Becker v. Billings

136 N.E. 581, 304 Ill. 190

• Court: Illinois Supreme Court
• Decided: June 21, 1922
• Docket: No. 13952
• Status: Published

Opinions

Mr. J ustice Dunn

delivered the opinion of the court:

The Chicago National Bank and the Home Savings Bank, banking corporations in Chicago, failed on December 18, 1905. The former was organized under the National Banking act and the latter under the State Banking act of Illinois. Their respective boards of directors for many years before the failures, each having seven members, consisted of the same persons, except that each had one director who was not a member of the other board. Fred M. Blount was a director of the National bank but not of the State bank,' and William J. Onahan was a director of the State bank but not of the National bank. The other six directors of each, bank were Cornelius K. G. Billings, John R. Walsh, John M. Smyth, Andrew McNally, Maurice Rosenfeld and William Best. On May 7, 1904, Andrew McNally died, and afterward Fred G. McNally was elected a director of each bank. Walsh was president of the Chicago National Bank. During 1899, 1900 and 1901 Billings was president of the Home Savings Bank, and after 1901 Onahan was president until the failure.

In 1910 two bills were filed in the circuit court of Cook county, the first by certain stockholders of the Chicago National Bank in behalf of themselves and of all other stockholders who might choose to join as complainants, against Billings and the Chicago National Bank; the other by Abraham G. Becker, as a stockholder in the Home Savings Bank, in behalf of himself and all other stockholders who. might choose to join, against Billings and the Home Savings Bank. The bills charged misappropriation and loss of the funds of the respective banks by John R. Walsh in consequence of the negligence of Billings in violation of his duties as director, and prayed for an accounting and a decree against Billings to pay to the banks, respectively, the amount of damages so occasioned by his neglect. A supplemental bill, which was amended, was filed, a temporary injunction was granted and a receiver appointed in each case, as set forth in the opinion in Wallach v. Billings, 277 Ill. 218. Upon appeals from these orders the Appellate Court reversed the order granting the injunction and affirmed the order appointing a receiver in the case of the National bank but affirmed both orders in the State bank case. (Wallach v. Billings, 161 Ill. App. 317; Becker v. Billings, id. 351.) After the causes were remanded to the circuit court a demurrer was sustained in each case to the bill, the supplemental bill and the amended supplemental bill, and leave was given to file an amended and supplemental bill. In the National bank case a demurrer by Billings was sustained to this amended and supplemental bill, it was dismissed for want of equity, and upon successive appeals by the complainant to the Appellate and Supreme Courts the decree was affirmed. (Wallach v. Billings, 277 Ill. 218.) In the meantime the State bank case was continued in the circuit court, the time for filing the amended and supplemental bill being extended from time to time until after the final decision in the National bank case in the Supreme Court, in February, 1917. On August 21, 1918, an amended original and supplemental bill was filed, by which for the first time the survivors of the board of directors at the date of the failure and the heirs of the directors who had died since that date, with perhaps some exceptions, were made defendants. Demurrers were filed to this bill by various defendants, they were all sustained and the bill was dismissed for want of equity. The complainant appealed, the Appellate Court affirmed the decree and granted a certificate of importance, and the complainant has appealed to this court.

The amended and supplemental bill averred the organization of the banks, their failure and the composition of their boards of directors, as already stated, and set forth the by-laws of the Home Savings Bank, providing, among other things, that regular meetings of the board of directors should be held on the second Monday of each month; that the board of directors at the beginning of each year should appoint from its own number, or from among the stockholders, an auditing committee of two members, to examine from time to time and report in writing to the board of directors as to the state of the books, accounts, securities, business and affairs of the bank, and that the policy of the bank as to investments should be to invest its funds in United States government bonds and in the highest class of municipal securities, but the board of directors should in all cases first authorize the purchase of or investment in securities and that no loans of any kind should be made by or on behalf of the bank. The bill then alleged that the directors and officers, and each of them, continuously from January 5, 1899, to December 18, 1905, willfully, deliberately and continuously failed and neglected to observe, perform and discharge their duties as such directors and as such officers, and each and every of their said duties as prescribed and imposed upon them by the by-laws of the bank and by the laws of the State of Illinois, and as the direct and immediate result of such failure and neglect the bank became insolvent and was obliged to cease doing business; that among the duties of the directors which they so willfully, deliberately and continuously failed to perform, were to attend the meetings of the board of directors once in each month; to prescribe proper and sufficient rules and regulations for the government of the bank and for the control and supervision of the executive officers; to supervise, examine and inspect the business transacted by the bank, for the purpose of seeing that it was properly, lawfully and safely managed in conformity with the laws of the State and the by-laws of the bank; to appoint an auditing committee, as required by the by-laws of the bank, and see that the committee performed its duty and made reports to the board of directors; to prevent the unlawful use, misapplication or waste of the funds of the bank; to see that no securities were purchased with such funds or the money of the bank invested without the authority of the board of directors, but that the policy of the bank with respect to its investments, as prescribed by its by-laws, was carried out by investing its funds in United States government bonds and in the highest class of municipal securities; and to diligently, honestly and continuously, while they were directors, administer and supervise the business of the bank in accordance with the by-laws and the laws of the State. It was charged that in violation of these duties the directors and officers knowingly, willfully and continuously permitted Walsh and the corporate enterprises which he owned or controlled to obtain from the bank large sums of money, amounting to more than three million dollars, upon wholly inadequate or worthless securities, which were known to the directors and officers, at the time the moneys were invested in such securities, to be wholly inadequate or worthless. The bill set out at considerable length the relation of the two banks and their boards of directors. It alleged that Walsh during the years from 1897 to 1905 owned substantially all of the capital stock of eight named corporations, which were called in the bill Walsh corporations, or controlled and dominated them for his own use; that the businesses in which these corporations were engaged were speculative and hazardous, and the board of directors of the Home Savings Bank, and each member of the board and the officers of the bank, well knew that they were of that character, but that they permitted Walsh to cause the bank to purchase from him and from or through the Chicago National Bank, and from the Walsh corporations or some of them, bonds and bond certificates and securities issued by the Walsh corporations which were without any intrinsic or market value, and that such purchases were made by the board of directors of the Home Savings Bank when it knew that such bonds, bond certificates and securities were worth at the time not to exceed one-third of the amount of money paid for them by the Home Savings Bank; that in purchasing such bonds, bond certificates and securities the directors of the bank made no inquiry as to their intrinsic or market value but recklessly relied wholly upon representations and statements of Walsh. The bill set out specifically the various securities bought, the amount paid for them and their value and the amount realized from them, showing a loss of more than $2,500,000,—more than the entire capital stock and surplus of the bank, the capital stock being $100,000 and the surplus more than $200,000. The bill then averred the death of Andrew McNally, Fred G. McNally, John M. Smyth and John R. Walsh and made numerous persons defendants as their representatives, together with the survivors of the original board of directors and the members of the board of directors at the time the bill was filed, and prayed that the original directors and their representatives might be decreed to pay to the bank the loss sustained by reason of their negligence as directors. The original bill averred a demand upon the directors of the bank to bring suit and their failure to do so, and the supplemental bill first filed, which was sworn to, contained the allegation that during the years 1901 to 1905, inclusive, when Billings was a director of the bank, during which time the principal losses sustained by the bank were incurred, all the directors of the bank except Billings were under the domination and control of Walsh mentioned in the original bill and obeyed his orders implicitly; that Billings is a man of ability and experience in large business affairs, and worth, on information and belief, more than $10,000,000; that if Billings had attended the directors meetings, as he should have done, he would have discovered that Walsh was misappropriating the funds of the bank and could thereby have prevented any considerable loss to the bank. It was also averred that Billings, though not a resident of Illinois, was the owner of real and personal property in the State worth more than $1,000,000.

On the part of the defendants who were not made parties to the original bill until the amendment of August 21, 1918, it is contended that the Statute of Limitations is a bar to the maintenance of the bill against them. On the part of Billings it is contended, independent of any reference to the Statute of Limitations, that the decision in Wallach v. Billings, 277 Ill. 218, is conclusive against his liability in this case; that he did not owe to the stockholders the duty of passing upon securities purchased by the bank; that his inaction was not the proximate cause of loss to the bank; that the appellant acquiesced in the wrongs complained of; that there is a lack of necessary parties; that a receiver having been appointed, the appellant could not maintain the bill until after demand on the receiver and his refusal to sue, and that the appellant had an adequate remedy at law.

The appellant insists that the appellees are trustees of an express trust, in whose favor the Statute of Limitations does not run, and relies upon the case of Ellis v. Ward, 137 Ill. 509, in which the doctrine was applied to a bill in equity by the receiver of an insolvent corporation to require the directors to re-pay money which they had misapplied, the court saying: “Ordinarily an express trust is created by a deed or will, but there are many fiduciary relations established by law and regulated by settled legal rules and principles where all the elements of an express trust exist and to which the same legal principles are applicable, and such appears to be the relation established by law between directors and the corporation.” While it has been frequently said that directors of a corporation are trustees for the stockholders and their fiduciary relation is always recognized, there is no other case in this court holding them to be trustees of an express trust, and there are numerous decisions in other States to the contrary. (Boyd v. Mutual Fire Ass’n, 116 Wis. 155; Emerson v. Gaither, 103 Md. 564; Cullen v. Coal Creek Mining Co. 42 S. W. (Tenn.) 693; Wallace v. Lincoln Savings Bank, 89 Tenn. 630; Baxter v. Moses, 77 Me. 465; Spering’s Appeal, 71 Pa. 10; Lippitt v. Ashley, 89 Conn. 451; Pearson v. Concord Railroad Corp. 62 N. H. 537; Landis v. Sexton, 105 Mo. 486; Cooper v. Hill, 94 Fed. 582.) In Gottlieb v. Miller, 154 Ill. 44, where it was claimed that the directors of an insolvent corporation were trustees of its assets for the benefit of its creditors, the court said: “The proposition refers to the assets of an insolvent corporation as a ‘trust, fund’ and to the officers of the corporation as ‘trustees.’ This is not strictly accurate. The supposed trust does not fall within the definition of either an express trust, an implied trust, a resulting trust or a constructive trust. (1 Perry on Trusts,—2d ed.—secs. 24-27, inclusive.) At most, the assets of a corporation are, under some circumstances, a quasi trust fund, and the directors or officers of the corporation, under some circumstances, quasi trustees.” In Briggs v. Spaulding, 141 U. S. 132, it is said: “Bank directors are often styled trustees, but not in any technical sense. The relation between the corporation and them is rather that of principal and agent,—certainly so far as creditors are concerned, between whom and the corporation the relation is that of contract and not of trust. But, undoubtedly, under circumstances they may be treated as occupying the position of trustees to cestui que trust.” This statement seems to be in accordance with the weight of authority, but there are other cases in which the decisions are contradictory. Cases where the application of the Statute of Limitations has been recognized vary as to the time when it commences to run,—whether at the time of the doing of the acts complained of, (Thomas v. Richter, 88 Wash. 451; Link v. McLeod, 194 Pa. 566; Mason v. Henry, 152 N. Y. 529; Cooper v. Hill, supra;) or at the time of their discovery. (Greenfield Savings Bank v. Abercrombie, 211 Mass. 252; Brinckerhoff v. Roosevelt, 143 Fed. 478.) Even if the directors are regarded as trustees, the relation of trustee and cestui que trust ended when they ceased to be directors, and when that relation is absolutely ended, whether by breach of trust or otherwise, the statute applies. (2 Perry on Trusts, sec. 864; Wyckliffe v. Lexington, 11 B. Mon. 155; Sparing’s Appeal, supra; Lexington and Ohio Railroad Co. v. Bridges, 7 B. Mon. 556.) In the case of Ellis v. Ward, stipra, the defendants were the directors who had misappropriated the money and who were still directors of the company when the bill was filed against them. “It may be conceded that so long as a trustee continues to exercise his powers as trustee in regard to property that he can be called to an account in regard to that trust, but when he has parted with all control over the property and has closed up his relation to the trust and no longer claims or exercises any authority under the trust, the principles which lie at the foundation of all statutes of limitation assert themselves- in his favor and time begins to cover his past transactions with her mantle of repose.” (Clarke v. Boorman’s Exrs. 18 Wall. 493.) The directors turned over the assets of the bank on December 18, 1905, to the Chicago Clearing House banks and after that time had no control of the business of the bank. If the appellant did not then fully know of the existence of his cause of action against them and each of them, he had learned of it when he filed his original bill, on November 14, 1910, and made only Billings and the bank parties defendant. The persons who were then directors were made defendants to the supplemental bill, but it was not until more than seven years later that the- other directors, besides Billings, who participated in the wrongful acts complained of were made defendants. As to them the statutory time had elapsed and their demurrers were properly sustained.

Billings also claims the benefit of the Statute of Limitations, but as to him the case presents a different aspect. He was a party to the original bill, which was filed within the five-year limitation of the statute, and he can have the benefit of the statute only on the theory that the amended bill, filed August 21, 1918, states a new cause of action against him which had not been previously alleged. The only charge in the original bill was a general charge that Billings wholly neglected every duty which rested upon him as a director of the bank; that he neglected to attend any meetings of the board of directors or to devote any time or pay any attention to the business of the bank or to his duties as director, and that by reason of such negligent conduct Walsh was permitted to, and did, take the entire domination, direction and control of all the business operations and transactions of the bank and conducted the same in all particulars in accordance with his own wishes and purposes, entirely free from any control, supervision or restraint on the part of Billings or any of the other directors or officers of the bank, and was permitted to, and did, practice a systematic course of mismanagement, misappropriation and waste of the funds and assets of the bank in the manner which has been previously stated. The charge was negligence, only. There was no allegation that Billings knew anything about the condition of the bank or its business or had any reason to believe that its affairs were not carefully and honestly managed by its officers and the other directors. In fact, the contrary inference might arise from the allegation that he paid no attention whatever to the business of the bank. Whatever liability he might be charged with arose from negligence, only, and not from any action on his part. This was the cause of action stated in the original bill and the supplemental bill and amendment ma'de in 1910. On August 21, 1918, by leave of the court the appellant filed an amended original and supplemental bill, which, omitting some of the allegations of the previous bills and amendments in explanation and definition of the charge of negligence against Billings which had been contained in the previous bills and was retained in the amended and supplemental bill, averred that the business of the various Walsh corporations was speculative and hazardous in its character; that the board of directors of the Home Savings Bank, and each member of the board, knew that this was their character; that the purchases of the bonds and securities of those corporations were made by the board of directors when they knew that such bonds and securities were worth not to exceed one-third of the amount of money paid for them by the bank, and that in purchasing the bonds and securities the directors named, one of whom was Billings, made no inquiry as to their intrinsic or market value; that the purchases of the bonds and securities of the Walsh corporations, as set forth in the amended bill, were unlawful, reckless, hazardous and dishonest banking and were known to the board of directors, and each member of the board, at the time they occurred, to be improper, unlawful, reckless, hazardous and dishonest transactions; that the purchases were not made in the interest of the bank nor for the purpose of procuring safe and secure investments for the funds of the bank, but were made at the solicitation of Walsh for the sole purpose of enabling him to secure funds for the purpose of carrying on the business of the Walsh corporations, and by reason thereof the Home Savings Bank was defrauded out of a large part of the money so invested in such bonds and securities.

This amended bill contained no allegation that Billings was not at all times a resident of this State or that all the directors of the bank except Billings were under the domination of Walsh, and there is nothing distinguishing the charge against Billings from the charge against the other directors. The parties have discussed at some length the effect of the omission of the allegations mentioned from the amended bill. There was no order striking them from the record, and the rule of equity pleading is that an amended bill or amendment to ,the bill is a continuation of the original bill of which it is considered a part, the two together constituting one record. (American Freehold Land Mortgage Co. v. Sewell, 92 Ala. 163; Lewis v. Lanphere, 79 Ill. 187; French v. Hay, 22 Wall. 238.) But the amendment is sometimes of such a character that it is regarded as an independent graft upon the original case and the beginning of a new lis pendens. (French v. Hay, supra.) When the amendment sets up a new equity, or where the party making the amendment brings forward a new claim or a different and distinct ground of relief not before asserted, the suit will be regarded as begun at the time of filing the amendment and will not relate back to the filing of the original bill. (Norris v. Ile, 152 Ill. 190.) Where an amendment making new parties to a bill to obtain a legal title to land was made several years after the original bill was filed, the suit was not regarded as commenced against the new parties at the time of commencing the suit originally, but they were entitled to the benefit of the Statute of Limitations at the time the amendment was filed. (Miller's Heirs v. McIntyre, 6 Pet. 61.) The same principle must apply to the introduction of a new claim against the same parties.

Billings has contended at all times that the original bill and supplemental bill as first amended stated no 'cause of action against him. However this may be,- it is clear that if they did state a cause of action it was not the same cause of action as that stated in the amended and supplemental bill last filed. The latter bill, instead of being founded on non-feasance, mere neglect and omission to do anything, charges a fraudulent breach of trust, actual, intentional wrongdoing in the purchase of bonds and securities of corporations engaged in business which Billings knew to be speculative and hazardous, at three times their value, not for the purpose of making safe investments of the funds of the bank but for the sole purpose of enabling Walsh to secure funds for the purpose of carrying on the speculative and hazardous business of the Walsh corporations. The charges against Billings are the same as those against all the directors, and accuse all of a common design, which was jointly carried out, to fraudulently convert the funds of the bank for Walsh’s benefit. These charges in the amended bill must be regarded as inconsistent with the charges in the original bill of a total failure to pay any attention to the business of the bank. The act of purchasing securities known to be speculative with the funds of the bank, at a price known to be three times their value, for the sole purpose of enabling the seller of the securities to obtain the funds of the bank to carry on the hazardous business of the corporations whose securities are involved, is not merely a failure to pay any attention to the business of the bank, it is fraudulently using power over the business and funds of the bank and attending to its business in such a way as to produce a profit to another at the expense of a loss to the bank.

The appellant argues that the cause of action as stated in the amended bill is the same as that set forth in the original bill because both causes of action arose out of Billings’ duty as a director, his failure to perform any of his duties and the consequent loss to the bank, and his counsel say that the bank’s cause of action is its right to hold Billings liable for the loss flowing from his failure to perform his duties as a director. This is not a correct definition of the cause of action. The cause of action is not the loss of the bank and is not the right of the bank to hold Billings liable for the loss. It is the act or omission of Billings which caused the loss and gave the right to the bank to hold him liable which constitutes the cause of action. This principle is well recognized and has been frequently stated. (Mooney v. City of Chicago, 239 Ill. 414; Crane v. Chicago and Western Indiana Railroad Co. 233 id. 259.) These were actions at law, but the principle is equally applicable in equity. Indeed, for such acts as are alleged against Billings and his associates in the amended bill the bank could have maintained an action on the case against them all, jointly or severally, but the cause of action for the negligence stated in the original bill would not be the same as that for an intentional conversion stated in the amended bill. The difference is that between a charge of negligently losing the money and willfully taking it.

Both the original bill and the amended bill are based upon a breach of duty of Billings, but they state entirely different, breaches and conduct altogether inconsistent. It is impossible for the allegations of both bills to be true, and evidence which sustains one will disprove the other. The original bill made no charge of any wrongful act against Billings. It would have been a defense to the cause of action set up in it that Billings was an invalid, who was prevented by the condition of his health from attending to the business of the bank at the times when the investments in the securities of the Walsh corporations were made, (Briggs v. Spaulding, supra,) but such a defense could not be made to the charge contained in the amended bill, of active, fraudulent participation in the purchase of the securities. That charge was first made in the cause when the amended bill was filed on August 21, 1918, which was more than twelve years after the cause of action arose and Billings ceased to be a director. That amended bill contained no allegation that Billings was not a resident of Illinois. The supplemental bill does contain an allegation that he was not a resident of Illinois, but this bill was filed more than seven years before the amended and supplemental bill now under consideration, and its allegation that Billings was not then a resident of Illinois is not a statement that he was not a resident of Illinois on August 21, 1918, or had not been a resident for more than five years before that date.

The appellant contends that in his brief originally filed in this court Billings did not claim the benefit of the Statute of Limitations and therefore has waived it. The conclusion does not follow. One of the grounds of demurrer alleged in the circuit'court was the Statute of Limitations. After the first opinion in this case was filed a rehearing was granted, the result of which was to open the whole case for argument upon any questions appearing in the record. (Colesar v. Star Coal Co. 255 Ill. 532; Public Utilities Com. v. Pittsburg, Cincinnati, Chicago and St. Louis Railroad Co. 290 id. 580.) An appellant or plaintiff in error who brings a case to an appellate court for review must indicate by his assignment of errors the errors of which he complains and his argument must be confined to the errors so assigned. An appellee or defendant in error is subject to no such requirement. He is entitled to sustain the decree of the trial and appellate courts by any argument and upon any basis appearing in the record which shows that the decree is right, even if he had not previously advanced such argument. Mulvihill v. Shaffer, 297 Ill. 549; Hartford Fire Ins. Co. v. Peterson, 209 id. 112.

The Statute of Limitations was. a bar to the maintenance of the appellant’s suit against'all the appellees, and the demurrer was properly sustained.

The decree will be affirmed.

Decree affirmed.