Commonwealth, for Use of Coleman v. Farmers Deposit Bank of Frankfort
| Decision Date | 16 June 1936 |
| Citation | 95 S.W.2d 793,264 Ky. 839 |
| Parties | COMMONWEALTH, for Use of COLEMAN et al., v. FARMERS DEPOSIT BANK OF FRANKFORT, KY. |
| Court | Kentucky Court of Appeals |
Appeal from Circuit Court, Franklin County.
Action by the Commonwealth, for the use of Clell Coleman and another, against the Farmers Deposit Bank of Frankfort Kentucky, which filed a cross-petition. The petition as amended was dismissed, and plaintiffs appeal.
Affirmed.
R. W Keenon and B. L. Kessinger, both of Lexington, C. E. Rankin of Harrodsburg, Clifford Smith, of Frankfort, and Bruce & Bullitt, of Louisville, for appellants.
Leslie W. Morris and Marion Rider, both of Frankfort, for appellee.
The appellant Clell Coleman served as auditor of public accounts of the commonwealth of Kentucky for a term of four years, beginning the first Monday in January, 1928. Before he assumed the duties of the office he executed to the commonwealth of Kentucky, as required by statute, an official bond in the penal sum of $200,000, which was signed by the appellant Fidelity & Deposit Company of Maryland, as surety. Among the clerks in the auditor's office appointed by Coleman was one Ernest Marrs, who was designated claim clerk, and the auditor assigned to him the duty to investigate and audit the general claims presented against the commonwealth. Marrs executed and delivered to Coleman an indemnifying bond in the penal sum of $5,000, for the faithful performance of his duties, which was signed by appellant Fidelity & Deposit Company of Maryland as surety. During the time he acted as claim clerk it was Marrs' custom, after auditing and investigating a claim and finding it to be correct, to prepare a state warrant drawn on the treasurer directing its payment and then to present it to the auditor for his signature. The auditor, relying upon the representation of Marrs, would sign the warrant and return it to Marrs for transmission to the payee designated therein. Shortly after Coleman's term of office expired it was discovered by the commonwealth that Marrs had defrauded it out of a large sum of money. The method employed by him was substantially this:
He would make up a false claim, usually in some ficticious name, and present to the auditor a state warrant drawn on the treasurer for the amount of the purported claim. The auditor would sign the warrant and return it to Marrs, but instead of mailing it to the designated payee Marrs would indorse the payee's name on the back of the warrant and present it to the treasurer for payment. The treasurer would issue the check of the commonwealth of Kentucky in payment of such purported claim and deliver it to Marrs, who would indorse the payee's name on the back, then write his own name on the check or deliver it to a third person without his indorsement and obtain money on it. Each check was regular on its face in every respect, and was drawn against funds belonging to the commonwealth on deposit in the Farmers Deposit Bank, a state depository. The total number of fraudulent warrants prepared by Marrs upon which checks were issued was 106, aggregating the sum of $14,069.03.
The commonwealth of Kentucky brought an action in the Franklin circuit court against Coleman and the Fidelity & Deposit Company of Maryland, the surety on his official bond, for the amount of the loss, and recovered a judgment for the full amount. It was adjudged that the defendants, upon payment of the judgment, were entitled to have assigned to them by the commonwealth and were entitled to be subrogated to all the rights, privileges, causes of action, and remedies, both legal and equitable, which the commonwealth had against all other persons or firms in the subject of the litigation. Coleman and the Fidelity & Deposit Company of Maryland paid to the commonwealth the amount of the judgment, and a written agreement was entered into between the parties in which the commonwealth acknowledged payment of the judgment, and assigned to the defendants in that action all of its rights and interests therein. Thereafter this action was instituted by Coleman and the Fidelity & Deposit Company of Maryland against the Farmers Deposit Bank to recover from it the amount of the loss caused by Marrs' fraud upon the theory that the checks had been paid by the bank upon the forged indorsements of the payees and that the plaintiffs were subrogated to the rights of the commonwealth. The bank filed an answer and cross-petition, which consists of 59 pages of typewritten matter. It pleaded estoppel, negligence of the auditor in failing to audit and investigate the claims presented by him as required by law, and many other defenses which it is unnecessary to mention. In its cross-petition it sought to make parties to the action a number of banks and individuals who had indorsed and presented to it for payment the checks in question. The plaintiffs filed an amended petition in which they alleged that it was made the duty of the auditor of public accounts to audit, investigate, and determine the correctness of claims presented against the commonwealth of Kentucky, and that on account of the great number of claims presented it was impossible for him to audit all of the claims personally, and that it was necessary to delegate that duty to a clerk, and that he did delegate the duty to Marrs, the claim clerk. In their amended petition they set out in detail the method employed by Marrs in preparing and presenting the fraudulent claims, procuring warrants and checks, and obtaining the money thereon. A second amended petition was filed in which it was alleged that it was the duty of the bank to know that the payee designated therein had duly indorsed the checks in question before accepting them or charging same to the account of the commonwealth of Kentucky, and that the acceptance of the checks by it and the payment of the amounts named therein when none of them had been indorsed by the payees designated therein constituted negligence upon the part of the bank. Demurrers to the petition as amended and to the answer and each paragraph thereof were filed. The court overruled the demurrer to the answer and to each paragraph thereof, and carried the same back to the petition and sustained the general demurrer to the petition as amended. The plaintiffs declined to plead further, and their petition as amended was dismissed, and from that judgment they have appealed.
It may be assumed for the purposes of this opinion that the bank was liable to the commonwealth for the loss sustained by it by reason of the payment...
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