Court Opinion

ID: 3773964
Source: CourtListenerOpinion
Date Created: 2016-07-06 07:25:22.81747+00
Date Added: 2024-06-11T14:12:37.134847
License: Public Domain

This matter had its inception in the Court of Common Pleas of Montgomery county, Ohio. It is before us upon an appeal on questions of law and fact.
The appeal is taken by virtue of the provisions of Section 687-22 and Sections 12223-1 to 12223-18, General Code, from the finding of the court filed on the 18th of January 1940, declaring that the Superintendent of Building and Loan Associations had exceeded or abused his authority and discretion in issuing an order of June 6, 1939, finding that the liquidation of the Mutual Home  Savings Association was being improperly conducted and that the interests thereof were not being properly protected and in taking possession of the business and property of the association under Section 687-1, General Code.
The appellants claim the right to liquidate the assets of the association by virtue of the fact that the Superintendent of Building and Loan Associations withdrew from the control of a group of directors the right to *Page 441 
continue the liquidation and conferred such right, under statutory authority, upon the appellants, the state officials. Broadly, the appellants claim that the superintendent had an undoubted right to so act and that there was no abuse of discretion. On the other hand, directors of the appellee claim that the action of the superintendent was an abuse of discretion,
as the directors were conducting the affairs of the association in a manner entirely proper and within the limits of statutory authority and the superintendent was without authority to deprive them of that control.
The case was bitterly contested and as a result a bill of exceptions is now presented to us containing more than four thousand pages, all of which we have read.
Counsel for appellants state the question before this court as follows:
"The question before the court is: `Did Superintendent Merion exceed or abuse his power and discretion in finding that the liquidation of the Mutual under the directors was being improperly conducted, or that the interests in the liquidation were being improperly protected and is therefore taking possession of the business to complete the liquidation?'"
The first pleading is captioned, "Application for an Order of Injunction and Restoration," and was filed June 11, 1939. Its allegations are, briefly, that prior to the 6th of June 1939 the Association was operated under the provisions of Section 687-21, General Code; that on the 6th of June 1939 the defendant, Merion, as superintendent, with the written approval of defendant, Jones, the director of commerce, took charge of all business and property of the association for liquidation under the provisions of Section 687-1, General Code; that the liquidation of the association under Section 687-21, General Code, was being properly conducted and the interests of stockholders were being properly *Page 442 
protected; and that the superintendent grossly exceeded and abused his power and discretion in the issuance of the order providing for the liquidation of the association under the provisions of Section 687-1, General Code. Plaintiff prays for an order of the court directed to the superintendent to show cause why such action for the liquidation under Section 687-1, General Code, should not be set aside and the association restored to the rights previously enjoyed by virtue of Section 687-21, General Code.
On motion, the court ordered that Merion, superintendent, and Jones, director of commerce, show cause in the form of an answer on or before June 13, 1939, why their action should not be set aside and restoration made to the Mutual Home  Savings Association of the rights previously enjoyed.
In response to this order, the defendants, Merion, superintendent of building and loan associations, and Jones, director of commerce, answered.
They denied that the liquidation of the association under Section 687-21, General Code, was being properly conducted or that the interests of the stockholders therein were being properly protected, and denied that the state officers had exceeded and abused their power and discretion.
The superintendent sets out eighteen reasons why the liquidation was not being properly conducted.
The cause came on for hearing before the court below and on January 16, 1940, the court found that Charles S. Merion, superintendent of building and loan associations of Ohio exceededor abused his power and discretion in issuing the order of June 6, wherein he found that the liquidation of the association was being improperly conducted or that its interests were not being properly protected, and that he abused his discretion in taking possession of the business for complete liquidation pursuant to Section 687-1, General Code, *Page 443 
and divesting the directors of the control of the association. The court "ordered, adjudged and decreed that the superintendent or the Director of Commerce of Ohio be enjoined from further proceeding under the order of June 6, 1939, and from further action in liquidating the association" and it ordered that "the defendants restore to the association all the rights and powers previously enjoyed under Section 687-21, General Code."
We quote from the court's opinion:
"We come to the question at once as to whether or not the liquidation by the directors was proper or improper and whether or not the interests of the Mutual Home  Savings Association were being properly protected. This court is going to answer this question by saying that it was proper liquidation and a good jobwas being done by the directors, and that the interests of theMutual Home Savings Association were being protected."
The several sections of the statutes which are involved in this litigation are included within the limits of Sections 676 to 695, General Code. To understand the matter fully, the statutes must be read in detail.
Section 687, General Code, states the conditions under which the superintendent may take possession of the business and property of an association.
Section 687-2, General Code, provides that the court may require the superintendent to file a bill of particulars and if, upon the issues joined, the court finds that the bill of particulars is insufficient or that the superintendent exceeded or abused his power and discretion, the court shall dismiss the liquidation proceedings and direct the superintendent to surrender the property to the association.
Section 687-10, General Code, enumerates the power of the superintendent after taking possession.
The net result of these provisions is that the building *Page 444 
and loan associations of Ohio are constantly under the supervision of the superintendent, who has plenary power to act at any time he deems the interests of the stockholders and others to have been put in jeopardy, on any of the special grounds enumerated. However, the superintendent is under the constant supervision of the court to which an appeal may be made by any association aggrieved by the order made by the superintendent. Upon the issues made and the evidence, the court has authority to set aside the order of the superintendent. See, State, ex rel.Bettman, Atty. Genl., v. Court of Common Pleas, 124 Ohio St. 269,  178 N.E. 258, 78 A.L.R., 1079.
Section 687-21, General Code, definitely provides that the issuance of an order by the superintendent shall terminate the power of the association "to pay withdrawals of shareholders or depositors." A similar inhibition appears in Section 687-21a,
General Code, which says that the order of the superintendent "shall suspend the power * * * to pay withdrawals of stock or of stock credits."
There is no provision in the statutes permitting an escrow agent to operate, but there has been the long-time custom of the Superintendent of Building and Loan Associations to permit this. The statutes are concerned with the liquidation of the association under certain conditions and payment of claims to creditors and stockholders. These statutes also relate to the association's continuance under the control of the directors, with limited power in reference to the distribution of its funds.
The essence of the escrow plan was that the purchaser of the association's real estate or the mortgagor would agree to make a cash payment of a given amount to be accepted by the association, not in its own name but on its behalf by an "escrow agent" — an individual or a bank. The escrow agent would use the cash for *Page 445 
the purchase of the association's stock on the market and these credits were accepted by the association at par. As a result, although the actual negotiations were for cash, the association gave, instead of the cash credit a greater amount of stock credit. It was believed by the superintendent that such device did not violate the statute.
As we have before stated, we find no statutory authority for these escrow agents. The duty of the statutory liquidating agency was to liquidate and not to make a favorable showing on the books. It did no one any good and could not result in a largerdividend to the stockholders than a straight payment of dividends as provided by the statute.
Regardless of the questionable legality of the so-called escrow plan, it is apparent that the take-over by the superintendent can not be predicated solely upon the fact that escrowing was indulged in, since the plan was formulated by a superintendent prior to 1933, who then suggested its use in the liquidation of building and loan associations over the entire state, and subsequent superintendents, including the present, have sanctioned the continuance of the policy with certain limitations.
In the answer, wherein the present superintendent sets out eighteen specific reasons why the liquidation was not being properly conducted, seven of these reasons relate to what might be designated as an abuse of the permitted plan of liquidation by the misuse of the device of escrow.
Complaint is made that the directors used the device to an unwarranted extent, and in a manner that did not inure to the benefit of distressed stockholders but in fact permitted an abnormal market through which stockholders and others having knowledge of the facts might speculate and obtain improper profits. The record discloses that contrary to the policy of the *Page 446 
superintendent, the board of directors, including the general manager, followed a plan of escrowing beyond the maximum authorized by the superintendent. Both the predecessor of the present superintendent, under whom the present liquidating directors began operations, and the present superintendent restricted the escrow plan within narrower limits than did the board of directors.
Mr. Davidson, a resident of Dayton and a former bank clerk, was, at the request of the liquidating board, appointed as deputy superintendent. He was held in very high regard by the board of directors. Mr. Davidson was called as a witness by the state, and testified that he was in continuous argument with the manager and president over the amount desired to be escrowed. He further testified that he had instructions from both superintendents to make an effort to procure more cash for dividends and less escrow, but not to stop the liquidation. He further testified that he conveyed this information to the manager and the officers; and that he would quarrel with them and finally sign the escrow papers, since he could either do that or stop the liquidation.
An outstanding example of this situation and its results is shown in what is designated as the "James deal." Lee Warren James, formerly a very prominent lawyer in the city of Dayton, now residing in New York city, in the early days of the association was a director and its attorney. He secured a mortgage loan on a very valuable lot on Main street, Dayton, Ohio, in the sum of $440,000.
Aside from his real estate holdings, Mr. James had no other known assets.
Sometime in 1938, while the present board was acting as liquidators, Mr. James presented a proposition of settlement through which an undisclosed third person would purchase the property for $220,000 cash, plus accrued delinquent taxes in the sum of something *Page 447 
like $50,000, the same to be accepted in full settlement of his mortgage liability. It was the desire of the board to escrow the entire amount. The deputy superintendent had advice from his superior that on large deals he did not have the authority to approve escrows but that the same should be referred direct to the superintendent. The association sought the approval of the superintendent to accept the cash and immediately purchase stock therewith. They received advice from the superintendent that this could not be done since the association could not deal directly in its stock. However, the superintendent authorized the acceptance of the $220,000 as cash settlement, and, as an alternative, stated that if the purchaser or Mr. James would procure $440,000 of stock the same would be approved in escrow. The purchaser was unwilling to go through with the deal on the plan of purchasing stock, for the reason that he would subject himself to a large income tax. The association was unwilling to close the deal on a cash basis, and nothing further was done.
If the amount offered was a fair price under existing conditions, it should have been accepted on a cash basis. On the other hand, if the amount offered was not the best sale price obtainable, it should not have been recommended at all. It would appear that the escrow plan in this instance, as insisted on by the directors, may have lost the association a desirable settlement of an uncertain asset.
The record presents further evidence of certain evils that arose, directly attributable to the excessive amount of escrowing. We ascertain from the record that stock did not normally come into the escrow agent as fast as the escrow funds went into his hands. This at once would present an unfortunate condition.
The stockholders generally had a perfect right to accumulate an inventory of stock at lower markets. We do not mean to criticize the action of the stockholders, *Page 448 
but rather the plan, which brought about some undesirable results.
Another very grave evil which arose, was that some time prior to June 23, 1938, the manager of the association, Mr. Kelsey (he was also a director), began to accumulate stock for his own use, buying the same under a fictitious name. Possibly none of the other eight directors knew of this activity of Mr. Kelsey. All of them testified that they would not have approved of it had they known. Mr. Kelsey finally sold his stock at a good profit, and, at the request of the board, resigned.
Much of the evidence in reference to transactions connected with escrowing of stock have disclosed activities which we can not consider as proper in conducting the liquidation of the association.
For instance, the following is typical of the transfers that occurred:
Reiger Brothers, stockbrokers, on a certain day, might transfer stock to another broker. On the same day, the broker would transfer back to Reiger Brothers, and later, on the same day, there would be a transfer from Reiger Brothers to Reiger, escrow agent, all at advanced prices. When we consider all the evidence, the apparent purpose of these numerous transfers on the same day was in order that Reiger Brothers' profits would not be disclosed.
Considering the evidence in its entirety, as it refers to escrows, and the attending results, we are unable to determine that the superintendent abused his discretion in taking over the institution for liquidation under Section 687-1, General Code.
Out of the pleadings, the mass of evidence and the briefs of counsel we arrive at the conclusion that the real issue in this case is whether the Superintendent of Building and Loan Associations abused his discretion, when, on the 6th of June 1939, he took charge of the liquidation under the provisions of Section 687-1, *Page 449 
General Code. This issue is clearly made by the pleadings.
What constitutes an abuse of discretion by a court is well understood, but it is not so clear as to what may constitute such an abuse by a ministerial officer or commission.
In 32 Ohio Jurisprudence, 952, Section 91, the matter is discussed and the general principles enunciated. See, also, State
v. Ferranto, 112 Ohio St. 667, 148 N.E. 362; State v. Wright,59 Ohio App. 191, 17 N.E.2d 428 (decided by this court);Hoffman v. Knollman, 135 Ohio St. 170, 20 N.E.2d 221.
The latest definition by the Supreme Court of Ohio, of abuse of discretion by a court, may be found in paragraph one of the syllabus in Steiner v. Custer, 137 Ohio St. 448,31 N.E.2d 855, as follows:
"The meaning of the term `abuse of discretion' in relation to the granting of a motion for a new trial connotes more than an error of law or of judgment; it implies an unreasonable, arbitrary or unconscionable attitude on the part of the court."
In 12 Words and Phrases (Perm. Ed.), 587 et seq., may be found many other definitions as to abuse of discretion. Some of these apply to the exercise of discretion by public functionaries other than courts. Bd. of Commrs. of Rio Grande County v. Lewis,28 Colo. 378, 65 P. 51; Taylor v. Robertson, 16 Utah 330,52 P. 1.
"Discretion may be defined, when applied to public functionaries, as the power or right conferred upon them by law of acting officially under certain circumstances, according to the dictates of their own judgment and conscience, and not controlled by the judgment or conscience of others." First Natl.Bank of Remsen v. Hayes, Aud., 186 Iowa 892, 902, 171 N.W. 715. See, also, Phinney v. Montgomery, 218 Iowa 1240, 257 N.W. 208;Farrelly v. Cole, 60 Kan. 356, *Page 450 56 P. 492; State, ex rel. Hopkins, v. Tindell, 112 Kan. 256,210 P. 619.
On request of the association, examiners were sent from Columbus to the Dayton office by Mr. Merion. They continued their examination for a considerable period. The directors seemed to appreciate the action of the superintendent in sending them and expressed this on several occasions. We cannot go into detail as to the result of the examination other than to say that Merion did not proceed arbitrarily but after due and cautious consideration of the affairs of the association. It is true that in his investigation he did not make the escrow procedure a major cause for the taking over of the association, but over the course of six months, between the first information in reference to the condition of the association and the time it was taken over, many things came to his attention which might properly be considered and influence him in reference to the proper action to be taken for the welfare of the association.
It becomes our duty to examine the evidence to determine whether there has been an abuse of discretion.
We have cited the eighteen grounds asserted by the superintendent to justify his action. From the eighth to the eighteenth specification, the grounds are that the members of the board were in constant dissension; that they failed to secure the consent of the superintendent; failed to prevent the practice of having appraisers sign appraisal forms in blank; permitted fictitious appraisals; caused accommodation appraisals to be made; permitted appraisals to be made of property by those interested therein; permitted excessive insurance; failed to prevent collusive bidding; illegally authorized payment for services not performed; and conducted the liquidation at excessive cost. The eighteenth ground is "for other errors apparent on the face of the record."
We have gone over all the evidence relating to these grounds and find that some are not of serious consequence *Page 451 
in the management of the liquidation. Nevertheless, they are proper to be considered by the superintendent in determining whether he should continuue the operation of the association in the control of the board of directors rather than take the association over as an officer of the state. Small matters considered by themselves may not arouse strong opposition, yet a large number of acts may be done, the aggregate of which, if each merits criticism, may well weigh heavily in the ultimate action of the superintendent.
The first eight grounds relate largely to the policy and action of the board in relation to escrowing. The extent to which escrowing took place is indicated by the fact that on May 7, 1938, at the inception of the operation by the directors, there was cash on hand in the sum of $831,410, and that on June 6, 1939, there was $857,744 cash on hand (with no distribution dividends paid), a cash increase of only $26,334 in a period of over a year. During this period, for the escrow operations, the directors sanctioned the use of $413,694. Had no escrow purchases been made, the cash on June 6, 1939, would have been $1,271,438. In other words, substantial dividends could have been paid.
On July 29, 1939, shortly after taking control on June 6th, Merion, as superintendent, paid out approximately $450,000 as a dividend on the original $17,000,000 of outstanding stock. This dividend still left in the treasury of the association a considerable amount of undistributed cash, the ultimate and proper destination of which is the pockets of the stockholders, pro rata. A further dividend has recently been paid.
This brings us to the final determination as to whether Merion, the superintendent, abused his discretion by taking over the association after he had discovered to what extent this process of escrowing had been practiced and to what extent some of those connected with the association may have profited by it.
We are not impressed with the claim that inasmuch *Page 452 
as the escrow plan had been endorsed by prior superintendents this would be an excuse for any of the directors liquidating an association to use the plan to the extent it was used in this case, even though there may have been no attempt to secure a private profit.
Without burdening this opinion with further details, we arrive at the conclusion that the association, the appellee, which deemed itself aggrieved by the order of the superintendent, has failed to show that the superintendent in his take-over order abused the discretion reposed in him by statute.
Arriving at this conclusion, the order of the court is that the petition be dismissed.
Petition dismissed.
BARNES and HORNBECK, JJ., concur.