dismiss filed by leave of court on October 18,

(3) For debts contracted between the time of making

or assenting to a loan to a stockholder or director and the

time of its repayment, to the extent of such loan.

For the purpose of this section the capital of the corpo-

ration shall be considered as the aggregate amount paid in

on its shares of capital stock issued and outstanding.

Unless a director was absent from the meeting of which

such dividend was declared or loan made, or unless his

dissent therefrom shall be entered on the corporate rec-

ords, he shall be conclusively presumed to have assented

thereto.’’

42. On December 13, 1931, the total liabilities of Insull

Investments, Inc., exceeded the total fair market value of

its assets, and that on that date and ever since that date

the company was and has been wholly and irretrievably

insolvent.

43. On January 9, 1932, at a meeting of the Board of

directors held in Room 1700, 72 West Adams Street, Chi-

cago, Illinois, at which meeting all of the directors were

present except Martin J. Insull and John H. Gulick, a

1939, (R. 209,) the motion to require plantiffs’ attorneys

to show by what authority they commenced and are prose-

cuting this suit filed October 23, 1939, (R. 471,) and the

second motion for summary judgment filed November 14,

1939. R. 284.

The amended motion to dismiss sets forth that the com-

plaint does not state a cause of action for illegal payment

of dividends for several reasons: (1) A suit under Section

23 of the old General Corporation Act of Illinois must be

brought on behalf of all creditors, whereas this suit is

brought on behalf only of B debenture-holders and such

other creditors as elect to join and share the costs and

expenses. (2) Said Section 23 is unconstitutional because

it is beyond the power of the legislature to declare a con-

clusive presumption of fact, as this section purports to

do in its last paragraph, which provides, ‘‘Unless a

director was absent from the meeting at which such divi-

dend was declared * * * or unless his dissent therefrom

resolution was unanimously adopted, ratifying, confirming

and approving certain actions of the Executive and

Finance Committee, among them a resolution authorizing

and directing the payment of the dividend of $1.39 per

share on the Company’s $5.50 Prior Preferred Stock, pay-

able January 2, 1932, to stockholders of record December

15, 1931.

44. As hereinabove set forth, the Company had no sur-

plus at any time during the years 1929, 1930, 1931 and

1932. Nevertheless, the company paid cash dividends

during each of these three years on all classes of its Pre-

ferred Stock, the exact amounts of which cash dividends

are unknown to the Plaintiffs.

45. The Board of Directors authorized or ratified the

action of the Finance or Executive Committee authorizing

the payment of dividends as set forth above, thereby ren-

dering themselves jointly and severally liable, within the

purview of the Statute of the State of Illinois, set forth

above, to the plaintiffs, and all other creditors and holders

of contracts of the Company.

NW LE Fs Ths SAORI

shall be entered on the corporate records, he shall be

conclusively presumed to have assented thereto.’’ (3) The

Illinois statute is penal in character and will not be en-

forced in Federal equity courts. (4) The complaint does

not contain the essential allegation that the defendants

or any of them as directors of the corporation declared

or assented to the payment of any dividend. (5) The

complaint does not allege facts which show that the cor-

poration was insolvent at the time any dividend was

declared or that the payment of any dividend rendered

the corporation insolvent or that such payment impaired

its capital. R. 209-216.

The District Court dismissed the complaint as to this

cause of action, basing its decision only on the ground of

insufficiency of allegations to state a cause of action.

(Opinion, R. 296; Decree, R. 321.) The Circuit Court of

Appeals reversed the judgment of the District Court as

to this cause of action and held that the complaint was

sufficient. R. 357-360.

The amended motion to dismiss also challenges the suf-

ficiency of the complaint on the ground that it fails to

allege facts which show that the requisite jurisdictional

amount is present. The only allegations as to amount

involved appear in Paragraphs 4, 16 and 43. Paragraph

4 consists merely of the general statement that more than

$3,000 is involved. (R. 3.) Paragraph 16 alleges merely

the number of $1,000 debentures held by the several plain-

tiffs. (R. 19.) Paragraph 43 alleges that the Executive

and the Finance Committees authorized and directed the

payment of a dividend of $1.39 a share on the preferred

stock outstanding December 15, 1931, (R. 34,) but there is

no allegation how many shares of preferred stock were

outstanding on that date and so there is no basis for com-

puting the amount of the dividend authorized.

Pa AEWA GAHRAN ANG CNA IG POE CR ANID ISI ROT 1S EAE OBESE ARTO INES BORE. 6 ric IR TOE ai

SY AB EON ATT HAY II SHON PPE SS fs OEE

The Cireuit Court of Appeals held, contrary to the

record, that the complaint ‘‘discloses facts from which the

amount of a paid dividend may be determined,’’ and by

reference to other pleadings and to a proposed amendment

offered more than eight years after the occurrences out of

which the cause of action arose, held that there was suffi-

cient showing of jurisdictional amount. R. 362.

The amended motion to dismiss also charged that there

was a collusive selection of non-resident plaintiffs to give

an appearance of jurisdiction in the Federal Courts. (R.

209.) This ground was supported by the affidavit of de-

fendants. (R. 217.) Plaintiffs answered that about two-

thirds of the debenture holders who signed separate copies

of a uniform contract employing attorneys to collect

moneys due on their debentures were citizens and residents

of States other than Illinois, and that about one-third of

them were residents of Illinois; that the attorneys for this

group decided to institute a suit against former directors

of I. U. I. in the District Court of the United States for

the Northern District of Illinois, and that the secretary

of a committee incorporated to conduct litigation respect-

ing recovery on the debentures, after consultation with

the attorneys for the group, selected the names of those

used as plaintiffs in the filing of this suit. (R. 247-249.)

No named plaintiff was consulted about the use of his

name nor did any named plaintiff have any knowledge

that he was being named as a plaintiff until after the suit

was commenced. The selection was entirely by residents

of Illinois and by persons who had no legitimate interest

in the cause of action. R. 480.

The District Court did not rule on the point except by

its general order sustaining the motions to dismiss. (R.

321.) The Cireuit Court of Appeals held that the facts

appearing in the record do not constitute such collusion

—————————_=- |

PAINE SORELLE LIE GEOL IY UA EDR Ae STD MEE RRND SE AT TINA. AMIENS SABE HELL CLD

as will cause the Federal courts to refuse to entertain the

suit. R. 362.

The motion to require plaintiffs’ attorneys to show by

what authority they commenced and are prosecuting this

suit against the former directors of I. U. I. was filed

October 23, 1939, and was supported by affidavits showing

that the defendants and their attorneys had only recently

learned of the lack of authority of plaintiffs’ attorneys

and by affidavits showing that the named plaintiffs were

selected without consulting them and that the suit was

commenced without their knowledge. (R. 471.) Plaintiffs’

attorneys answered that they had commenced this suit by

virtue of the authority conferred upon them by written

instruments signed by the several plaintiffs and particu-

larly Paragraph 2 thereof. (R. 474.) This ‘‘uniform

contract’’ is addressed to two law firms and the pertinent

part reads:

‘‘The Undersigned Hereby Employs You

1. To collect all moneys due upon the Insull Utility

Investments, Inc., Debentures listed below the name of the

undersigned.

2. To institute, prosecute, join and participate in any

and all suits, actions and proceedings in the name of, or

on behalf of, the undersigned and that you may deem ad-

visable in furtherance of such collection, in any part of the

world where such actions may be brought or may at any

time be pending.’’ R. 467.

The answer of plaintiffs’ attorneys shows that the first

twenty-four named plaintiffs were never formally notified

of the commencement of this suit in their names and that

there was mailed to the last named five by the incorporated

committee a letter dated February 4, 1933, relating to an

unidentified suit against former directors in which it is

P REDE LPR SAREE BANE PNET NTRS A APT STN PMA The wc OS

stated: ‘‘it was necessary to file this suit yesterday and

we take this means of notifying you that you have been

selected as one of the twenty-nine plaintiffs pursuant to

the authority granted the attorneys in paragraph 2 of the

uniform contract with debenture holders.’’ (R. 475.) The

attorneys admitted that they received no instructions from

the named plaintiffs other than as set forth in said uniform

contract. (R. 475.) The chairman of the committee or-

ganized and incorporated to conduct this litigation testified

that he had no knowledge of the manner of the selection

of the plaintiffs and had no instructions from any of them.

(R. 483.) The secretary testified that not one of the plain-

tiffs in whose names this suit was brought ever conferred

with the attorneys of the committee or with any member

of the committee and that he handpicked the twenty-nine

named plaintiffs from the 953 non-resident debenture-

holders who had signed contracts with the attorneys pur-

suant to mail solicitation. (R. 480.) This secretary was a

resident of Illinois and was not a debenture-holder when

suit was commenced. (R. 477.) The charter says the

committee is incorporated to maintain an organization ‘‘for

the purpose of taking all necessary or proper steps to

obtain for such debenture holders the maximum recovery

on their debentures.’’ (R. 479.) The complaint is not

signed by plaintiffs but is signed by one who says he is

their agent. R. 38-39.

The District Court overruled this challenge to the au-

thority of plaintiffs’ attorneys (R. 321) and the Cireuit

Court of Appeals affirmed this ruling. R. 362.

November 14, 1939, a motion for summary judgment was

filed asking for an order barring prosecution of this suit

against present defendants because of the settlement with

and release of four other defendants. (R. 284-285.) The

plaintiffs answered that this settlement was effected by

covenants not to sue and that no one was released thereby.

ree oT |

ATE dah ln O/ GRAB NEE TY ots ——

(R. 242-246.) The instruments of settlement were signed

by Attorney Jacobson pursuant to authority given him

under the uniform contract to compromise and settle the

claims of the debenture-holders. (R. 271.) The suit was

dismissed as to the four defendants upon the payment of

$50,000. (R. 64-65.) The complaint charged these released

defendants with exactly the same acts as are charged

against present defendants.

The Contested Issues.

As to the matters presented by this cross-petition the

following questions arise and are in issue:

(a) Whether the attorneys appearing for plaintiffs had

authority to commence and prosecute this suit.

(b) Whether named plaintiffs were collusively selected

to confer on the District Court jurisdiction which it could

not otherwise have.

(ec) Whether the facts alleged show that the necessary

jurisdictional amount is involved.

(d) Whether the complaint alleges facts which state a

cause of action against these cross-petitioners for declar-

ing and assenting to the payment of dividends in violation

of Section 23 of the 1919 General Corporation Act of II-

linois.

(e) Whether said Section 23 is constitutional.

(f) Whether this alleged cause of action for illegal pay-

ment of dividends can be maintained on behalf only of

such creditors as join in the proceeding and share the

costs and expenses thereof ;

(g) Whether plaintiffs can maintain this suit in the

absence of an allegation that they owned the debentures

when the alleged wrongs were committed.

* ate "

—

(h) Whether the District Court properly denied the

filing of the proffered amendments to the complaint.

(i) Whether the cause of action was released by the

settlement with four alleged joint wrongdoers.

Reasons for Allowance of the Writ.

1. The Circuit Court of Appeals for the Seventh Cir-

cuit has decided an important question of local law in

conflict with applicable decisions of the Supreme Court of

Illinois.

(a) Under the established law, this suit must be dis-

missed because the complaint was filed without the

knowledge or authority of the plaintiffs and so the

suit was never legally commenced. Frye v. County

of Calhoun, 14 Tl]. 131; Town of Kankakee v. Kanka-

kee & Indiana R. Co., 115 Ill. 88, 92; Bell v. Farwell,

189 Ill. 414, 417.

(b) When the Circuit Court of Appeals held that

‘‘the word ‘assenting’ includes the approval and rati-

fication of a dividend after it has been declared,’’ it

held squarely against the Supreme Court of Illinois

which has decided that ‘‘assenting’’ as used in the

Corporation Act means assenting to the creation of

indebtedness, which corresponds to the declaration of

a dividend, and that a recognition of an indebtedness

after it has been contracted, and so of a dividend

after it has been declared, does not have the effect of

charging a director with the statutory liability. Lewis

v. Montgomery, 145 Ill. 30, 47.

trary to the Illinois law when it held that the Exec-

utive Committee of I. U. I. was the agent of the hoard

of directors in the declaration of dividends. Lewis v.

Montgomery, 145 Ill. 30, 46.

a ge a Nm

(d) The holding of the Circuit Court of Appeals

that the settlement with four of the defendants did

not release all of the defendants charged jointly with

the same wrong is contrary to the established law of

Illinois. Wallner v. Chicago Traction Co., 245 Ill. 148,

151; City of Chicago v. Babcock, 143 Ml. 358, 366;

Petroyeanis v. Pirola, 205 Ill. App. 310, 312; Stanley

v. Leahy, 87 Ill. App. 465, 467; Vigeant v. Scully, 35

Til. App. 44, 47.

2. The Cireuit Court of Appeals for the Seventh Cir-

cuit has decided an important question of Federal law in

conflict with applicable decisions of this Court and with

its own decisions and with decisions of other Cireuit

Courts of Appeals.

(a) The record shows that none of the debenture-

holders who were non-residents of Tllinois had any

knowledge of the selection of the named plaintiffs or

of the commencement of this suit until after the suit

had been commenced and that the non-residents whose

names were used as plaintiffs were handpicked by a

resident of Illinois, who was not a debenture-holder,

under the direction of the attorneys who appear for

plaintiffs, with the sole purpose of conferring jurisdic-

tion on a Federal court in violation of the rule stated

in Southern Realty Investment Co. v. Walker, 211 U.

S. 603; Dawson v. Columbia Trust Co., 197 U. S. 178,

181; Quincy v. Steel, 120 U.S. 241, 248; Cashman v. A. &

S. Canal Co., 118 U. S. 58, 61; Detroit v. Dean, 106

U. S. 537, 541; and Cerri v. Akron-People’s Telephone

Co., 219 Fed. 285.

(b) Under the facts shown by this record, plain-

tiffs’ attorneys commenced this suit against the

former directors of I. U. I. without the knowledge or

the authority of the named plaintiffs and under the

rule stated in Pueblo of Santa Rosa v. Fall, 273 U. S.

315, 319, and Sutherland v. International Ins. Co., 43

Fed. (2nd) 969, 972, this suit must be dismissed.

1919 General Corporation Act of Illinois by the Cir-

cuit Court of Appeals in this case extends the statute

by construction to embrace cases not within its terms

contrary to the decision of the same Circuit Court of

Appeals in White-Wilson-Drew Co. v. Lyon-Ratcliff

Co., 268 Fed. 525, 527.

(d) Since the original complaint did not state a

cause of action with respect to improper payment of

dividends, the new cause of action alleged in the pro-

posed amendments, if a cause of action is alleged, is

barred by the Statute of Limitations. N. é G. Taylor

Co. v. Anderson, 275 U. S. 431, 439; Allis-Chalmers

Manufacturing Co. v. City of Chicago, 297 Ill. 444;

Board of Education v. Blodgett, 155 Tll. 441.

(e) The District Court ruled in accordance with the

established practice in denying amendments offered

seven years after the suit was commenced and about

nine years after the occurrences out of which the

alleged cause of action arose. National Bank v. Car-

penter, 101 U. S. 567, 568; United States v. First Wis-

consin Trust Co., 92 Fed. (2nd) 840, 844.

(f) The law is established that the requisite juris-

dictional amount must affirmatively and distinctly

appear from the allegations of the complaint and that

a defect in such allegations cannot be helped by pre-

sumptions or argumentative inferences drawn from

the complaint. There is no allegation in the complaint

at bar of the amount of any dividend paid nor are

there facts alleged from which the amount may be

determined. The decision in this case is contrary to

the rule in Mutual Life Ins. Co. v. Thompson, 27 Fed.

(2nd) 753, 754; Smith v. McCullough, 270 U. S. 456,

459; Norton v. Larney, 266 U. 8. 511, 515; and Han- |

ford v. Davies, 163 U. S. 273, 280.

(g) Since plaintiffs have not by their allegations

shown that the alleged wrongs occurred while plain-

tiffs were the owners of debentures, they cannot main-

tain this suit. Graham v. Railroad Co., 102 U. S. 148,

153; Chicago Daily News Co. v. Siegel, 212 Ill. 617,

629.

(h) The Cireuit Court of Appeals was in error

when it used plaintiffs’ other pleadings and proposed

amendments to bolster up the original complaint. It

is established that on motion to dismiss all doubts

with respect to the sufficiency of the complaint must

be resolved against the plaintiff. Mutual Life Ins.

Co. v. Thompson, 27 Fed. (2nd) 753, 754; Lyons v.

Reinecke, 10 Fed. (2nd) 3, 7; United States v. Linn,

42 U.S. 104, 111.

Respectfully submitted,

Conrap H. PoprpENHUSEN,

Epwarb R. JoHNSTON,

Fioyp E. THompson,

11 South La Salle Street, Chicago,

Solicitors for H. L. Stuart, Sam-

uel Insull, Jr., Edward J. Doyle,

George F. Mitchell and Philip J.

McEnroe.

Wa ter Brewer,

Epwarp J. Farre.u,

231 South LaSalle Street, Chicago,

Solicitors for Stuyvesant Pea-

body.

a a aa icenbnisiaiasiadeaaaaa

pie

ARGUMENT IN SUPPORT OF CROSS-PETITION.

The complaint did not state a cause of action against the

defendants for alleged wrongful payment of dividends.

We present this point first because it is the ground on

which the District Court dismissed the complaint as to the

alleged cause of action against the former directors of

Insull Utilities Investments, Inc. for declaring or assenting

to the payment of a dividend in violation of Section 23 of

the General Corporation Act of Illinois of 1919, which

was repealed by the Business Corporation Act of Illinois

of 1933. We shall undertake to show that the holding

of the District Court is in line with the established law of

Illinois as declared by the Supreme Court of Illinois and

the Federal courts of the Seventh Circuit.

The only specific allegations with respect to the declara-

tion of or the assenting to dividends are that ‘‘the board

of directors authorized or ratified’’ the action of the

Finance or the Executive Committee declaring dividends.

(Par. 45.) This is far from alleging that any present de-

fendant, acting as a director, ‘‘declared or assented to a

dividend’’ within the meaning of the old Illinois statute.

The only specific reference to a meeting of the board of

directors is to the one held on January 9, 1932, where it

is said a resolution was adopted ‘‘approving and ratify-

ing’’ a resolution of the Executive and Finance Committees

‘fauthorizing and directing’’ the payment of a dividend

on January 2, 1932, to stockholders of record Decem-

ber 15, 1931. (Par. 43.) It does not appear from these

SPIER LEI eSB PBIS PSG ONL TIN ig MIR LPL LMI Et RIM

allegations whether the dividend was authorized or di-

rected by the Executive Committee or by the Finance

Committee or by both, nor does it appear whether the

dividend had already been paid at the time of the alleged

action by the board of directors. Presumably, the dividend

was paid January 2, 1932, and so the ‘‘approving and

ratifying’’ by the board of directors a week later was

certainly not a ‘‘declaring or assenting to a dividend’’

which is the only act which fixes the liability under the

statute.

We here point out that neither cross-petitioner Peabody

nor McEnroe nor Doyle nor Mitchell were members of the

Finance Committee and only Doyle of this group was a

member of the Executive Committee. Cross-petitioners

Insull and Stuart were members of both committees. (R.

5-6.) But there is no allegation that either Insull or

Stuart was present at any meeting of the Finance Com-

mittee where a dividend was declared or that either Insull

or Stuart or Doyle was present at a meeting of the Execu-

tive Committee where a dividend was declared. The

Finance Committee consisted of five members (Par. 10)

and the Executive Committee consisted of seven members,

(Par. 9) and the action may have been taken by either

committee by a majority which did not include any of

cross-petitioners. As Judge Briggle found, (R. 297,) no

present defendant is definitely charged with any act in

declaring or assenting to the dividend.

We deem the failure to allege that any of the present

defendants (cross-appellants here) ever declared or as-

sented to the payment of a dividend is conclusive against

the sufficiency of the complaint. The offense penalized by

the statute is the participation in the wrongful declaration

of a dividend at the time it is declared. Ratification is not

made actionable. In Lewis v. Montgomery, 145 Tl. 30, the

Illinois Supreme Court squarely ruled that ‘‘assenting’’

Ppp tE? Nxt ue eee NLT NOE RP ETELS are gene ress ——— . -

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meant approval at the time of the action and not subse-

quent ratification. There it was sought to hold directors

liable for recognizing indebtedness that had been created

by the general manager of the corporation in alleged viola-

tion of the statute. The Court said (p. 47):

‘The liability is created only where the indebtedness

of the corporation exceeds the amount of the capital

stock, and is imposed only upon the directors and of-

ficers assenting to such excess of indebtedness. This

plainly means assenting to its creation. Manifestly, a

recognition of the indebtedness by the directors after

it has been so contracted as to become binding upon

the corporation, should not have the effect of charging

them with this statutory liability.’

When the Circuit Court of Appeals holds that ‘‘the word

‘assenting’ includes approval and ratification of a dividend

after it has been declared’’, (R. 359,) it holds squarely

contrary to the Supreme Court of Illinois which has de-

cided that ‘‘assenting’’, as used in Section 23 means

assenting to the creation of the liability and that a recogni-

tion of the obligation of the corporation by the directors

after it has been contracted by another agent does not have

the effect of charging the directors with the statutory

liability. The Circuit Court of Appeals held in an earlier

case that this statute should not be extended by construc-

tion to embrace cases not within its terms. (White-Wilson-

Drew Co. v. Lyon-Ratcliff Co., 268 Fed. 525, 527.) It is

generally held by the courts, under similar statutes, that

mere ratification of an improper dividend is not sufficient

to create the statutory liability. Western Mortgage &

Guaranty Co. v. Grey, 215 Calif. 191, 8 Pac. (2nd) 1016,

1020; Watkinson v. Adams, (Okla.) 103 Pac. (2nd) 498, 500.

The Circuit Court of Appeals reasons from the premise

that the executive committee of a corporation is the agent

Siete eraeneas —

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of the board of directors, whereas the Illinois Supreme

Court holds squarely opposite in Lewis v. Montgomery,

145 Ill. 30, saying at p. 46:

““The directors, though the governing body of the

corporation, are only its officers and agents, and any

subordinate agent appointed by them, or acting by

virtue of their sufferance or recognition, does not

thereby become their agent, but the agent of the cor-

poration. His acts are the acts of the corporation,

so as to make it liable for debts or obligations incurred

by him on its behalf, but they are not the acts of the

directors, unless commanded or authorized by them.’’

There is no allegation that the acts of the executive

committee were commanded or authorized by cross-

petitioners. The allegations are merely that the board of

directors acquiesced in the declaration of a dividend by the

executive committee by resolution adopted after the divi-

dend had been declared and paid. R. 34.

Another defect in the complaint that is fatal to the

maintenance of this suit by present plaintiffs is that it 2s

nowhere alleged that they were creditors of the corpora-

tion at the time the dividends were declared and paid.

(Graham v. Railroad Co. 102 U. 8. 148, 153; Chicago Daily

News Co. v. Siegel, 212 Ill. 617, 629; Buell v. Lanski, 232

Ill. App. 500, 511.) Whether they extended credit to the

corporation before the dividends were declared or whether

they bought their debentures in the open market after the

alleged wrong had been done does not appear from the

allegations of the complaint. If they bought their deben-

tures after the dividends were paid they cannot now sue

for alleged wrongs which caused them no legal injury.

Courts do not countenance speculation by litigation.

The complaint was filed February 3, 1933 and it is al-

leged (Par. 16, R. 19) that on that day plaintiffs were the

teobic

‘‘owners and holders of debentures.’’ It is not alleged

and cannot be inferred that such ownership existed on any

day other than that alleged. The only other paragraph

which could be contended refers to a date of purchase is

paragraph 13 (R. 11-12), but when all of the paragraph is

read it is clear that there is no allegation that the named

plaintiffs bought their debentures from I. U. I. January

1, 1930 and paid the face amount therefor. It is true that

it is alleged in the first part of the paragraph that plaintiffs

are part of the public to whom the debentures were issued,

but it is alleged by the same sentence that I. U. I. received

pay for the debentures from the underwriters and that

$4,818,000 of said debentures have been paid and cancelled

since they were issued. If it can be said that there is an

allegation in this paragraph that any plaintiff bought de-

bentures from the underwriters in January 1930, there is

no allegation that the debentures mentioned in paragraph

16 are the debentures bought at the time of the original

issue, three years before this suit was commenced. The

debentures then bought may have been among those sub-

sequently paid and cancelled and those plaintiffs owned at

the time this suit was filed may have been debentures

acquired after the dividends were declared and paid. All

uncertainties and ambiguities in the complaint must be

resolved against the plaintiffs.

The liability under Section 23 is personal to the creditors

and a suit to enforce the liability must be brought by one or

more creditors on behalf of all creditors. (Ryerson & Son

v. Peden, 303 Ill. 171, 184; Seegmiller v. Day, 249 Fed. 177,

179; Pollard v. Bailey, 20 Wall. 520, 527.) This suit is

brought by plaintiffs on their own behalf as holders of B

Debentures of I. U. I. and on behalf of all other owners

and holders of such debentures similarly situated and all

other creditors who desired to join in the suit and share

the costs and expenses thereof. (R. 2.) The Circuit Court

OB LEE ET be RIAL IIE CED ES ts ARE OUIRD a ne e » rea PoP Et ORES WS tw -

of Appeals is in error when it says that ‘‘This suit was

brought on behalf of all creditors.’’ (R. 361.) Plaintiffs

do not sue on behalf of the A debenture-holders except as

they are included among other creditors, and then they are

not included unless they join in the proceeding and make

themselves liable for costs and expenses of this suit. No

A debenture-holder ever joined. When this suit was filed

the banks and others besides debenture-holders had claims

aggregating some $70,000,000. We think it is clear from

the allegations of the complaint that it was never intended

by plaintiffs to include the banks as their co-plaintiffs.

Since this suit was not brought on behalf of all creditors,

it cannot be maintained as a suit under the Illinois statute.

Section 23 imposes liability ‘‘for declaring or assenting

to a dividend if the corporation is, or is thereby rendered

insolvent, or its capital is thereby impaired, to the extent

of such dividend.’’ No facts are alleged in this complaint

which show that the corporation was insolvent at the time

any dividend was declared or that the payment of the divi-

dends rendered the corporation insolvent or that such pay-

ment impaired its capital. The complaint does not set forth

the capital of the corporation, its assets and liabilities are

not stated, and the dates of payments or amounts of divi-

dends paid are not alleged. The allegations with respect

to the financial condition of the corporation (Pars. 20,

29, 42, 44) are mere conclusions of the pleader and are

not allegations of fact which show that the corporation

could not legally pay dividends. There are no allegations

with respect to any dividend except the last which was

paid January 2, 1932. As to this last dividend the allega-

tion in Paragraph 42 that on December 13, 1931, the total

liabilities exceeded the total ‘‘fair market value’”’ of its

assets is not an allegation that the actual value of the

assets, which were stocks of other corporations, did not

excced the liabilities of this investment company. Further-

a gil Saree . |

21 :

more, since this last dividend was declared by the Execu-

tive Committee on December 4, 1931, the condition of the

corporation on December 13, 1931, would not of itself be

sufficient to charge these cross-petitioners as directors with

the statutory liability, especially when it is alleged the

board did not act until January 9, 1932. There is a com-

plete lack of allegation of essential facts to show either

insolvency or impairment when any dividend was declared

or assented to by any cross-petitioner in any capacity.

The complaint nowhere alleges facts which show that any

of the cross-petitioners knew that the corporation was not

in financial condition to pay any of the several dividends.

The complaint reveals that the books of the corporation

showed a surplus by reason of income from dividends on

the stocks held in the portfolio of the company and by

reason of the proceeds of the sale of subscription rights.

Such of the directors, if any, as the complaint shows as-

sented to the payment of a dividend had the right to rely

on these books. Chick v. Fuller, 114 Fed. 22, 29.

If this action for improper payment of dividends were

brought on behalf of all creditors of the corporation and

the complaint otherwise alleged a case within the terms

of the statute and these plaintiffs (cross-respondents here)

were in position to maintain the suit, it could not be main-

tained because the statute on which it is based is unconsti-

tutional. The last paragraph of the statute provides, ‘‘ Un-

less a director was absent from the meeting at which such

dividend was declared, * * * or unless his dissent there-

from shall be entered on the corporate records, he shall be

conclusively presumed to have assented thereto.’’ It is

beyond the power of the legislature to declare a conclusive

presumption. Such an attempt is an invasion of the judicial

field and violates Section 2 of Article II and Article IIT of

the State Constitution and the Fourteenth Amendment to

the Federal Constitution. (Carolene Products Co. v. Me-

BP STI ENS BL TAOS PLN IPR OL III Sy I AT AAI BB ARIA a

Laughlin, 365 Tll. 62, 70; People v. Rose, 207 Ill. 352, 361;

Hall v. Woods, 325 Ill. 114, 144; Heiner v. Donnan, 285

U. S. 312, 329.) This provision of Section 28 creating a

conclusive presumption being unconstitutional, it follows

that subdivision 2 of this section of which this invalid pro-

vision is an essential and integral part, is likewise invalid.

(Chicago Motor Club v. Kinney, 329 Ill. 120, 184; Spring-

field Gas Co. v. Springfield, 292 Tll. 236, 243.) The Supreme

Court of Illinois decided, under the Illinois Corporation

Act prior to the revision thereof in 1919, that a director

could only be held liable for the violation of the statute

when the evidence showed that he had consciously approved

or participated in the wrongful act, (Lewis v. Montgomery,

145 Ill. 30,) and the Federal courts in Illinois gave this

statute the same construction. (White-Wilson-Drew Co.

v. Lyon-Ratcliff Co., 268 Fed. 525; Chick v. Fuller, 114 Fed.

22, 29.) The very purpose of the addition of the conclusive

presumption clause in 1919 was to change this rule of

evidence.

The provision of Section 23 under consideration is a penal

statute. It in effect prohibits declaration of a dividend

which will render the corporation insolvent or which will

impair the capital of the corporaton. It punishes directors

for violation of their duties to the corporation and its

stockholders and creditors. (Vestal Co. v. Robertson, 277

Ill. 425, 430; Patterson v. Thompson, 86 Fed. 85, 86.) Inas-

much as liability sought to be created by the section is penal

in character, a suit cannot be maintained in equity to enforce

such liability. (Loverin v. McLaughlin, 161 Ill. 417, 435;

Robson x. Doyle, 191 Ill. 566, 570.) The Federal courts

will not enforce a penal law of Illinois. Gwin v. Breedlove,

43 U.S. 29, 37; Sherman v. Gassett, 4 Gil. 521.

For all these reasons the District Court properly dis-

missed the complaint as to the cause of action fer wrongful

payment of dividends. While it based its decision only on

NARADA ALES LIE SVT WLM ETN VM ap EMR LEI AR OLLI TE MERI LO BI AEE IES hale ERP TNS RIEL IEP IP CLAM MEARE ATE,

the ground of insufficiency of the complaint to state a cause

of action, the decree will be sustained if any ground appear-

ing of record is sound. The Cireuit Court of Appeals erred

in holding the original complaint sufficient and in reversing

the decree of the District Court.

We respectfully submit that under the authorities the

District Court properly refused the amendment to the

complaint not only because it was presented too late, (Na-

tional Bank v. Carpenter, 101 U.S. 567, 568; L. BE. Whitham

Construction Co. v. Remer, 105 Fed. (2nd) 371,) but also

because it failed to state a cause of action. (Lewis v. Mont-

gomery, 145 Ill. 30, 47.) The allowance of an application

to amend rests in the discretion of the trial court and its

order denying the application will not be reversed unless

there is an abuse. United States v. First Wisconsin Trust

Co., 92 Fed. (2nd) 840, 844; Davis v. Virginia Ry. & Power

Co., 229 Fed. 633, 639.

These defendants filed their motions to dismiss in 1933

(R. 39, 48, 46) and plaintiffs had the case continued gen-

erally in 1934. (R. 57-58.) In 1939 defendants took steps

which stirred plaintiffs to action in this case which they

had permitted to lie dormant for more than six years. The

proposed amendments were offered March 1, 1940 (R. 299),

more than seven years after the complaint was filed. The

District Court ruled in accordance with established practice

regarding tardy amendments. The Cireuit Court of Appeals

ruled directly contrary to the spirit of the established law

as well as the new Federal Rules of Civil Procedure which

stress dispatch of business of the courts and require dili-

gence on the part of litigants. Since the original complaint

did not state a cause of action, the new cause of action al-

leged in the amendments, if a cause of action is alleged, is

barred by the Statute of Limitations. (NV. € G. Taylor Co.

v. Anderson, 275 U. 8. 431, 439; Allis-Chalmers Co. v. City

of Chicago, 297 Ill. 444, 449.) Under Illinois law this com-

pleted bar is a vested right which is protected by the Con-

stitution. Board of Education v. Blodgett, 155 Ill. 441,

Hanley v. Waters, 255 Ill. App. 239.

Il.

The complaint fails to allege facts which show that the

requisite jurisdictional amount is involved.

The only paragraphs of the complaint relating to amount

involved are paragraphs 4, 16 and 43. Paragraph 4 con-

sists merely of the general statement that more than

$3,000.00 is involved (R. 3). Paragraph 16 alleges merely

that the plaintiffs are the holders of debentures in varying

amounts (R. 19). The allegation in paragraph 43 is that

a committee directed payment of a dividend of $1.39 a share

on the preferred stock outstanding December 15, 1931 (R.

34) but there is no allegation of how many shares of pre-

ferred stock were outstanding on that date, and so there

is no basis for computing the amount of the dividend

authorized or paid. The Circuit Court of Appeals is in

error when it says that the complaint ‘‘discloses facts from

which the amount of a paid dividend may be determined.”’

R. 362.

It is not enough that a complaint contains a formal

allegation of jurisdictional amount. It must allege facts

showing that the amount in controversy exceeds $3,000.00.

Smith v. McCullough, 270 U.S. 456, 459; Norton v. Larney,

266 U. S. 511, 515; Mutual Life Ins. Co. v. Thompson, 27

Fed. (2nd) 753, 754. It must affirmatively and distinctly

appear from the facts alleged and not by inference or argu-

ment that the necessary amount is involved. Hanford v.

Davies, 163 U. S. 273, 280; Wolfe v. Hartford Life € Annu-

ity Ins. Co., 148 U. 8S. 389.

We respectfully submit that the Circuit Court of Appeals

is in error when it uses ‘plaintiffs’ counter motions, an-

swers on facts and proposed amendments’’ to bolster up

the original complaint. (R. 362.) It is well established that

on a motion to dismiss all doubts with respect to the suffi-

ciency of the complaint must be resolved against the plain-

tiffs. Mutual Life Ins. Co. vy. Thompson, 27 Fed. (2nd) 753,

754; Lyons vy. Reinecke, 10 Fed. (2nd) 3, 7; United States

v. Linn, 42 U. S. 104, 111. Plaintiffs cannot supply defi-

ciencies in their complaint by the affidavit of Mr. Jacobson

as to the amount of any dividend that was paid. It is essen-

tial that the complaint itself set forth sufficient facts to

show the necessary jurisdictional amount. This it does not

do. It states, (par. 44, R. 34) ‘‘the exact amounts of which

cash dividends are unknown to plaintiffs’’. On this ground

of failure to allege facts as to amount involved to show

jurisdiction in a federal court the complaint was properly

dismissed.

ITI.

The plaintiffs were collusively selected to create an ap-

pearance of diversity of citizenship which does not in

fact exist.

The Circuit Court of Appeals says ‘‘The record presents

a situation where certain creditors having a justifiable in-

terest in the controversy agreed that several members of

their class would cause the suit to be commenced in order

to confer federal jurisdiction.’ (R. 362.) If the record

supported this statement of fact then New Albany Water-

works v. Louisville Banking Co., 122 F. 776, 779; Hutchin-

son Box Board and Paper Co. v. Van Horn, 299 F. 424, 429

and Matter of Reisenberg, 208 U. §. 90, 111, would be in

point. But it does not and the cases do not support the

Court’s conclusion.

, q

In the cases cited by the Court the parties who were

actually interested in the alleged cause of action agreed

among themselves to cause the suit to be commenced in

the name of and carried on by some of their number for

the benefit of all. There the interested litigants selected

the named plaintiffs so that diversity of citizenship would

appear between the plaintiffs and the defendants, and it

is held under those circumstances that this did not consti-

tute such collusion as would cause the federal courts to

refuse to entertain the suits.

In the case at bar the record establishes without dispute

that none of the debenture holders who were non-residents

of Illinois had any knowledge of the selection of the named

plaintiffs, or of the commencement of this suit until after

the suit had been commenced. In their answer to this point

of the verified amended motion to dismiss, the attorneys for

plaintiffs admit that one-third of the group that had em-

ployed them to collect the amount due on the debentures

held by the members of the group were citizens of Illinois

(R. 247) ; that each member of the group signed a separate

copy of the uniform contract under which the attorneys

were employed (for form see R. 467); that the attorneys,

not the debenture holders, decided to institute the suit

in the federal courts (Rec. 248); and that the secretary of

the incorporated litigating committee, not the debenture

holders, after consulting with said attorneys, selected the

names of the plaintiffs from the non-resident signers of the

contracts for the purpose of filing this suit in the Federal

court (R. 249). On the hearing the secretary of this cor-

poration admitted that not one of the plaintiffs in whose

names suit was brought ever conferred with the attorneys

who claimed to represent plaintiffs or with any member

of the committee that assumes to speak for plaintiffs, or

with the secretary of this incorporated committee, that made

the selection of plaintiffs from citizens ontside of Illinois.

(R. 480.) All of the officers of this Illinois corporation, or-

ganized to conduct litigation, were residents of Illinois. Not

even the plaintiffs had anything to do with their selection,

and not even they knew anything about the filing of the

complaint until after it had been filed. (R. 481.) The chair-

man of this litigating committee testified that he had no

contact with any of the non-resident members of the com-

mittee relative to the filing of this suit, that he had nothing

to do with the selection of the persons whose names were

used as plaintiffs, and that the first time he learned how

they were selected was on the hearing in the District Court

seven years after the suit was commenced. R. 483.

These admitted facts bring the case squarely within the

rule stated in Southern Realty Investment Co. v. Walker,

211 U. S. 603; Dawson v. Columbia Trust Co., 197 U. 8. 178,

181; Quincy v. Steel, 120 U.S. 241, 248; Cashman v. A. & 8.

Canal Co., 118 U. S. 58, 61; Detroit v. Dean, 106 U. S. 537,

and Cerri v. Akron-People’s Telephone Co., 219 Fed. 285.

These suits were dismissed because of collusion to create

an appearance of diversity of citizenship.

We respectfully submit that there is no basis in the

record for the finding of the Cireuit Court of Appeals that

the creditors agreed that certain members of their class

would cause this suit to be commenced. (R. 362.) The un-

disputed evidence is that the non-resident creditors were

not consulted about the commencement of the suit and

knew nothing about its commencement until after the com-

plaint had been filed. (R. 480.) On the hearing one of the

plaintiffs’ attorneys frankly admitted to the Court that

the selection of the persons to be used as plaintiffs was

made under the direction of the attorneys from the deben-

ture holders who were not residents of Illinois in order

that jurisdiction might be conferred on the Federal Court

(R. 484) and he also admitted that the attorneys had

had no consultation with the non-resident creditors respect-

ing the filing of this suit against former directors or the

use of their names as plaintiffs prior to the commencement

of the suit. (R. 487.) They assumed to act under the author-

ity granted by the Uniform Contracts which by the very

terms thereof gave no such authority.

‘When the arrangement of the parties is merely a con-

trivance between friends for the purpose of founding a

jurisdiction which otherwise would not exist, the device

cannot be allowed to succeed.’? Dawson v. Columbia Trust

Co., 197 U. S. 178, 181. This collusive selection of plaintiffs

is alone a sufficient ground for the dismissal of this suit.

True diversity of citizenship is not present and there is no

jurisdiction in the Federal courts.

IV.

Plaintiffs’ attorneys failed to sustain the burden of show-

ing that they had authority to commence this suit against

former directors of I.U.I. A suit commenced without

authority cannot be prosecuted even where plaintiffs

ratify the commencement of the suit.

Plaintiffs’ attorneys in their answer to the rule to show

their authority, state that they commenced this suit by

virtue of authority conferred on them by the Uniform Con-

tract, separate copies of which were signed by some 953

non-resident debenture holders and 534 debenture holders

residing in Illinois. (R. 474.) Paragraph 1 of this con-

tract empleys them ‘‘to collect all moneys due upon the

Insull Utility Investments, Inc. Debentures listed below

the name of the undersigned.’’ (R. 467.) Paragraph 2,

on which they particularly rely, authorizes the attorneys

to participate in any suit that they ‘‘may deem advisable

in furtherance of such collections.’? R. 467.

The debentures were contracts between the holders and

the corporation. The directors were not parties to the

debentures and there was no privity of contract between

the holders and the directors. These attorneys were em-

ployed only to further the collection of moneys due upon

the debentures and this is a far ery from giving them

authority to sue the former directors for some supposed

cause of action for alleged wrongful payment of dividends.

If an attorney were employed to bring an action on a note

no one would assume that he had authority to bring a penal

action against some person who was not a party to the

note.

There is a presumption that an attorney has the author-

ity to commence a suit, but when that authority is put in

issue, the burden is on the attorney to show his authority.

This is nothing but elementary law of agency. A court

may at any time require an attorney to show his authority

to appear for a client. Pueblo of Santa Rosa v. Fall, 273

U.S. 315, 319; Bell v. Farwell, 189 Til. 414, 419-424; Town

of Kankakee v. Kankakee & Indiana R. Co., 115 Tll. 88, 92.

A complaint filed by an attorney without authority is not

the commencement of a suit. Where the power of the Court

is illegally called into exercise the plaintiff cannot give life

to the void act of the attorney by thereafter approving

what the attorney has already done without authority. A

defendant cannot be made to answer a suit illegally com-

menced. This point is squarely decided in Frye v. County

of Calhoun, 14 Ill. 131, where the Court says (p. 133):

‘‘The process of the courts is not to be issued

except at the instance of a suitor. It must be de-

manded by him in person, or by his authorized attor-

ney. A defendant is not bound to answer to the merits

of a suit commenced without authority from the plain-

tiff. Otherwise, he might be twice compelled to liti-

gate the same cause of action. A judgment in his

favor in a suit prosecuted without authority, would be

no bar to a second action brought by the direction of

the plaintiff.

‘‘The fact that some of the judgment creditors sub-

sequently approved of this unauthorized act of the

solicitor, does not change the legal character of the

case. The true question is, Whether he had authority

at the time to commence the swt for them, and not

whether they afterwards approved of what he had

done. The power of the court was illegally called into

exercise by him, and the law will not suffer them to

profit thereby against the objections of the defendants.

The latter were improperly brought before the court,

and they had a clear right to be discharged.’’ (Our

italics.)

The Circuit Court of Appeals says that plaintiffs’ attor-

neys were authorized by the employment contract to in-

stitute all proceedings deemed advisable in furtherance

of the collection of ‘‘all moneys due the debenture holders.”’

(R. 362.) If this were the fact we would not be making

the point. Plaintiffs’ attorneys admit that their only

authority to institute this suit is the uniform contract,

about 1500 counterparts of which were secured by mail

solicitation. This contract says as plainly as the English

language can express an agreement that the attorneys are

employed ‘‘to collect all moneys due upon the Insull Utility

Investments, Inc. Debentures’’. Authority to collect the

money due ‘‘upon the debentures’’ is quite a different

thing from authority to collect ‘‘all moneys due the deben-

ture holders’’ from any source. By the very language of

the contract authority is limited to the collection of moneys

due upon the debentures. This suit which ihe attorneys

filed is one upon an alleged statutory liability and not one

upon the debentures.

The attorneys in their answer to the rule admit that

they received no instructions from the named plaintiffs

other than is set forth in the uniform contract. (R. 475.)

The first twenty-four named plaintiffs were never notified

of the filing of this complaint on February 3, 1933. (R.

474.) There was mailed to the last named five, after the

filing of the complaint, a letter dated February 4, 1933

which said among other things: ‘‘It was necessary to file

this suit yesterday and we take this means of notifying

you that you have been selected as one of the twenty-nine

plaintiffs pursuant to the authority granted the attorneys

in paragraph 2 of the uniform contract with debenture

holders.’’ (R. 475.) These letters did not give the title

or number of the case, but assuming that plaintiffs learned

of the commencement of this suit and that they did not

protest the use of their names, under the specific language

of the Illinois Supreme Court in Frye v. Calhoun, 14 Tl.

131, 133, ratification by silence is not a justification for

bringing the suit without the advance authority or consent

of the plaintiffs.

The Circuit Court of Appeals did not make the investiga-

tion of this point that the law requires, but contented

itself with saying that ‘‘The District Court investigated

this matter thoroughly and concluded that attorneys for

plaintiffs had authority to prosecute these proceedings’’

and then concluded ‘‘ We see no reason for disturbing this

conclusion.’’ We direct attention to the fact that Judge

Wilkerson heard the testimony on this branch of the case

but did not decide the question. However during the

hearing he did comment that it would be ‘‘a rather far-

fetched ruling’’ to hold that the contract authorized the

filing of this suit. (R. 486.) When the case was de-

cided by Judge Briggle he had disposed of the case in favor

of the defendants on other grounds and it was not neces-

sary for him to decide this question. We do not know how

much consideration he gave to this point, but his memo-

randa of decision would indicate that it was only casual.

(R. 297.) Whatever consideration the District Court

gave to the point, we respectfully submit that defendants

are entitled to a full re-examination of the matter by this

Court. Pueblo of Santa Rosa v. Fall, 273 U. S. 315, 319.

If this suit was commenced without authority it must be

dismissed.

We present this contention in all earnestness. We think

a mere reading of the contract under which these attorneys

claim to receive their authority to commence this suit is a

conclusive answer to their claim. They admit they have

no other authority than the contracts which were solicited

in connection with the bankruptcy proceeding.

The second motion for summary judgment should have

been allowed. The settlement with and release of the

four co-defendant directors, against whom exactly the

same charges were made as are made against these re-

maining defendants, effected a discharge of all defend-

ant directors for all causes of action alleged. The fact

that the settlement agreement took the form of a cove-

nant not to sue is immaterial. They paid $50,000 for the

release, the suit was dismissed, and the Statute of Limita-

tions barred commencing another.

When this suit was commenced by plaintiffs there were

included among the defendants Walter S. Brewster, Waldo

F. Tobey, Louis A. Ferguson, and Britton I. Budd, other

former directors, the first of whom had been a member of

both the Executive Committee and the Finance Committee.

All of the acts of wrongdoing charged against the present

defendants (cross-petitioners here) as directors were

charged against the settling defendants. In 1937, while the

case was pending below, a settlement was made by the at-

torney for plaintiffs under which these defendants paid

varying amounts, totaling $50,000, and the case was dis-

missed as to them. The remaining defendants, by their

amended motion to dismiss (R. 215) and by their second

motion for summary judgment (R. 284) claimed this re-

sulted in a complete settlement of all causes of action and,

therefore, released all former directors.

The instrument executed in effecting this settlement

was in the form of a covenant not to sue, (R. 269-271,) and

this plaintiffs contend saves their case against other al-

leged joint wrongdoers. R. 242-246.

We submit that no man of experience is credulous

enough to believe that these four defendants paid to the

attorney for plaintiffs $50,000 just for a contract that

they would not be sued. There cannot be the slightest

doubt that there was a complete settlement of the causes

of action against these four defendants and that the at-

torney for plaintiffs convinced them that the payment of

$50,000 would free them from any further liability. A suit

brought at this late date would be barred by laches

and the Statute of Limitations. It is obvious to anyone

facing the realities that the four defendants who paid the

$50,000 have been released from all liability on account

of their acts as directors of L.U.1I.

It is important here to again examine the power of at-

torney under which Lewis F. Jacobson pretended to act

when he accepted the $50,000 from the settling directors

and delivered to them agreements in the form of covenants

not to sue, on behalf of the debenture-holders whom he

claimed to represent, including the plaintiffs, and on be-

half of the attorneys for these debenture-holders. This

power of attorney authorized Jacobson ‘‘to execute and

acknoweldge any document or instrument whatsoever in

furtherance of the collection of money due on said deben-

tures, including the execution and vertification of a proof

of claim in bankruptey’’ and also ‘‘to collect, receive and

account for all moneys due the undersigned on said deben-

tures, including the execution and verification of a proof

amount due on said debentures.’’ (R. 467.) It will be

observed that there is no authority given to Jacobson

to receive moneys for covenants not to sue, nor is the

authority given to him to execute such covenants on behalf

of the debenture-holders whom he claims to represent.

The only authority given is to collect and account for all

money due on the debentures, or to compromise the amount

due and collect and account for a part. Acting pursuant

to that authority, Jacobson compromised with and col-

lected $50,000 from four of the defendants and dismissed

the case as to them.

This was a settlement of the cause of action against

these four defendants regardless of the form of the settle-

ment contract. The other defendants are not bound by the

attempt to reserve the cause of action against them. Under

the well-established law of Illinois and of most other

American jurisdictions, when the cause of action is com-

promised, settled and released as to one or more of several

joint wrongdoers, there is no cause of action left and no

suit can be maintained against those with whom settlement

is made or against any other persons alleged to have acted

with them in the commission of the wrong. The fact that

the instrument of settlement takes the form of a covenant

not to sue is immaterial if all the circumstances show there

was in fact a release. City of Chicago v. Babcock, 148 Il.

358, 366; Petroyeanis v. Pirola, 205 Ill. App. 310, 312;

Stanley v. Leahy, 87 Ill. App. 465, 467; Vigeant v. Scully,

35 Ill. App. 44, 47. It is the settled law of Illinois that

when one of several alleged joint wrongdoers is released

all are released. Wallner v. Chicago Traction Co., 245 Ill.

148, 151.

CONCLUSION.

The Cireuit Court of Appeals has wholly disregarded

the Illinois decisions and decisions of this Court on the

phase of the case presented by this cross-petition for writ

of certiorari. It is therefore respectfully submitted that

this case is one calling for the exercise by this Honorable

Court of its supervisory powers over the judgments and

decrees of the Cireuit Courts of Appeals in order that the

errors committed by the Circuit Court of Appeals of the

Seventh Circuit may be corrected. That these cross-

petitioners may have the benefit of the rights to which

they are entitled under the established law, this cross-

petition should be granted and this Honorable Court should

review the decision of the Cireuit Court of Appeals and

enter its judgment affirming the decree of the District

Court in all respects.

Respectfully submitted,

Conrap H. Poppenuusen,

Epwarp R. Jounston,

Fioyp E. Tompson,

11 South LaSalle St., Chicago,

Water Brewer,

Epwarp J. FAarre.,

231 South LaSalle St., Chicago,

Solicitors for Cross-Petitioners.

“ , te Senne Nic ed

Nba eT abe Ne TAO

zB erp .

DEC 30 194)

= ELMOUE C8

IN THE

SUPREME COURT OF THE UNITED STATES

Ar tHe Ocroser Tzrm, 1941

SAMUEL INSULL, JR., et al, 7

Cross-Petitioners, i ee

: ‘Gee

the Seventh Circuit.

DE MET’S INCORPORATED,

Cross-Respondent. .

CROSS-PETITION.

CONRAD H. POPPENHUSEN,

EDWARD R. JOHNSTON,

FLOYD E. THOMPSON,

11 South LaSalle St., Chicago,

JOHN J. HEALY,

135 South LaSalle St.,

Solicitors for Cross-Petitioners.

PRINTED BY CHICAGO LAW PRINTING CO.

INDEX.

NN PN NE ie sts ani eee

in STE TIN BITE SEN ate TE

Rtatement OF the came non. ciccscccccccccccscesécossocoes.c-.....

I in Ce Ee ee

Reasons for allowance of writ..............

I cesetdecinet ts: ethctieienicisesonceadsc ea uit oe

Sum MARY OF ARGUM ENT.

I. The complaint did not state a cause of action

against defendants for alleged wrongful pay-

sexistapubtana tne sali asnce., Ste ee dem ee

II. The complaint fails to allege facts which show

that the requisite jurisdictional amount is in-

volved

tego A tO OD ENE AAA ed

TABLE or CasEs.

Allis-Chalmers Mfg. Co. v. Chicago, 297 Ill. 444, 449.

Board of Ed. v. Blodgett, 155 Il. 441...

Buell v. Lanski, 232 Ill. App. 500, 511................

Carolene Products Co. v. McLaughlin, 365 Il. 62, 70..

Chicago Daily News Co. v. Siegel, 212 Tl. 617, 629......

Chicago Motor Club v. Kinney, 329 Tl. 120, 134............

Chick v. Fuller, 114 Fed. 22, 29

Davis v. Virginia Ry. & Power Co., 229 Fed. 633, 639

Graham v. Railroad Co., 102 U.S. 148, 153

Gwin v. Breedlove, 43 U.S. 29, 37

Hall v. Woods, 325 Tl. 114, 144

eo, |

PAGE

Tasie or Cases (continued).

Hanford v. Davies, 163 U. 8. 273, 280.............--0---00-0--+40- 9, 20

"ahley v. Waters, 255 TIL. App. 239... 18

Heiner v. Donnan, 285 U. S. 312, 329........-...--..2:-c:ce0-0 16

Lewis v. Montgomery, 145 Il. 30, 46, 47_....... 7, 8, 12, 16, 17, 18

Lion Bonding Co. v. Karatz, 262 U.S. 77, 86.........-..---- 20

Loverin v. McLaughlin, 161 Ill. 417, 435_............---...--- 16

Lyons v. Reinecke, 10 Fed. (2nd) 3, 7.......---..--------------- 9, 11, 20

Mutual Life Ins. Co. v. Thompson, 27 Fed. (2nd)

FO TI aris. cncieenissactortsveretewseiinticcniiitiemnestintingtieaghectineininin 9, 11, 19, 20

National Bank v. Carpenter, 101 U. S. 567, 568............ 8,17

Norton v. Larney, 266 U.S. 511, 515...............-...---.------- 9, 19

Pattersun v. Thompson, 86 Fed. 85, 86.............--------------- 16

People v. Rose, 207 Ill. 352, 361........-.-.-------------------e-eeo 16

Pianta v. Reich Co., 77 Fed. (2nd) 888, 890.............-..-.-- 20

Pollard v. Bailey, 20 Wall. 520, 527........-..-----------1-----+ 14

Robson v. Doyle, 191 Ill. 566, 570.............---------+---eeee-ce0++ 16

Ryerson & Son v. Peden, 303 Tll. 171, 184.............---.---- 14

Seegmiller v. Day, 249 Fed. 177, 179............------------------ 14

Sherman v. Gassett, 4 Gil. 521 .......2.......eeeeeeeceeeeceeneeoes 16

Smith v. McCullough, 270 U. 8S. 456, 459_.......-....--..-----. 9, 19

Springfield Gas Co. v. Springfield, 292 Tl. 236, 2438.... 16

N. & G. Taylor Co. v. Anderson, 275 U.S. 431, 438...... 18

U.S. v. First Wis. Tr. Co., 92 Fed. (2nd) 840, 844... 8,17

U. &. v. Lage, 32 i Teese 9, 11, 20

Vestal v. Robertson, 277 Ill. 425, 430............------------------ 16

White-Wilson-Drew Co. v. Lyon-Ratcliff Co., 268

We, OI iscsi sniscbi ceca ceccsinnnaoccciensoncpesiat 8, 12, 16

L. E. Whitham Constr. Co. v. Remer, 105 Fed. (2nd)

GN a icicticriccnsacecineseeceinaeeonstatndscipherenndchiniateasiptilactinia 17

Wolfe v. Hartford Life & Annuity Ins. Co., 148 U.S.

5 ETT ER ar Pin Led enemy WHY 7 Sere 20

ill

Inurnois Statutes Crrep.

Business Corporation Act of 1933, Sec. 167, Smith-

I I

General Corporation Act of 1919, See. 23, Smith-

MR Tc

Constitutions Crrep.

Illinois State Constitution, Art. IT, See. 2, and Art. III

U.S. Constitution, Amendment XTV__..

PAGE

IN THE

SUPREME COURT OF THE UNITED STATES

At THE Ocroser TERM, 1941

OY sick

SAMUEL INSULL, JR., et al.,

Cross-Petitioners, | Cross-Petition for Writ

of Certiorari to the

United States Circuit

Court of Appeals for

DE MET’S INCORPORATED, the Seventh Circuit.

Cross-Respondent.

vs.

Cross-Petition for Writ of Certiorari.

To the Honorable the Supreme Court

of the Umted States:

Samuel Insull, Jr., H. L. Stuart, Edward J. Doyle, F. K.

Shrader and C. W. Sills respectfully pray that a writ of

certiorari issue to the United States Circuit Court of Ap-

peals for the Seventh Circuit directing that Court to cer-

tify to this Honorable Court the record in the case of

De Met’s Incorporated, Plaintiff-Appellant, v. Samuel In-

sull, Jr., et al., Defendants-Appellees, No. 7431 in that

Court, in order that the decision and judgment of said

Court rendered October 1, 1941, may be reviewed in so far

as the Circuit Court of Appeals reversed the decree of the

District Court for the Northern District of Illinois.

On this day De Met’s Incorporated, and Robert E. Wood

representing intervenors, filed a petition for a writ of

certiorari to said Cireuit Court of Appeals in this case,

accompanied by a transcript of the record from said Court,

seeking to have this Court review that portion of the

decision and judgment of said Court which affirmed the

decree of the District Court. These cross-petitioners will

oppose the petition of De Met’s Incorporated and others

on the ground that the Circuit Court of Appeals was right

in so far as it affirmed the District Court.

Jurisdiction.

The jurisdiction of this Court is invoked under Section

240 of the Judicial Code as amended by the Act of Febru-

ary 13, 1925. (28 U.S. C. A., See. 347.) This cause orig-

inated in the United States District Court for the Northern

District of Illinois and was reviewed on appeal by the

United States Cireuit Court of Appeals for the Seventh

Cireuit. The opinion of the Circuit Court of Appeals was

filed August 22, 1941, but petitions for rehearing were filed

and denied, and final judgment was entered October 1,

1941. R. 343, 405.

Statement of the Case.

This action was brought in January, 1933, to recover

damages from the former directors of Corporation Secu-

rities Co. of Chicago, (hereinafter called ‘‘Corp.’’) after

the bankruptcy of that corporation which occurred in April,

1932. The complaint was filed in equity and purported to

be a class suit brought by the Delaware corporation as

holder of certain serial gold notes of Corp., on behalf of

itself and ‘‘all other owners and holders of such other

notes similarly situated, and all other creditors who desire

to join in this proceeding and share the costs and expenses

thereof.’’ (R. 2.)

One asserted ground of liability was the alleged violation

of Section 23 of the 1919 General Corporation Act of IIli-

nois by the ‘‘board of directors’’ in that it ‘‘authorized or

ratified’’ the declaration of dividends by Corp. during the

years 1930, 1931 and 1932 when it had “‘no actual surplus. ”’

In so far as the complaint relates to this alleged cause of

action, it alleges merely* that there was in force during

the period involved said Section 23, which provides that

‘‘directors’’ shall be jointly and severally liable for ‘‘de-

claring or assenting to a dividend”? if the corporation is or

is thereby rendered insolvent or its capital is thereby im-

paired (Par. 32); that at no time between January 1, 1930,

and April 16, 1932, did the company have any actual surplus

and that the company did not have cash income for any year

in excess of its cash expenses and interest charges for that

year (Par. 22); that the company had no surplus at any

time during the years 1930, 1931 and 1932, but the ‘‘com-

pany’’ paid cash dividends during each of these three years

on all classes of its preferred stock, the exact amounts of

which cash dividends are unknown to plaintiff (Par. 33);

and that the ‘‘board of directors authorized or ratified’’ the

payment of dividends, thereby rendering ‘‘themselves’’

jointly and severally liable within the purview of the stat-

ute to the plaintiff and all other creditors and holders of

contracts with the company. Par. 34.

*22. At no time between January 1, 1930 and April 16,

1932, did the company have any actual surplus whatsoever.

The books of the company, when the irregularities set forth

above are corrected, show that the company did not have,

and the company did not in fact have, cash income for any

year in excess of its cash expenses and interest charges

for that year.

32. During all of the period of the existence of Corpora-

tion Securities Co. of Chicago, there has been in full force

and effect a certain statute of the State of Illinois known

as Section 23 of the General Corporation Act, which is in

words and figures as follows:

‘“‘The directors shall jointly and severally be liable for

the debts and contracts of the corporation in the following

cases:

(1) For assenting to an indebtedness in excess of the

amount of the capital of the corporation, to the amount of

(Footnote continued on pages 4 and 5)

This case was presented to the District Court and is now

before this Court as to the cause of action relating to al-

leged wrongful payment of dividends on motions to dismiss

filed in 1933, which set forth that the complaint does not

state a cause of action for payment of dividends contrary

to the statute. (R. 17, 21, 24, 31.) Among the grounds

set forth are:

1. A suit under Section 23 of the old General Cor-

poration Act of Illinois must be brought on behalf of

all creditors, whereas this suit is brought on behalf

only of plaintiff and such other creditors as elect to

join and share the costs and expenses ;

9. Said Section 23 is unconstitutional because it is

beyond the power of the legislature to declare a con-

clusive presumption of fact, as this section purports

to do in the last paragraph, which provides: ‘‘Unless

a director was absent from the meeting at which such

dividend was declared, * * * or unless his dissent

therefrom shall be entered on the corporate records

he shall be conclusively presumed to have assented

thereto”’;

such excess; provided no director shall be liable under this

clause (1) of this section if at the time such indebtedness

is incurred, the value of the assets of the corporation as a

going concern is greater than the amount of such indebted-

ness, including in such assets the assets acquired with or

resulting from the incurring of such indebtedness ; but not

including in such assets good will or any sum therefor ;

(2) For declaring or assenting to a dividend if the cor-

poration is, or is thereby, rendered insolvent, or its capital

is thereby impaired, to the extent of such dividend ;

(3) For debts contracted between the time of making

or assenting to a loan to a stockholder or director and the

time of its repayment, to the extent of such loan.

For the purposes of this section the capital of the cor-

poration shall be considered as the aggregate amount paid

in on its shares of capital stock issued and outstanding.

3. The Illinois statute is penal in character and will

not be enforced in Federal equity courts;

4. The complaint does not contain the essential

allegation that the defendants or any of them, as

directors of the corporation, declared or assented to

the payment of any dividend;

9. The complaint does not allege facts which show

that the corporation was insolvent at the time any

dividend was declared or that the payment of any

dividend rendered the corporation insolvent or that

such payment impaired its capital.

The District Court dismissed the complaint as to this

cause of action basing its decision only on the ground of

insufficiency of allegations to state a cause of action.

(Opinion, R. 298-299; Decree, R. 317.) The Cireuit Court

of Appeals reversed the judgment of the District Court

as to this cause of action and held that the complaint was

sufficient. R. 346.

A further ground of insufficiency of the complaint is

that it fails to allege facts which show that the requisite

jurisdictional amount is present. The only allegations as

Unless a director was absent from the meeting at which

such dividend was declared or loan made, or unless his dis-

sent therefrom shall be entered on the corporate records,

he shall be conclusively presumed to have assented thereto.”

33. As hereinabove set forth, the company had no surplus

at any time during the years 1930, 1931 and 1932. Neverthe-

less, the company paid cash dividends during each of these

three years on all classes of its Preferred Stock, the exact

oe of which cash dividends are unknown to the plain-

tiff.

34. The Board of Directors authorized or ratified the

payment of dividends as set forth above, thereby render-

ing themselves jointly and severally liable, within the pur-

view of the Statute of the State of Illinois, set forth above,

to the plaintiff, and all other creditors and holders of con-

tracts of the company.

to amount involved appear in Paragraphs 4 and 10. Para-

graph 4 merely makes the general statement that more than

$3,000 is involved. (R. 3.) Paragraph 10 alleges merely

that plaintiff owned notes of the face amount of $20,000

when it filed the complaint. (R. 6.) Paragraphs 33 and 34,

which are the only paragraphs of the complaint relating

to the payment of dividends, make no suggestion of the

amount involved. (R. 12.) In fact, it is alleged in Para-

graph 33, ‘‘the exact amounts of which eash dividends are

unknown to the plaintiff.”’

The Circuit Court of Appeals ignored this point but sus-

tained the complaint as to the cause of action relating to

alleged wrongful payment of dividends, thereby holding

in effect that the complaint alleged facts showing that the

requisite jurisdictional amount is involved.

The Contested Issues.

As to the matters presented by this cross-petition the

following questions arise:

(a) Whether the complaint alleges facts sufficient to

show the requisite jurisdictional amount is involved.

(b) Whether the complaint alleges facts which state

a cause of action against these cross-petitioners for

declaring and assenting to the payment of dividends

in violation of Section 23 of the old General Corpora-

tion Act of Illinois.

(d) Whether this alleged cause of action for illegal

payment of dividends can be maintained on behalf only

of such creditors as join in the proceeding and share

the expenses thereof.

(e) Whether the District Court properly denied the

filing of the proffered amendments to the complaint.

2 Renee A tae

(f) Whether plaintiff can maintain this suit in the

absence of an allegation that it owned notes when

the alleged wrongs were committed.

Reasons for Allowance of the Writ.

1. The Cireuit Court of Appeals for the Seventh Circuit

has decided an important question of local law in conflict

with applicable decisions of the Supreme Court of Illinois.

(a) When the Circuit Court of Appeals held ‘‘that

a corporate director participates in a dividend, that

is, declares or assents to a dividend, under the statute,

if he votes to give such an executive committee the

power to declare a dividend and this is done, if he

himself is an active member of the executive committee

which declares a dividend, or if he approves, ratifies

or assents to a declaration of the executive committee,’’

it assumed facts which do not appear on the face of

the complaint and it announced rules of law in conflict

with the decision of the Supreme Court of Illinois in

Lewis v. Montgomery, 145 Ill. 30.

(b) When the Circuit Court of Appeals held, by

adoption of its ruling in the companion case of Aiken

et al. v. Insull et al., that ‘‘the word ‘assenting’ in-

cludes the approval and declaration of a dividend after

it has been declared,’’ it held squarely against the

Supreme Court of Illinois which has decided that ‘‘as-

senting,’’ as used in the General Corporation Act of

1919, means assenting to the creation of the obligation,

and that a recognition of the obligation after it has been

contracted does not have the effect of charging a

director with the statutory liability. Lewis v. Mont-

gomery, 145 Ill. 30, 47.

the Illinois law when it held that the executive com-

BRM RINE AIL SRP IA AA AOE TAL TOUR P22 AS CRN IDI LIOR AB EINE OT EE IER EAE AR PEO Se PONE LIE 7 d

mittee of Corp. was the agent of the board of directors

in the declaration of dividends. Lewis v. Montgomery,

145 Ill. 30, 46.

(d) Since the original complaint did not state a cause

of action with respect to improper payment of divi-

dends, the new cause of action alleged in the proposed

amendments, if a cause of action is alleged, is barred

by the Statute of Limitations. Allis-Chalmers Manu-

facturing Co. v. City of Chicago, 297 Ill. 444; Board of

Education v. Blodgett, 155 Ill. 441.

2. The Circuit Court of Appeals for the Seventh Circuit

has decided an important question of Federal law in con-

flict with applicable decisions of this Court and with its own

decisions and with decisions of other Circuit Courts of

Appeals.

(a) The construction placed on Section 23 of the

1919 General Corporation Act of Illinois by the Cir-

cuit Court of Appeals in this case extends the statute

by construction to embrace cases not within its terms,

contrary to the rule applied by the same Circuit Court

of Appeals in White-Wilson-Drew Co. v. Lyon-Ratcliff

Co., 268 Fed. 525, 527.

(b) The District Court ruled in accordance with the

established practice in denying amendments offered

seven years after the suit was commenced and nine

years after the occurrences out of which the alleged

cause of action arose. National Bank v. Carpenter, 101

U.S. 567, 568; United States v. First Wisconsin Trust

Co., 92 Fed. (2nd) 840, 844.

dictional amount must affirmatively and distinctly ap-

pear from the allegations of the complaint and that a

defect in such allegations cannot be helped by presump-

tions or by argumentative inferences drewn from the

pleadings. There is no allegation in the complaint at

bar of the amount of any dividend paid nor are there

facts alleged from which the amount may be deter-

mined. The decision in this case is contrary to the rule

in Mutual Life Ins. Co. v. Thompson, 27 Fed. (2nd) 753,

754; Smith v. McCullough, 270 U.S. 456, 459; Norton

v. Larney, 266 U.S. 511, 515; Hanford v. Davies, 163

U. S. 273, 280.

(d) Since plaintiff has not by its allegations shown

that the alleged wrongs occurred while plaintiff was

the owner of notes it cannot maintain this suit. Graham

v. Railroad Co., 102 U.S. 148, 153; Chicago Daily News

Co. v. Siegel, 212 Ill. 617, 629.

(e) The Circuit Court of Appeals was in error when

it went outside the complaint and used the proposed

amendments to bolster up the original complaint. It

is established that on motion to dismiss all doubts with

respect to the sufficiency of the complaint must be re-

solved against the plaintiff. Mutual Life Ins. Co. v.

Thompsen, 27 Fed. (2nd) 753, 754; Lyons v. Reinecke,

10 Fed. (2nd) 3, 7; United States v. Linn, 42 U.S. 104,

111.

Respectfully submitted,

Conrap H. Poprennuvusen,

Epwarp R. Jounston,

FLoyp E. THompson,

11 South La Salle Street, Chicago,

Joun J. Heaty,

135 South La Salle Street, Chicago,

Solicitors for Samuel Insull, Jr.,

H. L. Stuart, Edward J. Doyle,

F. Kk. Shrader and C. W. Sills,

Cross Petitioners.

ARGUMENT IN SUPPORT OF CROSS-PETITION.

The complaint did not state a cause of action against the

defendants for alleged wrongful payment of dividends.

We present this point first because it is the ground on

which the District Court dismissed the complaint as to the

alleged cause of action against the former directors of Cor-

poration Securities Co. of Chicago for declaring or assent-

ing to the payment of a dividend in violation of section 23

of the General Corporation Act of Illinois of 1919, which

was repealed by the Business Corporation Act of Illinois

of 1933. We shall undertake to show that the holding of

the District Court is in accord with the established law of

Illinois as declared by the Supreme Court of Illinois and

as applied by the Federal Courts of the Seventh Circuit.

There is no allegation in the complaint that any of these

defendants (cross-petitioners here) declared or assented to

any dividend at any time. The complaint merely alleges

(Par. 33, R. 12) that ‘‘the company paid cash dividends’’

and (Par. 34, Ree. 12) that ‘‘the board of directors author-

ized or ratified the payment of dividends.’’

There is no allegation that either Samuel Insull, Jr., or

H. L. Stuart or E. J. Doyle or F. K. Shrader or C. W. Sills

attended any meeting of the board of directors at which

action on dividends was taken. Not one of these defendants

is mentioned by name except in the title and in the prayer

of the complaint. There were eleven directors of this cor-

poration (R. 2) and the six directors, excluding the five who

present this cross-petition, could have taken the action

necessary to cause the company to pay divicends.

SNS Gera sae

It was this uncertainty of the allegations of this com-

plaint that caused Judge Briggle to say, (R. 299):

‘The liability under the statute must be predicated

upon the individual director having declared or as-

sented to a dividend, and it is not enough to say that

the company or the board or the committee declared a

dividend. It would be a dangerous theory of law if

an individual director were to be held liable for some

misfeasance or malfeasance related to his conduct as

a director without the assertion of some fact to show

wrong on the part of the specific director involved.”?

This is sound reasoning supported by all authorities on

pleading. It is well established that on a motion to dismiss

all doubts with respect to the sufficiency of the complaint

must be resolved against the plaintiff. Mutual Life Ins. Co.

v. Thompson, 27 Fed. (2nd) 753, 754; Lyons v. Reinecke,

10 Fed. (2nd) 3, 7; United States vy. Linn, 42 U.S. 104, 111.

We deem the failure of the plaintiff to allege that any of

the present defendants ever declared or assented to the

payment of a dividend by the corporation to be conclusive

against the sufficiency of the complaint.

The allegations are wholly insufficient to state a cause of

action under the Illinois statute in other respects. No facts

are alleged to show what dividends were paid, or when they

Were paid, or that the corporation was insolvent when any

dividend was paid, or that it was rendered insolvent by any

such payment, or that its capital was thus impaired. The

allegations of the complaint are mere conclusions of the

pleader, unsupported by facts (Par. 22, R. 10; Par. 33,

| R.12). It is a sound rule of pleading, especially on motions

| to dismiss, that ambiguities and uncertainties in pleadings

, are to be construed most strongly against the pleader.

United States v. Linn, 42 U. S. 104, 111; Coffey v. Colonial

Trust Co., 50 Fed. (2nd) 313, 314.

Anata

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Pal Dight 8 Ps Fue

PAIN Oh A ERTS LID TEBE) NOE RLE, ROE LSM CAEL OGRA sane ° a

We respectfully submit that the legal conclusions stated

in the next to the last paragraph of the opinion of the

Cireuit Court of Appeals (R. 346) are squarely in conflict

with the construction placed upon the General Corporation

Act by the Supreme Court of Illinois in Lewis v. Montgom-

ery, 145 Ill. 30. The Cireuit Court of Appeals holds that an

executive committee of a corporation is the agent of the

board of directors, whereas the Illinois Supreme Court

holds just the opposite in the cited case, saying at p. 46:

“The directors though the governing body of the

corporation are only its officers and agents and any

subordinate agent appointed by them or acting by vir-

tue of their sufferance or recognition does not thereby

become their agent but the agent of the corporation.

His acts are the acts of the corporation so as to make

it liable for debts or obligations incurred by him on

its behalf, but they are not the acts of the directors

unless commanded or authorized by them.’’

The Circuit Court of Appeals holds that a director declares

or assents to a dividend under the statute if he approves

or ratifies a declaration of a dividend by an executive com-

mittee, whereas the Illinois Supreme Court holds directly

to the contrary in the cited case, saying at p. 47:

‘“‘The liability is created only where the indebted-

ness of the corporation exceeds the amount of the

‘ capital stock and is imposed only upon the directors

and officers assenting to such excess of indebtedness.

This plainly means assenting to its creation. Mani-

festly, a recognition of the indebtedness by the direc-

tors after it has been so contracted as to become bind-

ing upon the corporation, should not have the effect

of charging them with this statutory liability.”’

The same Cirenit Court of Appeals in White-Wilson-

Drew Co. vy. Lyon-Ratcliff Co., 268 Fed. 525, recognized

that the rules of construction declared by the Illinois Su-

preme Court in Lewis v. Montgomery to apply to section

16 of the Illinois statute dealing with directors’ liability

for assenting to indebtedness in excess of the capital stock,

apply to section 19 of the statute providing for liability of

directors for declaring or assenting to dividends in viola-

tion of the statute, saying p. 527:

‘*Even if section 19 is held not to be a penal statute,

it must at least be said that the liability imposed is like

that of a surety, stricti juris. Woolverton v. Taylor,

132 Ill. 197. The liability imposed under section 19 is

much more extreme and severe than that imposed

under section 16. In Lewis v. Montgomery, 145 Ill. 30,

47, in construing section 16, it was said:

‘The words employed * * * should not be ex-

tended by construction, so as to embrace cases not

clearly within the terms of the statute.’ ”

But an equally serious objection to the conclusion

reached by the Circuit Court of Appeals is that facts are

assumed which do not appear from the allegations in the

complaint. Nowhere in the complaint is it stated that there

was an executive committee of Corp. or that the board of

directors empowered an executive committee to declare

dividends or that any of the present defendants were on

an executive committee or that any of these defendants

were present at a board meeting which empowered an

executive committee to declare dividends. Thus is appears

that the Circuit Court of Appeals goes beyond the four

corners of the complaint for facts when it says in its opin-

ion (R. 346): ‘‘In the instant case the board of directors

empowered an executive committee to declare dividends. ’’

It also appears that the Cireuit Court of Appeals is as-

suming facts not alleged when it states (R. 346):

‘‘We believe that a corporate director participates

in a dividend, that is, declares or assents to a dividend,

eer |

reappear

sa pea Mae itt a SEED! ORSAY Sg AT IPTG PLT NE

ATEN Sp AE TAL AIST PN a NDE AMG

under the statute if he votes to give such an executive

committee the power to declare & dividend, and this

is done if he himself is an active member of the execu-

tive committee which declares a dividend, or if he

approves, ratifies or assents to a declaration of the

executive committee.”’

We think the opinion of the Circuit Court of Appeals clearly

reveals that the Court confused the allegations of the com-

plaint in this case filed in 1933, which is the pleading being

tested by the motions to dismiss filed shortly thereafter,

with the allegations of amendments to the complaint which

were presented in 1940, more than eight years after the

dates of the challenged transactions.

Another ground of insufficiency of the complaint is that

the suit is not brought by plaintiff on behalf of all creditors.

That the liability under section 23 is personal to the ered-

itors and that a suit to enforce the liability must be brought

by one or more creditors on behalf of all creditors is estab-

lished by Ryerson & Son v. Peden, 303 Il. 171, 184; Seeg-

miller v. Day, 249 Fed. 177, 179; and Pollard v. Bailey, 20

Wall. 520, 527. This suit is brought by plaintiff on its own

behalf as a holder of corporate notes and on behalf of

other holders of such notes similarly situated and all other

creditors who desired to join in the suit and share the costs

and expenses thereof (R. 2). Certain noteholders repre-

sented by General Robert E. Wood intervened, but there

are many that did not elect to join in the proceeding and

make themselves liable for costs and expenses of this suit.

When this suit was filed the banks and others besides note-

holders had claims aggregating some $25,000,000. We think

it is clear from the allegations of the complaint that it was

never intended by plaintiff to include the banks as its co-

plaintiffs. Since this suit was not brought on behalf of all

creditors it cannot be maintained as a suit under the

Illinois statute.

a SON we

Another defect in the complaint that is fatal to the

maintenance of this suit by plaintiff or intervenors (cross-

respondents here) is that it is nowhere alleged that they

were creditors of the corporation at the time the dividends

were declared and paid. Graham v. Railroad Co., 102 U.S.

148, 153; Chicago Daily News Co. v. Siegel, 212 Til. 617,

629; Buell v. Lanski, 232 Ill. App. 500, 511. Whether plain-

tiff extended credit to the corporation or whether it bought

its notes in the open market for a nominal sum after

the corporation was in bankruptcy does not appear from

the allegations of the complaint. Plaintiff says it owned

notes of the face amount of $20,000 when it filed the com-

plaint (Par. 10, R. 6), but it does not allege when it ac-

quired these notes, except that it acquired them before ma-

turity which may have been any time before the suit was

commenced; nor what it paid for them except that it was

something of value; nor that it owned them when the chal-

lenged transactions took place. If it bought its notes after

the alleged wrongful dividends were paid and got them at

a price which took into account the depleted assets of the

corporation, it cannot now sue for wrongs which caused

it no injury. Courts do not countenance speculation by liti-

gation.

If this action for improper payment of dividends were

brought on behalf of all creditors of the corporation and

the complaint otherwise alleged a case within the terms

of the statute and this plaintiff was in position to maintain

the suit, it could not be maintained because the statute on

which it is based is unconstitutional. The last paragraph

of the statute provides, ‘‘Unless a director was absent from

the meeting at which such dividend was declared, * * *

or unless his dissent therefrom shall be entered on the

corporate records, he shall be conclusively presumed to

have assented thereto.’’ It is beyond the power of the

legislature to declare a conclusive presumption. Such an

DO AE NG PTL ates RRR Kare - ae i ! |

attempt is an invasion of the judicial field and violates

Section 2 of Article II and Article III of the State Consti-

tution and the Fourteenth Amendment to the Federal Con-

stitution. (Carolene Products Co. v. McLaughlin, 365 Il.

62, 70; People v. Rose, 207 Ill. 352, 361; Hall v. Woods, 325

Til. 114, 144; Heiner v. Donnan, 285 U. 8. 312, 329. This

provision of Section 23 creating a conclusive presumption

being unconstitutional, it follows that subdivision 2 of this

section, of which this invalid provision is an essential and

integral part, is likewise invalid. (Chicago Motor Club v.

Kinney, 329 Ill. 120, 134; Springfield Gas Co. v. Springfield,

292 Ill. 236, 243.) The Supreme Court of Illinois decided,

under the Illinois Corporation Act prior to the revision

thereof in 1919, that a director could only be held liable

for the violation of the statute when the evidence showed

that he had consciously approved or participated in the

wrongful act. (Lewis v. Montgomery, 145 Tl. 30,) and the

Federal courts in Illinois gave this statute the same con-

struction. (White-Wilson-Drew Co. v. Lyon-Ratcliff Co.,

268 Fed. 525; Chick v. Fuller, 114 Fed. 22, 29.) The very

purpose of the addition of the conclusive presumption

clause in 1919 was to change this rule of evidence.

The provision of Section 23 under consideration is a

penal statute. It in effect prohibits declaration of a divi-

dend which will render the corporation insolvent or which

will impair the capital of the corporation. It punishes di-

rectors for violation of their duties to the corporation and

its stockholders and creditors. (Vestal v. Robertson, 277

Ill. 425, 430; Patterson v. Thompson, 86 Fed. 85, 86.) Inas-

much as liability sought to be created by the section is penal

in character, a suit cannot be maintained in equity to en-

force such liability. (Lover v. McLaughlin, 161 Ill. 417,

435; Robson v. Doyle, 191 Ill. 566, 570.) The Federal courts

will not enforce a penal law of Illinois. Gwin v. Breedlove,

43 U.S. 29, 37; Sherman v. Gassett, 4 Gil. £21.

For all these reasons the District Court properly dis-

missed the cause of action for wrongful payment of divi-

dends. While it based its decision only on the ground of

insufficiency of the complaint to state a cause of action, the

deeree will be sustained if any ground appearing of record

is sound. The Circuit Court of Appeals erred in holding

the original complaint sufficient and in reversing the decree

of the District Court.

We respectfully submit that under the authorities the

District Court properly refused the amendment to the eom-

plaint not only because it was presented too late, (National

Bank v. Carpenter, 101 U. S. 567, 568, L. E. Whitham Con-

struction Co. v. Remer, 105 Fed. (2nd) 371) but also be-

cause it failed to state a cause of action. (Lewis v. Mont-

gomery, 145 Tl. 30, 47.) The allowance of an application

to amend rests in the diseretion of the trial court and its

order denying the application will not be reversed unless

there is an abuse. United States v. First Wisconsin Trust

Co., 92 Fed. (2nd) 840, 844; Davis v. Virginia Ry. & Power

Co., 229 Fed. 633, 639.

These defendants filed their motions to dismiss in 1933

(R. 17-38) and these motions were continued generally on

the motion of plaintiff on January 19, 1934. (Aiken R. 58.)

The case lay dormant for more than six years. In 1939

defendants took steps which stirred plaintiffs to action.

The proposed amendments were offered March 1, 1940,

(R. 300) more than seven years after the complaint was

filed. The District Court ruled in accordance with estab-

lished practice regarding tardy amendments. The Circuit

Court of Appeals ruled directly contrary to the spirit of

the established law as well as the new Federal Rules of

Civil Procedure which stress dispatch of business of the

courts and require diligence on the part of litigants.

Since the original complaint did not state a cause of

action, the new cause of action alleged in the amendments,

1 SETTER

if a cause of action is alleged, is barred by the Statute of

Limitations. (N. & G. Taylor Co. v. Anderson, 275 U.S.

431, 438; Allis-Chalmers Co. v. City of Chicago, 297 Ill. 444,

449. Under Illinois law this completed bar is a vested right

which is protected by the Constitution. Board of Education

v. Blodgett, 155 Ill. 441; Hanley v. Waters, 255 Ill. App.

239.

Even the proposed amendment did not state a cause of

action. No director is charged with declaring or assenting

to any dividend. It is merely charged that ‘‘the executive

committee’’ declared certain dividends (Par. 7, R. 305) and

that these ‘‘defendants’’ thereafter ratified the action of

this executive committee. (Par. 1, R. 301-303). The exeeu-

tive committee was composed of four of the directors (Par.

6, R. 305). Of these Samuel Insull and M. J. Insull were

never served. Only Samuel Insull Jr. and H. L. Stuart of

those now before the court were on the executive com-

mittee. Their acts as members of this committee were not

acts as directors. As committeemen, they were agents of

the corporation and not of the board of directors. Lewis v.

Montgomery, 145 Ill. 30, 47. Neither defendant Doyle nor

Shrader nor Sills were on the executive committee. An

examination of the proposed amendment will show that on

no occasion is it alleged that either Dovle or Shrader or

Sills declared or assented to a dividend in any capacity.

It is alleged merely that they ratified what the executive

committee had already done,—Doyle on six occasions (par.

1 (f), (h), (3), J), (nm), (p)); Shrader on two (Par. 1 (b),

(f)) and Sills on three Par. 1 (b), (f), (1)) (R. 301-303).

The amendment shows that the five defendants (cross-

petitioners here) as directors of the corporation merely

ratified what the executive committee had already done and

so serves to show that there is no cause of action under the

Illinois statute against these defendants, or any of them,

PO iE he +>

seta:

LLL O LS AEN, ELIE EAL BIEN IT

for wrongfully declaring or assenting to a dividend, which

is what the statute makes actionable. Lewis v. Montgomery,

145 Ill. 30, 47.

II.

The complaint fails to allege facts which show that the

requisite jurisdictional amount is involved.

The only paragraphs of the complaint which state any

amount are paragraphs 4 and 10. Paragraph 4 consists

merely of the general statement that more than $3,000 is

involved (R. 3). Paragraph 10 alleges merely that plain-

tiff owned notes of the face amount of $20,000 when it

filed the complaint (R. 6) but it does not allege what plain-

tiff paid for these notes except that it was something of

value, nor that plaintiff has been damaged to an amount in

excess of $3,000 or in any other amount. There is no allega-

tion anywhere in the complaint from which it is possible

to determine the amount of any dividend that was declared

or paid. In fact it is alleged in paragraph 33, ‘‘the exact

amounts of which cash dividends are unknown to the plain-

tiff’? (R. 12). An examination of paragraphs 33 and 34,

Which are the only paragraphs of the complaint relating

to the payment of dividends, will not reveal even a sugges-

tion of the amount involved much less that the amount

exceeds $3,000.

It is not enough that a complaint contain a formal allega-

tion of jurisdictional amount. It must allege facts showing

that the amount in controversy exceeds $3,000. Smith v.

McCullough, 270 U. §. 456, 459; Mutual Life Ins. Co. vy.

Thompson, 27 Fed. (2nd) 753, 754; Woods v. Thompson, 14

Fed. (2nd) 951, 952. It must affirmatively and distinctly

appear from the facts alleged and not by inference or

argument that the necessary amount is involved. Norton

AOL A SRK

hc cet OREN Y Oy REO Oe een en

v. Larney, 266 U.S. 511, 515; Hanford v. Davies, 163 U. 8.

273, 280; Wolfe v. Hartford Life & Annuity Ins. Co., 148

U. S. 389. If the requisite jurisdictional amount does not |

appear from the allegations of the complaint the case must

be dismissed. Lion Bonding Co. v. Karatz, 262 U.S. 77,

86; Pianta v. Reich Co., 77 Fed. (2nd) 888, 890.

The Circuit Court of Appeals does not discuss this point

in its opinion in this case but disposes of the point by

mere general reference to its opinion in Aiken v. Insull

(R. 344). Since that Court refers to the proposed amend-

ments in the Aiken case to bolster up the original com-

plaint (R. 357) it must have referred to the proposed

amendments in this case to get even a suggestion of the

amount involved. It is well established that on a motion

to dismiss all doubts with respect to the sufficiency of the

complaint must be resolved against the plaintiff. Mutual

Life Ins. Co. v. Thompson, 27 Fed. (2nd) 753, 754; Lyons

v. Reinecke, 10 Fed. (2nd) 3, 7; United States v. Linn, 42

U. S. 104, 111. It is essential that the complaint itself sets

forth sufficient facts to show the necessary jurisdictional

amount and the Cireuit Court of Appeals was in error when

it went outside of the complaint to find the essential allega-

tions of fact.

Plaintiff alleges that it owned notes when it filed the

complaint in 1933 (Par. 10, R. 6) but it does not allege

when it acquired these notes, except that it acquired them

before maturity which may have been any time before

the suit was commenced. There is no allegation that plain-—

tiff owned these notes when the challenged declaration of

dividends took place. There being no allegation that any

wrong was committed by any defendant at any time when

plaintiff owned notes, there is no allegation of any injury

in any amount to the named plaintiff or to any intervenor

or to any present creditor.

PRN Oa RO

On this ground of failure to allege facts to show jurisdic-

tion in a Federal court the complaint was properly dis-

missed.

CONCLUSION.

The Cireuit Court of Appeals has wholly disregarded the

Illinois decisions and decisions of this Court on the phase

of the case presented by this cross-petition for writ of cer-

tiorari. It is therefore respectfully submitted that this

case is one calling for the exercise by this Honorable Court

of its supervisory powers over the judgments and decrees

of the Cireuit Court of Appeals in order that the errors

committed by the Cireuit Court of Appeals may be cor-

rected. That these cross-petitioners may have the benefit

of the rights to which they are entitled under established

law, this cross-petition should be granted and this Honor-

able Court should review the decision of the Cireuit Court

of Appeals and enter its judgment affirming the decree of

the District Court in all respects.

Respectfully submitted,

Conrap H. Poprennusen,

Epwarp R. Jounston,

Fioyp E. Tuompson,

11 South LaSalle St., Chicago,

Joun J. Heaty,

135 South LaSalle St., Chicago,

Solicitors for Cross-Petitioners.

ee ws eee ee ae Bet

oD eRe

Nace es et

IE ADA a FREER

a a

APs t Doers,

anaes

Office - Supremes Court, U. 5.

FLD

Ab 24 li?

CHARLES ELMSAZE CROPLEY |

CLE RA ;

IN THE

SUPREME COURT OF THE UNITED STATES

At THE Octoser Term, 1941

THOMAS D. AIKEN, et at,

Plaintiff s-Petitioners,

Vs.

SAMUEL INSULL, JR., er ax.,

Defendants-Respondents.

SEE

Answer to Petition for Writ of Certiorari.

Conrap H. Poprennusen,

Epwarp R,. JoHnston,

Froypy E. Txompson,

11 South LaSalle St., Chicago,

Water Brewer,

Epwarp J. F

ARRELL,

231 South LaSalle St., Chicago,

Solicitors for Respondents.

PRINTED BY CHICAGO LAW PRINTING CO.

INDEX.

IE scilecsundiaigditeansa dai epe ee geae ta Rants

I. The conclusion reached by the District Court

and the Circuit Court of Appeals that the re-

lease and discharge of the banks operated to

release and discharge the former directors

of I. U. I. from all liability for the alleged

wrongful pledging is fully supported by the

established law and sound logic... aie

A. The argument of plaintiffs’ counsel is

based on the erroneous assumption of

fact that the release of the banks was

conditioned upon the reservation of the

cause of action against the former di-

ctsnancin thins A ee are eee

B. The release of the banks from all liabil-

ity for their part in effecting a pledge

of the assets of I. U. I. in alleged breach

of the debenture covenants likewise re-

leased the former directors of I. U. I.....

C. The rule that the release of one of several

joint tort feasors releases all of them ap-

plies even where there is a reserved in-

tention to look to others for further

Nes pe, _ eR EAN RN tay AA RTA

D. The rule for which we contend is the only

rule which has a foundation in sound

logic and established law.............--..-00000.0-..

12-26

12-14

14-16

16-21

RK sei or AO RR Aly

Argument (Contd.)—

II. The summary judgment motion applies to

the liability of defendant directors for

pledging of collateral for loans made by the

New York banks for the same reason that it

applies to the transactions with the Chicago

RUE -nirssiersees bse ealetiilicdnadiicbisndaen cies cae

1. No error is assigned on the point..............

2. Petitioners’ argument is premised on

false assumption of facts. The settle-

ment included the New York banks as

well as the Chicago banks.......00000000000000.....

3. Even as to the suits tried before Judge

Mack plaintiffs still had pending claims

III. The former directors of I. U. I. (respond-

ents here) and the settling pledgee banks

acted jointly in the pledging of the assets

of I. U. I. and consequently all contributed

to the consummation of the wrong to the

creditors of I. U. L, if wrong was done. The

District Court and the Circuit Court of Ap-

peals, in sustaining the motion for summary

judgment, were right in applying the well

established rule of release of all by the re-

lease of one or more of several alleged joint

SI oicincisiinctrecini detiaeesnsidiigentedadebilonds

RU ona steer a a

TABLE oF Cases.

Abb v. Northern Pae. Ry. Co., 28 Wash. 428, 68 Pac.

sdk asp <A eM LENE OE OER BOT Kae

Allen v. Ruland, 79 Conn. 405, 65 Atl. 138, 140............

Ayer v. Kemper, 48 Fed. (2nd) 11, 14.00.0002

Cerri v. Akron-People’s Telephone Co., 219 Fed. 285 9

Chapin v. C. & E. I. Ry. Co. 18 IIL App. 47,

|b Sher WAS Sea Ree Pa a 4, 5, 6, 15, 19, 30, 32

Chetwood v. California Natl. Bnk., 113 Cal. 414, 45

II I a 4, 25

Chicago News Co. v. Siegel, 212 Tl. 617, 629... 8

City of Chicago v. Babcock, 143 Ill. 358, 366... 15, 17

Clay v. Field, 138 U. S. 464, 479.0000. 8

Continental Corp. v. Gowdy, 283 Mass. 204, 186 N. E.

se CBA IOC NRE) ets h ALIANT ORES TSEC oe 10

I tanita aan Sarnia ciple Mae cschcsacis heniicccasea cc... "& 6,7

RR DUR i sear Iss a oe aides a .

sii 3

PAGE 5

TaBLe oF Cases (Contd.). :

Babbitt v. Read, 215 Fed. 395, 417, aff. 236 Fed. 42... 10 ;

Babcock & Wilcox Co. v. Pioneer Iron-Works, 34 Fed. 4

eek heiib cette slanetRiaediacadibsihedepecnaéaro soinsessaienaeseorsen 31 .

Becker v. Billings, 304 Ill. 190, 198.0000 5 &

Bee v. Cooper, 217 Cal. 96, 17 Pac. (2nd) 740, 741... 7,10 :

Bell v. Farwell, 189 Ill. 414, 417.................................. 9

Birdsell Mfg. Co. v. Oglevee, 187 Ill. 149, 153... 5

Bosworth v. Van Lanningham, 293 Fed. 875, 877........ 9

Braswell v. Morrow, 195 N. C. 127, 141 S. E. 489, 491 6

Briggs v. Spaulding, 141 U. S. 132, 147.0000. 5)

Bronson v. Fitzhugh, 1 Hill (N. Y.) 185, 186.............. 4, 22, 31

Brown v. City of Cambridge, 85 Mass. 474, 475,

snap le AREAS SE SALT, NTE DEN a IS 5, 19, 25

C. C. C. & St. L. Ry. Co. v. Hilligoss, 171 Ind. 417,

OR ie is A 6, 24, 31

S00 Gl RE ELGAR POSS FD PON AS EIT RL PIL NE ITER ee

PAGE

TaBLE oF Cases (Contd.).

Ellis v. Bitzer, 2 Ohio 89, 15 Am. Dee. 534, 537............ 20

Barmory V. Miia, Th TU, BI BI iscsi ssitctceicceconioles 15

Farmers’ Savings Bnk. v. Aldrich, 153 Ia. 144, 133

Bhi. Wi 5: eg SU. icon veiirtnnsvcebesbeouivonstioonecsuvseseonad 4, 5, 6, 7, 24

First & Merchants Natl. Bnk. v. Bnk. of Waverly,

EGO Va. G06, 197 B. Hi, GOE, WBG nace esicccccscecctinss 6

Fowler v. Bowery Savings Bnk., 113 N. Y. 450, 21

N. E. 172

Gholson v. Savin, (Ohio,) 31 N. E. (2nd) 858, 863... 4,7

Gibbs v. Redman Fireproof Storage Co., 68 Utah 298,

WD WMO. LOGE, MODE, MBG ian iccsce cnc cccscecscececssnceaseee 5, 6, 7, 24

Gore v. Henrotin, 165 Ill. App. 222, 224..0000000.. 4

Gottlieb v. Miller, 154 Ill. 44, 50.0.0... ccccccccceeeeceeeee 5

Graham v. Railroad Co., 102 U. S. 148, 153.0000... 8

Griffin v. Long, 96 Ark. 268, 131 S. W. 672, 673........ 9

Guth v. Vaughan, 231 Tl]. App. 143.0000. eee 4, 6, 31

Hanford v. Davies, 163 U. S. 273, 280.0000... eee. 8

Hart v. Evanson, 14 N. D. 570, 105 N. W. 942, 943.... 5

Hillmer v. Chicago Bank of Commerce, 375 II. 266,

EE cothiLoeiedaclnnsepicnnsan asennad bee 10

Kaplowitz v. Kay, 70 Fed. (2nd) 782, 783.................... 5, 31

Kelly v. Central Hanover Bnk. & Tr. Co., 11 Fed.

Supp. 497, 504, 85 Fed. (2nd) 61e..0.0.0.0 cee 6, 9

Killham v. Chaloupka, 195 Ill. App. 182, 185................ 4,15

Kilpatrick v. Hunter, 24 Me. 18..0.2.0.0........ceccccccseseseeeseee 22

Kirkland y. Ensign-Bickford Co., 267 Fed. 472, 475... 6, 31

Ota eT ene _

: ‘

PAGE

TaBLe oF Cases (Contd.).

Lanasa v. Beggs, 159 Md. 311, 151 Atl. 21, 25............ 4,10

Langnes v. Green, 282 U. S. 532... cccccccccccccoccececoses 10

Leddy v. Barney, 139 Mass. 394, 2 N. FE. 107............ 30

MacDonald v. Hornblower & Weeks, 268 Mich. 626,

SE Seb Ws Pe ina cuitalb aa pbuic ake oe BES 5, 29, 31

Marfield v. Cincinnati D. & T. Trac. Co., 111 Ohio 139,

SD Bix Bey Wg i cicialscnrchiasacadevithnsinitvinkien sp aide Cle 10

Martin v. Setter, 184 Minn. 457, 239 N. W. 219, 222... 6,31

Mattingly v. Northwestern Virginia R. Co., 158 U. S.

SUG! sNsioedcsnceciaitaiioiastite sree ieee al Ee gee 10

McBride v. Scott, 132 Mich. 176, 93 N. W. 243, 244,

SOM | pininwisetinier ners Rpetetin din tientiniteln nade aed 4, 5, 7, 25

McGoldrick v. Compagnie Generale Transatlantique,

OO AEs Bie A ecinnestartecclicitceiecc eine 10

Mooney v. City of Chicago, 239 Ill. 414, 423... 15

Muse v. DeVito, 243 Mass. 384, 137 N. EB. 730,

PM cteadheennlinsanepnion eee ucka te a ae eee 4, 7, 25, 31

Norton v. Larney, 266 U. S. 511, 515.00.0....ccccccccccccccscc-.-- 8

Ogden v. Armstrong, 168 U. S. 224, 232.000 8

Parmelee v. Lawrence, 44 Ill. 405, 410... d, 23

People v. Becker, 258 Til, 1$1.......................................... 31

People v. Superior Court, 359 Ill. 612, 619... 5

Petroyeanis v. Pirola, 205 Ill. App. 310, 312........ 7, 10, 18, 29

Phoenix Bank v. Martin, 219 Ky. 579, 293 S. W. 1064,

i en A TAR RD PEE ed Ol GAL ABE TON A

Pinel v. Pinel, 240 U. S. 594, 596....................................

Poughkeepsie v. Quintard, 136 N. Y. 275, 32 N. E.

764 9

SNR RECT AEN, HS SUSE RS HOE MD = |

es!

‘

€

PAGE

TasLe or Cases (Contd.).

Quincy v. Steel, 120 U. S. 241, 248.....................----.2---

Russell v. Stansell, 105 U.S. 303, 304.........0.00......2-------

Rust v. Schlaitzer, 175 Wash. 331, 27 Pac. (2nd) 571,

URES ARTES SESE RVG Ne EN Secor ee er ENO UE 5, 7, 10, 25

Sircey v. Hans Rees Sons, 155 N. C. 296, 71 S. E.

a acpi sasatatee oe cascade ctheptcrcerrlctircntretas 4, 5, 24

Smith v. Mann, 184 Minn. 485, 239 N. W. 223, 224....4, 25, 31

Spiess v. Sommarstrom Ship Bldg. Co., 272 Fed.

I. SI sichacctchuaeicsinsdaviicigieatieauttcheletnnontnbesaeitiniesivesasnnsnicnes 5, 31

Southern Realty Investment Co. v. Walker, 211 U. S.

RIES ERY 2 RR Re re aC Oe aT De 8

Stanley v. Leahy, 87 Ill. App. 465, 467............... 7, 10, 15, 16

Sterling Gas Co. v. Higby, 134 Ill. 557, 568............... 9

Sutherland v. Internatl. Ins. Co., 43 Fed. (2nd) 969,

gare pecatoiccceiansc icin staid saisbiahaicioreghitnediasestacannnglasiennn 9

Thompson v. Fox, 326 Pa. 209, 192 Atl. 107, 109............ 7

Town of Kankakee v. Kankakee & Indiana R. Co.,

BE cates ancincta hic biciniepecsemsntadeetiaelniceonntpistlnienyincent 9

Van Weel v. Winston, 115 U. S. 228, 237, 245.................. 5, 9

Veasic v. Wittams, @ U. BS. 134................................. 32

Vigeant v. Seully, 35 Ill. App. 44, 46, 47....4, 15, 20, 22, 31, 33

Wagner v. C. & A. R. Co., 265 Ill. 245, 251... 7

Wallner v. Chicago Traction Co., 245 Ill. 148, 151........ 4,15

Webb v. Cash, 35 Wyo. 398, 250 Pac. 1, 8...................... 5

Welty v. Laurent, 285 Ill. App. 13, 14........................ 4,7,15

Whitford v. Reddeman, 196 Wis. 10, 219 N. W. 361.... 6

Wright v. Griffey, 47 Ill. App. 577, 578........................ 29

MISCELLANEOUS.

Restatement of Torts, Sec. 886......0.......0..00. eee 18

Supreme Court Rule 38(5) _.-.u............c.sscecieeesseoees 36

eee .

IN THE

SUPREME COURT OF THE UNITED STATES ‘

At THE Ocroser Term, 1941 r

No. 821 f

THOMAS D. AIKEN, er at.,

Plaintiffs-Petitioners,

Vs.

SAMUEL INSULL, JR., er at.,

Defendants-Respondents.

Poses ld ea Ae a hon nt aa Cer Le aaa

Answer to Petition for Writ of Certiorari.

OR Oe

To the Honorable The Supreme Court of the United States:

The petitioners have not made an accurate statement of

the case.

The statement that Insull Utility Investments, Inc. was

organized by present defendants (respondents here) (Pet.

3) is not supported by the record. The allegation of

the complaint (Par. 5, R. 3-5) is that the company was

organized by Samuel Insull, now deceased, in the fall of

1928. Thereafter, in 1929, present defendants were elected

directors of the company. Par. 8, R. 5.

‘,

;

The record does not support the statement that the

public utility companies of the Insull Group, in the shares

of which I.U.I. made substantial investments, were ‘‘under

the direction and management of the defendants’’. (Pet.

3.) There is no allegation anywhere in the complaint

that respondents, H. L. Stuart or Stuyvesant Peabody,

had anything to do with the operation of any of these

public utility companies at any time.

In stating the covenant of the debentures, (Pet. 3) peti-

tioners omit the exceptions to the restrictions on pledging

which are that ‘‘the Company without so securing this de-

benture (a) may at any time mortgage or pledge any

of its property for the purpose of securing loans to the

Company contracted in the usual course of business for

periods not exceeding one year, and (b) may in order to

secure the purchase price or part thereof of any prop-

erty which it may hereafter acquire, mortgage or pledge

any or all of such acquired property.’’ R. 8-9, 14.

It is not true that ‘‘shortly after I.U.I. was organized,

the defendant directors caused I.U.I. to pledge substan-

tially all its assets to secure loans.’’ (Pet. 4.) LUI.

was an investment company organized ‘‘to acquire, dis-

pose of, underwrite and deal in securities, and do a gen-

eral investment business’’, (R. 3,) and borrowing money

to make investments was in the usual course of its busi-

ness. The facts alleged in Paragraph 30 (R. 24-32) show

that the first loan was made April 14, 1930, when $2,500,000

was borrowed from the Continental Bank, and that the

last loan was made December 22, 1931, when a loan of

$500,000 was made by the General Electric Company. All

the loans were for short periods and there were many

renewals. It is alleged in Paragraph 34 (R. 32) that as

late as May 15, 1931, the value of the assets of I.U.I.

was approximately $193,000,000 and its outstanding ob-

ligations were approximately $98,000,000. It is clear from

the allegations of the complaint that when the original

loans were made they were small when compared with

Karas

ET ERLE S SENN OE TOE LRG ANE IE SEN A LSE DT SOA ROTA C SERIA A

the assets of the company and that the drastic decline

in market value of securities brought about by the cata-

clysmic world-wide economic depression and not the origi-

nal borrowing and pledging caused the bankruptey of

LU.I.

After I.U.I. went into bankruptcy a score of suits were

filed against the banks by the trustee in bankruptcy and

by different groups of debenture-holders. (R. 116-128.)

By their suits the debenture-holders sought decrees against

the banks to compel surrender of all notes of I.U.. and

of all collateral pledged and for an accounting. (R. 112.)

After negotiation it was agreed that all claims of the

debenture-holders and the trustee in bankruptey be com-

promised and settled. (R. 137.) A decree was entered

in chancery confirming in the banks title to the collat-

eral pledged with them, free from all claims asserted or

assertable by the debenture-holders or the trustee aris-

ing out of or in any manner connected with the pledging,

(R. 175,) and permanently enjoining the debenture-holders

from instituting or prosecuting any suits against the banks

on account of such pledgings. (R. 177.) An order was

entered in bankruptcy reciting that the settlement had

been fully carried out by the payment by the banks of

$3,435,088.07 and the performance of other terms of the

settlement ‘‘in full settlement and compromise of all

claims involved”’ in all of the pending suits, (R. 196,)

and ordering that the acts of the trustee in bankruptcy

in carrying out the settlement be approved and that he

deliver releases to all of the banks. R. 197.

It is not true that the banks agreed that the cause of

action against the former directors of LU.L should not

be affected by the settlement. (Pet. 5.) The debenture-

holders as petitioners made the assertion in their petition

for approval of the settlement that the release of the banks

should not release former directors of the company (R.

ea go Spee

143) but this attempted reservation of a cause of action

against the former directors was not made a condition

of the effectiveness of the release of the banks.

Reasons for Denial of the Writ.

1. The decision of the Circuit Court of Appeals with

respect to the release of the alleged cause of action against

the former directors of 1.U.I. arising out of the alleged

pledging of assets by I.U.I. in violation of debenture cove-

nants, by virtue of the release of the banks for their par-

ticipation in said pledging, follows the decisions of the

courts of Illinois. Under the settled law of Illinois the

release of the settling banks released the former direc-

tors of I.U.I. as to all causes of action asserted or which

might have been asserted by the debenture-holders for

or on account of the alleged wrongful pledging of the

assets of I.U.I. as collateral to the bank leans. Wallner

v. Chicago Traction Co., 245 Ill. 148, 151; Welty v. Laurent,

285 Ill. App. 13, 14; Guth v. Vaughan, 231 Ill. App. 143;

Killham v. Chaloupka, 195 Ill. App. 182, 185; Gore v.

Henrotin, 165 Til. App. 222, 224; Vigeant v. Scully, 35 Tl.

App. 44, 46; Chapin v. C. d E. I. Ry. Co., 18 Ill. App. 47, 50.

This rule that where two or more persons each con-

tribute to cause a single injury the release of one releases

all is not only the settled law of Illinois but it is the law

of most if not all American jurisdictions. Farmers’ Sav-

ings Bank vy. Aldrich, 153 Ia. 144, 183 N. W. 383; Smith

v. Mann, 184 Minn. 485, 239 N. W. 223, 224; Muse v. DeVito,

243 Mass. 384, 1387 N. E. 730, 731; Lanasa v. Beggs, 159

Md. 311, 151 Atl. 21, 25; Abb v. Northern Pacific Ry. Co.,

28 Wash. 428, 68 Pac. 954, 955; Chetwood v. California

National Bank, 113 Cal. 414, 45 Pac. 704, 706; Sircey v.

Hans Rees Sons, 155 N. C. 296, 71 S. E. 310, 311; McBride

v. Scott, 182 Mich. 176, 93 N. W. 248, 244; Gholson v. Savin,

(Ohio.) 31 N. E. (2nd) 858, 863; Bronson v. Fitzhugh, 1

— en UPLIFT RRR sscideliiientimetinennatteniattnidinindiaaadmaidaebemtitaninns -

Hill (N. Y.) 185; Kaplowitz v. Kay, 70 Fed. (2nd) 782,

783; Spiess v. Sommarstrom Ship Bldg. Co., 272 Fed.

109, 111.

Furthermore the settling debenture-holders released the

cause of action against the former directors of I.U.I. by

an election of substantive rights in making their settle-

ment with the banks. Birdsell Manufacturing Co. v. Ogle-

vee, 187 Ill. 149, 153; Gibbs v. Redman Fireproof Storage

Co., 68 Utah 298, 249 Pac. 1032; MacDonald v. Hornblower

& Weeks, 268 Mich. 626, 256 N. W. 572; DeCock v. O’Con-

nell, 188 Minn. 228, 246 N. W. 885, 887; Fowler v. Bowery

Savings Bank, 113 N. Y. 450, 21 N. BE. 172.

Parmelee v. Lawrence, 44 Ill. 405, and other cases relied

on by petitioners are clearly distinguishable because they

apply only to joint obligor cases where there is the right

of contribution.

2. The rule of release established by the Illinois deci-

sions and applied by the Circuit Court of Appeals in

this case is founded on sound public policy and is a salu-

tary rule of law. Chapin v. C. & E. I. Ry. Co., 18 Ill. App.

47, 50, citing Brown v. City of Cambridge, 85 Mass. 474,

475; Farmers’ Savings Bank vy. Aldrich, 153 Ia. 144, 133

N. W. 383, 386; Rust v. Schlaitzer, 175 Wash. 331, 27 Pace.

(2nd) 571, 573; Sircey v. Hans Recs Sons, 155 N. C. 296,

718. E. 310, 311; McBride vy. Scott, 132 Mich. 176, 93 N. W.

243, 245.

3. The former directors of LU.I. did not stand in the

relation of trustees to the debenture-holders, People vy.

Superior Court, 359 Ill. 612, 619; Becker v. Billings, 304

Ill. 190, 198; Gottlieb v. Miller, 154 Ill. 44, 50; Briggs v.

Spaulding, 141 U. S. 132, 147; Van Weel v. Winston, 115

U. S. 228, 245; Webb v. Cash, 35 Wyo. 398, 250 Pae. 1, 8;

Hart v. Evanson, 14 N. D. 570, 105 N. W. 942, 943,

But if I.U.I. stood in the relation of a trustee to the

debenture-holders and if it violated its duty by pledging

its assets, then all who acted with I.U.I. in breaching its

trust are liable jointly and severally for the wrong, and

so the release of one would release all. First & Merchants

National Bank v. Bank of Waverly, 170 Va. 496, 197 S. E.

462, 465; Farmers’ Savings Bank v. Aldrich, 153 Ta. 144,

133 N. W. 383, 385; Braswell v. Morrow, 195 N. C. 127, 141

S. E. 489, 491; Whitford v. Reddeman, 196 Wis. 10, 219

N. W. 361; DeCock v. O’Connell, 188 Minn. 228, 246 N. W.

885, 887; Gibbs v. Redman Fireproof Storage Co., 68 Utah

298, 249 Pac. 1032, 1034.

4. The decisions in Kelly v. Central Hanover Bank &

Trust Co., 11 Fed. Supp. 497, and in 85 Fed. (2nd) 61, are

based on a failure of proof after a trial and can have no

application to the case at bar which presents entirely

different issues on different pleadings. We have here the

effect of a comprehensive and unconditional release of

some of several alleged joint wrongdoers. The legal effect

of the release of the settling banks cannot be explained

away nor can the debenture-holders, after accepting the

benefits of the settlement, make the excuse that the banks

were not in fact wrongdoers. Chapin v. C. & E. I. Ry.

Co., 18 Ill. App. 47, 51; Guth v. Vaughan, 231 TH. App.

143; C. C. C. & St. L. Ry. Co. vy. Hilligoss, 171 Ind. 417,

86 N. K. 485, 488; Martin v. Setter, 184 Minn. 457, 239 N. W.

219, 222; Kirkland v. Ensign-Bickford Co., 267 Fed. 472, 475.

d. The Cireuit Court of Appeals does not hold that the

banks and the former directors of 1.U.I. were jointly liable

as tort feasors and it is the settled law of Illinois that

the application of the rule of release of all by the release

of some of several alleged joint wrongdoers is not con-

fined to cases where the alleged wrongdoers are jointly

liable. The rule applies where all contributed to the same

injury even though they acted severally. Chapin v. C. &

E. 1. Ry. Co., 18 Til. App. 47, 50; Welty v. Laurent, 285 Til.

App. 13, 14; Wagner v. C. & A. R. Co., 265 Ill. 245, 251;

Gibbs v. Redman Fireproof Storage Co., 68 Utah 298, 249

Pac. 1032, 1034; Farmers’ Savings Bank v. Aldrich, 153 Ta.

144, 133 N. W. 383, 385; DeCock v. O’Connell, 188 Minn.

228, 246 N. W. 885, 887; Muse v. DeVito, 243 Mass. 384, 137

N. E. 730, 731.

6. The separate point with respect to the release of

the New York banks is an afterthought. It was not pres-

sented to the District Court for decision and there is no

assignment of error on the record which presented the

point to the Cireuit Court of Appeals. Furthermore, the

assumed facts from which the argument is made are not

supported by the record.

7. The statement that the decree approving the settle-

ment with the banks was entered on the express condition

that the cause of action against the former directors of

I.U.I. would be preserved is directly contrary to the facts.

It is immaterial that the settling debenture-holders who

petitioned for the decree intended to release only the banks,

There is no dispute among the authorities that where there

is an absolute and unconditional release of one of several

alleged wrongdoers it operates to release all who partici-

pated in the same act. Stanley v. Leahy, 87 Tl. App. 465,

467; Petroyeanis v. Pirola, 205 Tl. App. 310, 312; Bee y.

Cooper, 217 Cal. 96, 17 Pac. (2nd) 740, 741; McBride vy.

Scott, 132 Mich. 176, 93 N. W. 243, 244; Rust v. Schlaitzer,

175 Wash. 331, 27 Pae. (2nd) 571; Thompson vy. Fox, 326

Pa. 209, 192 Atl. 107, 109; Ducey v. Patterson, 37 Colo. 216,

86 Pac. 109; Gholson v. Savin, (Ohio,) 31 N. EB, (2nd) 858,

863.

In addition to the grounds assigned by the District Court

and the Circuit Court of Appeals in sustaining the motion

for summary judgment there are other equally well-sup.-

a ae

iene

ported grounds why a decree for defendants must be en-

tered with respect to the alleged cause of action grounded

on the pledging of assets of I.U.I. as security for bank

loans.

8. The complaint fails to allege facts which show that

the requisite jurisdictional amount is involved. This is

not a true class action, (Ayer v. Kemper, 48 Fed. (2nd)

11, 14,) and the amounts of the separate claims of the

plaintiff debenture-holders cannot be combined to create

the necessary jurisdictional amount. (Pinel v. Pinel, 240

U.S. 594, 596; Clay v. Field, 138 U.S. 464, 479.) The com-

plaint must affirmatively and positively allege facts which

show that the jurisdictional amount is present and the alle-

gations cannot be helped by presumptions or argumenta-

tive inferences. (Norton vy. Larney, 266 U.S. 511, 515;

Hanford v. Davies, 163 U.S. 273, 280.) There is no alle-

gation in the complaint that any plaintiff was a creditor

at the time of the alleged wrongful borrowings and pledg-

ings, and so there is no allegation of any injury in any

amount to any plaintiff. (Graham vy. Railroad Co., 102

U.S. 148, 153; Chicago News Co. v. Stegel, 212 Ill. 617, 629.)

A spurious class suit must be dismissed as to each plain-

tiff who does not individually and severally allege affirma-

tively and distinctly that he has a claim in excess of $3,000.

Ogden v. Armstrong, 168 U.S. 224, 232; Russell v. Stansell,

105 U.S. 303, 304.

9. The plaintiffs were collusively selected to create an

appearance of diversity of citizenship which does not in

fact exist. No debenture-holder who resided outside Tlli-

nois was consulted respecting the institution of this suit

or the selection of the plaintiffs in whose names the suit

was instituted. This ground of lack of jurisdiction sup-

ports the decree dismissing the suit. Southern Realty In-

vestment Co. v. Walker, 211 U.S. 603; Detroit vy. Dean, 106

U.S. 537, 541; Quincy v. Steel, 120 U.S. 241, 248; Cerri v.

Akron-People’s Telephone Co., 219 Fed. 285.

10. The authority of plaintiffs’ attorneys to institute

and prosecute this suit was appropriately challenged and

they failed to sustain the burden of showing that they had

authority to commence this suit against the former direc-

tors of I.U.I. Their only authority was to sue to collect

moneys due upon the debentures. No named plaintiff

knew that the suit against these fefendants had been com-

menced until after the complaint had been filed. A suit

commenced without authority cannot be prosecuted even

where plaintiffs acquiesce or attempt to ratify the com-

mencement of the suit. Frye v. County of Calhoun, 14 Til.

131, 132; Town of Kankakee v. Kankakee & Indiana R. Co.,

115 Ill. 88, 92; Bell v. Farwell, 189 Til. 414, 417; Pueblo of

Santa Rosa v. Fall, 273 U.S. 315, 319; Sutherland v. Inter-

national Insurance Co., 43 Fed. (2nd) 969, 972.

11. The facts alleged in the complaint do not state a

cause of action against the former directors of I.U.I. or

any of them on account of the alleged violation of the de-

benture covenants in pledging assets as security for bank

loans. The complaint states mere conclusions as to those

matters which are essential to state a cause of action for

wrongful pledging. (Van Weel vy. Winston, 115 U.S. 228,

237; Sterling Gas Co. v. Higby, 134 Ml. 557, 568; Bosworth

v. Van Lanningham, 293 Fed. 875, 877.) There is no alle-

gation that any of the indebtedness for which a pledge

was made was created after the debentures were issued,

Renewals of notes are merely extensions of time of pay-

ment and not the creation of new indebtedness. Kelly vy.

Central Hanover Bank & Trust Co., 11 Fed. Supp. 497,

O04; Griffin v. Long, 96 Ark. 268, 131 S.W. 672, 673; Phoenix

Bank v. Martin, 219 Ky. 579, 293 S.W. 1064, 1067; Pough-

keepsie v. Quintard, 136 N.Y. 275, 32 N.E. 764.

12. Plaintiffs became creditors of I.U.I. by purchas-

ing its debentures. In each debenture was a provision

that all liability of the directors for the payment of the

debenture was waived and released by the holders of the

debentures. This no recourse provision precludes any

recovery by plaintiffs against defendants as former di-

rectors for the payment of the debentures or any part

thereof. Continental Corp. v. Gowdy, 283 Mass. 204, 186

N.E. 244, 246; Marfield v. Cincinnati D. & T. Traction Co.,

111 Ohio 139, 144 N.E. 689, 691; Babbitt v. Read, 215 Fed.

395, 417, affirmed in 236 Fed. 42.

13. In addition to the settlement with the banks, plain-

tiff debenture-holders settled with four co-defendant di-

rectors and dismissed the suit as to them after the Statute

of Limitations barred the commencement of a new suit.

This settlement with and release of some former directors,

who were charged with identically the same wrongs as are

charged against present defendants, effected a discharge

of all former directors for all causes of action alleged.

The fact that this settlement agreement took the form of

a covenant not to sue is immaterial. Petroyeanis v. Pirola,

205 Ill. App. 310, 312; Stanley v. Leahy, 87 Til. App. 465,

467; Bee v. Cooper, 217 Cal. 96, 17 Pae. (2nd) 740; Lanasa

v. Beggs, 159 Md. 311, 151 Atl. 21, 25; Rust v. Schlaitzer,

175 Wash. 331, 27 Pac. (2nd) 571, 573.

14. These respondents may sustain the decree of the

District Court upon any ground warranted by the record,

though they may wish to show that the District Court

might have based its decree on different and additional

grounds and that the Cireuit Court of Appeals might have

affirmed on different and additional grounds. (McGold-

rick v. Compagnie Generale Transatlantique, 309 U.S. 430,

434; Langnes v. Green, 282 U.S. 531; Mattingly v. North-

western Virginia R. Co., 158 U.S. 53, 57; Hitlmer v. Chr

cago Bank of Commerce, 375 Ill. 266, 272.) It is the con-

sidered opinion of counsel for respondents that the grounds

assigned by the District Court as the basis for its decree

and the grounds assigned by the Circuit Court of Appeals

as the basis for its judgment in so far as it affirmed the

decree of the District Court are sound, and that the peti-

tion should be denied for the reasons assigned in Points

1 to 7, supra. In addition to the sound reasons assigned

for the decision in favor of respondents, there are other

reasons equally sound which require that the petition be

denied, which reasons are set forth in Points 8 to 13, supra.

ree. |

OE AAR ION NES TIS SRE NTE EE MLE ae PRY LIS

ARGUMENT IN OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI.

The conclusion reached by the District Court and the Cir-

cuit Court of Appeals that the release and discharge of

the banks operated to release and discharge the former

directors of I.U.I. from all liability for the alleged wrong-

ful pledging is fully supported by the established law

and sound logic.

The argument of plaintiffs’ counsel is based on the erroneous

assumption of fact that the release of the banks was condi-

tioned upon the reservation of the cause of action against the

former directors of I.U.I.

An examination of the proceedings of the United States

District Court and the settlement papers which appear

as exhibits to the motion for summary judgment will dis-

close that the assumption of fact made by plaintiffs’ coun-

sel that the release of the banks was conditioned on the

reservation of some cause of action against the former

directors of L.U.1. is without foundation and that the whole

argument resting on this false premise falls of its own

weight.

After deseribing the score of suits pending in the Fed-

eral courts of New York and Illinois against the New

York and Chicago banks by the debenture-holders and the

trustee in bankruptey of I.U.1. (Pars. 1-6, R. 116-122;

Pars. 8-10, R. 125-126), and the extensive negotiations be-

tween the attorneys for the creditors and the trustee and

the attorneys for the banks (Par. 25, R. 136), the peti-

tion states that the debenture holders had agreed to com-

promise and settle their claims which had been asserted

or which were assertable against the banks in the various

pending equity suits as well as the claims of the trustee

in bankruptey in the several pending preference suits.

(Par. 26.) There is no suggestion here that the settle-

ment was other than absolute and unconditional. (R. 137.)

The whole argument of plaintiffs’ counsel rests upon their

construction of Sub-Paragraph K of Paragraph 26. There

is not a suggestion in this paragraph or in anything that

precedes it that the attempted limitation of the effect of

the release of the banks should be a condition of the settle-

ment with the banks. The paragraph is just an announce-

ment of the hope of the petitioners that the release of the

banks would not be construed as a release of former officers

or directors of I.U.I. (R. 143.) There is nothing in the

record to show that the banks agreed to this attempted

reservation as a limitation of the effect of the release to

be given to them upon the consummation of the settlement

arrangement. The banks were not parties to the petition.

There was no answer to the petition by the New York

banks, and the Chicago banks by their answer merely ad-

mitted that the allegations of the petition that a settlement

had been reached were true. Ex. D, R. 162-165.

The decree approving settlement (Ex. F, R. 172-174), the

decree in chancery confirming settlement (Ex. G, R. 174-

194), and the order in bankruptcy confirming settlement

(Ex. H, R. 195-199), were obviously agreed orders, They

must have been drafted by plaintiffs’ counsel and approved

by the banks’ counsel. The Court will search these de-

cretal orders in vain for even a suggestion of the reserva-

tion of the alleged cause of action against the former di-

rectors of I.U.J. Obviously, the banks would not have

permitted this attempted reservation to be made a con-

OBR lag ANE Aa A DE EAI Ma Sm ARRAS F TEC ee

dition of the effectiveness of the release given to them.

The final decree in chancery and the final order in bank-

ruptey confirming the settlement show that the settlement

with the banks was unconditional and that the release

given to the banks was absolute and contained no attempted

reservation of any pretended cause of action against any

officer or director of I.U.I. The Court will notice that the

final orders entered February 24, 1938, not only released

the banks of all claims, demands and causes of action which

had been asserted against them in the scores of suits

pending in the Federal courts of New York and Illinois,

but they released all claims, demands and causes of action

which might have been asserted against the banks by de-

benture-holders or the trustee in bankruptcy of I.U.I. re-

specting liability of the banks for making loans to and

receiving collateral from the corporation in violation of

the debenture covenants. (R. 175, 197.) To make the

release of the banks doubly certain, all debenture-holders

and the trustee in bankruptcy and all parties claiming

through them were permanently enjoined from ever in-

stituting any action against said banks on account of

any matter involved in the bank suits or upon or in con-

nection with the debentures. R. 177.

The release of the banks from all liability for their part in

effecting a pledge of the assets of I.U.I. in alleged breach of the

debenture covenants likewise released the former directors of

LULL.

We do not believe that anyone will seriously contend

that the settling banks could not plead the settlement and

release in bar of any action which might be brought against

them for alleged breach of the covenants of I.U.I. deben-

tures in connection with the deposit of collateral as secu-

rity for the loans made by the banks to the corporation.

It is so held by the District Court (R. 293) and the Circuit

Court of Appeals. (R. 357.) This being established, it

follows as night the day that the release of the banks also

released the former directors of the corporation for their

participation in the commission of the alleged wrong. There

is not a case in I}linois which departs from the rule that if

there is an actual release of the cause of action against

one or more of several joint wrongdoers the cause of ac-

tion is released against the others. A few of the Illinois

cases are Wallner v. Chicago Traction Co., 245 Ill. 148,

151; Mooney v. City of Chicago, 239 Ill. 414, 423; City of

Chicago v. Babcock, 143 Ill. 358, 366; Emory v. Addis, 71

Ill. 273, 277; Welty v. Laurent, 285 Ill. App. 13, 14; Killham

v. Chaloupka, 195 Ill. App. 182, 185; Stanley v. Leahy, 87

Ill. App. 465, 467; Vigeant v. Scully, 35 Ill. App. 44, 46;

Chapin v. C. € E. I. R. Co., 18 Ill. App. 47, 50. It is uni-

versally held that the absolute release of one or more of

several joint wrongdoers releases all the rest of them and

that an unconditional and consummated settlement with

one or more of such wrongdoers is a bar to a suit against

any of the rest of them.

In applying the Illinois decisions to the case at bar,

we must keep in mind the fact that there was an absolute

and unconditional discharge of the banks from all asserted

or assertable liability. Certainly, in the light of the final

orders entered by the District Court in chancery and in

bankruptcy, these plaintiffs or any of the other debenture-

holders could not revive any of the many suits against the

banks. If any debenture-holder attempted to prosecute

any of these suits against the banks, the banks could plead

the release as a bar and the debenture-holder would sub-

ject himself to prosecution for contempt of court for vio-

lating the injunction permanently restraining prosecution

of the suits against the banks. This situation was brought

about by the action of plaintiffs and the debenture-holders

aie |

‘ethiniels neon

Tad LE Picasa ee chk ig ic omMeCe ae

oe a cea

represented by them in the bank suits. They asked the

Court to approve the compromise which released and dis-

charged the banks. They asked the Court to restrain all

debenture-holders from prosecuting any suit against the

banks for their part in the transactions which they as-

serted had resulted in a great loss to them. These de-

fendant directors had no part in releasing the banks from

this alleged liability and they were not consulted about

it during the negotiations for settlement nor were they

before the Court in the proceedings which concluded the

settlement with and discharge of the banks. Plaintiffs

created the situation which they now seek to avoid.

Cc.

The rule that the release of one of several joint tort feasors

releases all of them applies even where there is a reserved in-

tention to look to others for further compensation.

Plaintiffs’ counsel, in their petition (p. 27) challenge us »

‘‘to cite a single case of the Supreme or Appellate Courts

of Illinois deciding that in spite of a clause in a release

reserving the cause of action against the other joint tort

feasors, the reservation clause will be given no effect and

the other joint tort feasors will be released.” We have

met the challenge in the group of cases cited under the

preceding point and we could cite many more cases an-

nouncing the same rule. The Illinois courts, without ex-

ception, state that ‘‘the release of one alleged joint tort

feasor releases all,’’ and they attach no provisos to the

rule. If the joint tort feasor is released, he is released;

and the fact that the settling claimant tells the settling

defendant that he proposes to sue someone else notwith-

standing he is releasing the settling defendant does not

limit the legal effect of the release.

Stanley v. Leahy, 87 Ul. App. 465, 467, states directly and

in unequivocal language that it makes no difference that

the settling claimant intended to release only some of the

alleged wrongdoers. Plaintiffs’ counsel undertakes to dis-

tinguish this case by saying that it involved the sufficiency

of a pleading in which plaintiff said merely that she did

not intend to release all of the accused when she released

some of them, but said nothing to indicate that she ex-

pressed this intention to the settling tort feasors. The

Court places no such limitation upon its language. It

recognizes that neither logic nor law would support a

conclusion that makes the rule of release dependent upon

a self-serving arrangement by the settling claimant. All

of the argument of counsel cannot change the fact that

the Illinois Court in this ease held squarely and unequi-

vocally that it was altogether immaterial whether the set-

tling plaintiff intended to release all of the wrongdoers by

releasing some of them, because it recognized that under

the settled law of Illinois all joint tort feasors were re-

leased upon the release of one regardless of the intention

or agreement of the settling parties to release only some

of them.

City of Chicago v. Babcock, 143 Tl. 358, makes the situ-

ation as to the law in Illinois perfectly clear. There the

Court says (p. 366) that ‘A release to one of several joint

tort feasors is a release to all, and an accord and satisfaction

With one of them is a bar to an action against the others.”’

The Court then points out that a covenant not to sue is

different from a release and does not operate as a dis-

charge of anyone. As far as Illinois law is concerned, the

situation comes down to this: if one is released, all are re-

leased; if all are not released, then none is released. The

banks being released, (as the District Court (R. 293) and

the Circuit Court of Appeals (R. 357) squarely hold,) then

all who acted with the banks in the commission of the al-

leged wrong are released.

a | ——

Another Illinois case which holds squarely that the re-—

lease of one joint tort feasor releases all, notwithstand-

ing the instrument of settlement is cast in the form of a

covenant not to sue, is Petroyeanis v. Pirola, 205 Il. App.

310, 312. There the Court seemed to apply the rule which

is stated in Section 886 of Restatement of Torts: “The

discharge or satisfaction of a judgment against one of

several persons, each of whom is liable for a single harm,

discharges each of the others from liability therefor.”

We think that this rule of the Restatement is applicable

to the case at bar. The legal effect of the court proceed.

ings which carried out the settlement was a finding by the

Court that the banks should cancel their claims and the

claims of others filed against the bankrupt estate, aggre-

gating $71,979,083.95, and that they should pay $3,435,088.07

as compensation to the debenture-holders and the bank-

rupt estate. (R. 138-141.) The final decree entered Feb-

ruary 24, 1938, found that the settlement as outlined in

the petition had been fully consummated and that the

banks had paid the settlement fund and it enjoined the

prosecution of any claim against the banks. (R. 177.)

The order in bankruptcy entered on the same date found

that the banks had paid the amount agreed to be due “in

full settlement and compromise of all claims involved,”

in all the suits against the banks. (R. 196.) The situation

is exactly the same as if the case had been tried and the

Court had made a finding which resulted in a decree against

the banks to can

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