Mobile Companies, Inc. v. American States Ins. Co., 90-CA-2086-MR

• Decision Date: 30 August 1991
• Docket Number: No. 90-CA-2086-MR,90-CA-2086-MR
• Citation: 823 S.W.2d 934
• Parties: MOBILE COMPANIES, INC., Appellant, v. AMERICAN STATES INSURANCE COMPANY, Appellee.
• Court: Kentucky Court of Appeals

Page 934

823 S.W.2d 934

MOBILE COMPANIES, INC., Appellant, v. AMERICAN STATES INSURANCE COMPANY, Appellee.

No. 90-CA-2086-MR.

Court of Appeals of Kentucky.

Aug. 30, 1991.

Discretionary Review Denied by

Supreme Court March 4, 1992.

Gregory J. Bubalo, Jeanne R. Clemens, Ogden, Sturgill & Welch, Louisville, for appellant.

William S. Wetterer Jr., William S. Wetterer III, Louisville, for appellee.

Before DYCHE, GUDGEL and MILLER, JJ.

MILLER, Judge.

Mobile Companies, Inc. (Mobile), brings this appeal from a summary judgment entered in the Jefferson Circuit Court. Kentucky Rule of Civil Procedure (CR) 56.

The facts are these: In 1985, one Robert H. Goodwin purchased the entire capital stock of Mobile Industrial Services, Inc. (MIS), a wholly-owned subsidiary of Mobile. The purchase price was $100,000, of which Goodwin paid $10,000 cash and executed his promissory note to Mobile in the amount of $90,000. The note was collateralized by a pledge of the capital stock thus acquired, together with certain personal property of MIS. Goodwin had made a number of payments on the note when litigation ensued between himself and Mobile, each claiming the other had, in some manner, breached the sales agreement. During the course of litigation, an interim agreement was entered between Goodwin and Mobile, whereby Goodwin was to escrow a sum, approximately equal to the balance owed on the note, to be disposed of according to and pending the outcome of the litigation. Goodwin did not have the money with which to fund the escrow. It happened that his daughter, Patricia LaFollette, as guardian of her infant children, maintained a trust fund which had been established with proceeds from the death of the children's father--a Louisville police officer killed in the line of duty. Apparently, at the urging of her brother, who was aware of their father's financial need, Patricia improperly and without authority withdrew some $85,000 from her fiduciary account. The funds were delivered to Hilliard Lyons, Inc. (Hilliard Lyons), a brokerage house, in escrow to fulfill the interim agreement between Goodwin and Mobile. It was hoped that Goodwin would be successful in the litigation and, therefore, able to return the proceeds to Patricia's guardianship account. Things did not take such a turn, however.

Upon learning of Patricia's improper withdrawal from the fiduciary account, the children filed an action in the Jefferson Circuit Court against her and American States Insurance Company (American States), her surety. Ultimately, American States replenished Patricia's fiduciary account and intervened in the litigation between Goodwin and Mobile as Patricia's subrogee under the principal enunciated in National Surety Corp. v. First Nat. Bank, 278 Ky. 273, 128 S.W.2d 766 (1939), thereby ultimately setting up the subject controversy between itself and Mobile. The simple and ultimate question is whether American States, as Patricia's subrogee, has a right to the funds in the Hilliard Lyons escrow account or whether Mobile is entitled to it. The record reflects that after American States intervened, its intervening complaint was held in abeyance by court order pending resolution of the dispute between Goodwin and Mobile. This dispute ended with Mobile the victor, and Goodwin assigning all his right, title, and interest in and to the Hilliard Lyons escrow account to it. At this point, of course, American States was sitting in abeyance.

There being no genuine issue as to material fact, our sole concern is whether the court sought out and applied the correct law. Petty v. Codell Constr. Co., Ky., 346 S.W.2d 22 (1961); CR 56.03.

American States claims entitlement to the funds in the Hilliard Lyons escrow account under a principle called "the trust pursuit rule" recognized in the law of trusts. 76 Am.Jur.2d Trusts §§ 251 et seq. (1975). Mobile recognizes this rule, but denies application. Mobile contends it is entitled to the escrowed funds because of its alleged position as an innocent purchaser.

Under the trust pursuit rule, equity, subject to identification, will follow property wrongfully converted by a fiduciary and compel restitution to the beneficiary regardless of its present form. This rule, however, does not require restitution of a third person...