Citizens' Trust & Guaranty Co. v. Hays

• Decision Date: 17 December 1915
• Citation: 167 Ky. 560,180 S.W. 811
• Parties: CITIZENS' TRUST & GUARANTY CO. ET AL. v. HAYS ET AL.
• Court: Kentucky Court of Appeals

180 S.W. 811

167 Ky. 560

CITIZENS' TRUST & GUARANTY CO. ET AL. v. HAYS ET AL.

Court of Appeals of Kentucky.

December 17, 1915

Appeal from Circuit Court, Jefferson County, Chancery Branch, Second Division.

Action by Citizens' Trust & Guaranty Company and another against Edwin W. Hays and others. Judgment for defendants, and plaintiffs appeal. Affirmed.

Wehle &amp Wehle, of Louisville, Ky. for appellants.

Gibson & Crawford and Ellerbe W. Carter, all of Louisville, for appellees.

THOMAS J.

The question submitted for determination upon this appeal is one as to who is entitled to the right of possession and the owner of certain street improvement bonds issued, as provided by sections 3101 and 3102, by the city of Lexington, Ky. and delivered by it to the Central Construction Company in payment of certain improvements, which it had made under contract with the city, to certain streets therein. To properly understand the issues presented, it is necessary to make a brief statement of the facts.

The Central Construction Company some time previous to June 6 1913, had been employed by the Louisville & Nashville Railroad Company to construct a concrete viaduct under the tracks of the railroad company on Jefferson street in the city of Lexington, and, to insure the proper performance of that contract in accordance with its terms, it executed a bond to the railroad company with the appellant Citizens' Trust & Guaranty Company as its surety, the latter company being an indemnity corporation incorporated under the laws of the state of West Virginia, and duly authorized to enter into surety contracts and to conduct its business as such indemnity company in this commonwealth. Its general agent and the one through whom this surety contract for the Central Construction Company was procured and executed, was one J. F. Gauvreau, whose office was in the city of Louisville, Ky. In addition to the premium of $346, which was paid to the agent of appellant, there was delivered to him, as such agent, by the Central Construction Company, certain street improvement bonds of the city of Lexington, which had been given to it for street improvement work, amounting, in the aggregate, to $2,507. Shortly thereafter Gauvreau borrowed from the Crawford County State Bank of English, Ind., the sum of $2,200, and pledged to it, as collateral security therefor, the bonds which he had procured from the Central Construction Company in the manner stated. In procuring this loan from the Indiana bank, he employed the services of the appellee Edwin W. Hays, who was then, and had been for many years, a stockbroker, and as a part of his business would assist persons, who might apply to him, in securing loans and advancements on securities. The note by which Gauvreau procured this money was made payable to himself, and was indorsed in blank by him and delivered to the Indiana bank, who in turn advanced the money upon it. It matured in 30 days, and when that time expired, it was renewed for three months, which renewal matured on October 7, 1913. On September 25, 1913, the maker of the note and agent of appellant company disappeared from the city of Louisville, and his whereabouts are unknown. Appellee Hays, when the renewal note became due, paid it by executing to the Indiana bank his note for the same amount and with the same collateral security, but which collateral security had been delivered into his possession by the bank, and, so far as the record shows, he has had dominion and control over it since that time. On January 5, 1914, this suit was filed against appellee Hays and the National Bank of Commerce in the city of Louisville, wherein it is charged that the indemnity contract for and on behalf of the Central Construction Company, as well as the delivery to its agent of the street improvement bonds for the purpose stated, were each and all made and entered into without its knowledge, and that the subsequent appropriation of the street improvement bonds by its agent as collateral security for his own personal obligation was likewise without its knowledge and consent, and that neither the Indiana Bank or Hays acquired any rights or interest in and to any of the bonds as against it, because, as claimant put it, the bonds are not negotiable instruments, free from equitable defenses in the hands of an innocent holder when obtained before maturity, and, because further, that both the Indiana bank and Hays procured the bonds under such circumstances as to charge each of them with actual notice of the manner Gauvreau procured them. The bonds seem to have been in the possession of the National Bank of Commerce as depository only, and the plaintiff sued to enjoin the then defendants from selling, assigning, pledging, or in any manner disposing of the bonds. As the cause progressed, the Indiana bank was made a defendant, and the same relief was asked against it. It was furthermore charged, in the amendment making this bank a party, that in the procuring of the original note in June, 1913, whereby it loaned to the general agent of appellant the $2,200, it was then and thereby engaged in "doing business" within this commonwealth in violation of section 571 of the Kentucky Statutes, and that the contract whereby it obtained possession of the collaterals was therefore void, and it obtained no title thereto, equitable or otherwise. By appropriate pleadings all of these allegations were denied, and upon final submission the petition was dismissed, from which judgment this appeal is prosecuted. It may be here stated that the Central Construction Company is also a party plaintiff in the suit; the appellant Citizens' Trust & Guaranty Company suing for itself and for the use and benefit of the construction company.

In appellants' brief, counsel urged what they insist upon as "three legal reasons" why the judgment should be reversed, which are, in substance: First, that neither the Indiana bank or E. W. Hays is a bona fide purchaser of the improvement bonds; second, that the improvement bonds are not negotiable instruments; third, that the Indiana Bank was, at the time of making this loan, engaged in business within this commonwealth without complying with the requirements of the statute, supra, and that it thereby acquired no title unto itself to any of the improvement bonds, and it subsequently could not confer any title upon Hays.

Before considering either of these propositions we will dispose of the contention that appellee had actual knowledge, at the time of these transactions, of the infirmity of the title of Gauvreau to these bonds, or that he did not hold them as his individual property, but only in trust for the appellant Citizens' Trust & Guaranty Company. Subsection 56 of section 3720b of the Kentucky Statutes defines what is necessary to constitute such knowledge, as is claimed by appellant, in these words:

"To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith."

It is claimed by appellants that the facts as manifested by the proof are sufficient to charge appellees with actual notice under such subsection. We do not so understand or construe the testimony. Up to the time of the mysterious departure of the general agent of appellant, so far as this record shows he had borne a good reputation in the city of Louisville, although he had, upon occasions, issued some checks when he did not have the money to pay them, or money on deposit at the time, but there is nothing to show but what he afterwards took care of them, except perhaps some checks that were issued within a short while previous to his departure. He had, not only been conducting the business of appellant as its agent in a perfectly fair and upright manner, but had also been engaged in buying and selling and dealing in various securities in a manner so as to inspire the...