National Sur. Corp. v. First Nat. Bank

• Decision Date: 09 May 1939
• Parties: NATIONAL SURETY CORPORATION v. FIRST NAT. BANK OF PRESTONSBURG et al.
• Court: Kentucky Court of Appeals

128 S.W.2d 766

278 Ky. 273

NATIONAL SURETY CORPORATION v. FIRST NAT. BANK OF PRESTONSBURG et al.

Court of Appeals of Kentucky

May 9, 1939

Appeal from Circuit Court, Floyd County; J. W. Caudill, Judge.

Action by the National Surety Corporation against the First National Bank of Prestonsburg, Kentucky, and another, for amount which plaintiff was required to pay on surety bond after principal's unauthorized negotiation of a check to the defendants. From a judgment dismissing the petition as amended, the plaintiff appeals.

Reversed with directions.

Kirk &amp Wells, of Paintsville, and A. R. Kingdon, of Bluefield, W Va., for appellant.

Joe Hobson and A. B. Combs, both of Prestonsburg, for appellees.

REES Justice.

The National Surety Corporation brought this action against the First National Bank of Prestonsburg, Kentucky, and George W Snodgrass to recover the sum of $708. A demurrer to the petition as amended was sustained, and, the plaintiff having declined to plead further, a judgment was entered dismissing its petition as amended. From that judgment the plaintiff has appealed.

In its petition the plaintiff alleged, in substance, that it became bound with Leland Smith to the United Mine Workers of America, Local Union No. 6281, of McRoberts, Kentucky, for the faithful performance by Smith of his duties as financial secretary of the union; that Smith had defaulted in the performance of his duties by wrongfully appropriating to his own use the proceeds of a check for $708, payable to the United Mine Workers of America, Local Union No. 6281; that said check was drawn by the Consolidation Coal Company, payable to the United Mine Workers of America, Local Union No. 6281, and was indorsed and negotiated without the knowledge and consent of the payee; that the plaintiff, in the discharge of the obligation on its bond, had paid the sum of $708 to the United Mine Workers of America, Local Union No. 6281, and thereby was subrogated to the rights of the obligee in the bond. It was further alleged in the petition that Leland Smith had authority only to indorse and deliver the check to the treasurer of the payee for deposit in the Bank of Whitesburg; that in the company of the defendant George W. Snodgrass, without authority or right to do so he indorsed and negotiated the check to the defendant the First National Bank of Prestonsburg, and the bank credited the proceeds of the check to the general deposit account of the defendant, George W. Snodgrass; that both of the defendants had full notice that the check was the property of the United Mine Workers of America, Local Union No. 6281; and that they had notice of and participated in Smith's misappropriation of the check to his own personal use. In an amended petition the plaintiff alleged that subsequent to the negotiation of the check it gave further notification to the defendant First National Bank of Prestonsburg that the transaction was not authorized and constituted a breach of trust by all parties concerned with the negotiation of the check, and demanded that the defendant charge against the account of George W. Snodgrass the amount represented by the check which had been negotiated without authority; that in response to this notification the First National Bank of Prestonsburg withdrew from the account of the defendant George W. Snodgrass and impounded the sum of $708, and thereafter, upon receipt of a duly executed and satisfactory bond from the defendant George W. Snodgrass, such bond being conditioned to indemnify the defendant First National Bank of Prestonsburg against loss or damage which it might suffer by reason of its release of the impounded funds in its hands, released the amount so impounded to the defendant, George W. Snodgrass.

The appellees insist that the circuit court properly sustained the demurrer to the petition as amended, since neither the petition nor amended petition stated a cause of action against either of the appellees, and the allegations of the petition are not sufficient to entitle appellant to subrogation. The petition and amended petition are not drawn with the care and precision usually associated with good pleading, but the allegations are sufficient to constitute a cause of action against both of the defendants. Facts and not conclusions, as claimed by appellees, are alleged, which, if true, show that Leland Smith, in the presence of the defendant George W. Snodgrass, wrongfully negotiated a check payable to the United Mine Workers of America, Local Union No. 6281, and that the proceeds of the check were credited to the account of Snodgrass by the First National Bank of Prestonsburg, Kentucky, and that both of the defendants had notice of the unauthorized negotiation of the check by Leland Smith, and participated in the wrongful appropriation of the proceeds to his own personal use. The allegations of notice to the defendants and knowledge on their part of the unauthorized negotiation of the check were allegations of fact and not mere conclusions. In Stratton v. Stratton's Adm'r, 149 Ky. 473, 149 S.W. 900, 901, an action was brought to recover money, part of a trust fund, paid by the trustee for the benefit of the defendants. It was alleged that the defendants had notice of the terms of the trust and participated in the misappropriation of the funds by the trustee. It was argued that the demurrer to the petition should have been sustained, but this court held the petition stated a cause of action. It said: "The first error assigned is that the general demurrer interposed to the petition of the administrator should have been sustained, upon the ground that the petition did not state a cause of action. We are unable to agree with counsel in this view of the matter. The petition set out that after Lon Stratton, as trustee for Mirtie Stratton, had collected the insurance money, he wrongfully and fraudulently paid to J. W. Stratton and Clarence Stratton the amounts claimed. It was further averred that each of them had notice of the existence and terms of the trust, and, knowing that the fund was a trust fund, participated in the fraudulent misappropriation of it by the trustee. We think the petition stated a good cause of action, and that the court correctly overruled the demurrer to it."

It is also argued by appellees that the petition is insufficient in that it fails to give the covenants of the bond, or to allege that any obligee was designated therein. Cases are cited in which it was held that the stipulations of the bond upon which a recovery is sought must be alleged in order that liability of the obligors may be determined, but these were cases in which the action was on the bond and the obligee on the bond was seeking to recover from the...