The Brown-Crummer Investment Company v. The Bankers Service Company

• Decision Date: 03 May 1930
• Docket Number: 29,301
• Citation: 130 Kan. 583,287 P. 579
• Parties: THE BROWN-CRUMMER INVESTMENT COMPANY, Appellee, v. THE BANKERS SERVICE COMPANY, THE AMERICAN BANKERS INDEMNITY ALLIANCE, and THE GUARANTEE TITLE AND TRUST COMPANY, Appellants
• Court: Kansas Supreme Court

287 P. 579

130 Kan. 583

THE BROWN-CRUMMER INVESTMENT COMPANY, Appellee, v. THE BANKERS SERVICE COMPANY, THE AMERICAN BANKERS INDEMNITY ALLIANCE, and THE GUARANTEE TITLE AND TRUST COMPANY, Appellants

No. 29,301

Supreme Court of Kansas

May 3, 1930

Decided January, 1930.

Appeal from Sedgwick district court, division No. 3; GROVER PIERPONT, judge.

Judgment affirmed.

SYLLABUS

SYLLABUS BY THE COURT.

1. BANKS--Misappropriation of Bonds--Entering Credit to Account as Payment. A general depositor in a bank purchased a policy of indemnity securing the depositor against loss of bonds on deposit in the bank. An officer of the bank misappropriated the bonds, and the depositor was obliged to expend $ 28,000 to regain possession of the bonds. The depositor demanded the bank give credit on the depositor's account for the amount, and the credit was entered on the books of the bank. Held, liability of the bank to make good the depositor's loss on account of misappropriation of the bonds was not extinguished.

2. SAME--Insolvency--Application of Payments--Unsecured Debts--Liability of Indemnitor. Soon after the credit entry was made the bank failed. Meantime the depositor had made deposits and withdrawals in the usual course of business, and neither the bank nor the depositor had made specific appropriation of sums withdrawn, to payment of the depositor's loss. The assets of the bank were not sufficient to meet its liabilities. Held, the debt of the bank arising from misappropriation of the bonds was a secured debt, sums charged to the depositor's account should be applied first to payment of unsecured deposits, and the indemnitors were liable to the depositor on the policy for the unpaid portion of the depositor's loss resulting from misappropriation of the bonds.

E. L. Foulke, J. B. Nash, Roy H. Wasson, all of Wichita, John H. Atwood, Price Wickersham, Oscar S. Hill and Clarence C. Chilcott, all of Kansas City, Mo., for the appellants.

Thomas E. Elcock, James G. Martin, Austin M. Cowan, Chester I. Long, J. D. Houston, Claude I. Depew and W. E. Stanley, all of Wichita, for the appellee.

OPINION

BURCH, J.:

The action was one on a contract of indemnity which served as a policy insuring plaintiff against loss through abstraction and wrongful appropriation by the cashier of the bank, of bonds on deposit in the American State Bank of Wichita. The defense was that if liability on the policy accrued the liability was subsequently extinguished. The court stated findings of fact and conclusions of law, and rendered judgment for plaintiff. The insurers appeal.

Plaintiff was a dealer in bonds at Wichita and did its banking business with the American State Bank. Plaintiff had a general agreement with the bank reading as follows:

"American State Bank, Wichita, Kansas.

MARCH 24, 1922.

"GENTLEMEN--We hereby agree to repurchase from you upon demand any of the municipal or government bonds, warrants or other securities which you may be carrying for us from time to time, paying for same par and interest, to be computed at the rate of six (6) per cent, upon such funds as we may use, and we are to receive the coupons from the bonds as they mature.

"On certificates of deposit having a definite maturity we are to receive interest at the rate of four (4) per cent.

"Yours very truly,

R. E. CRUMMER, Vice President."

Particular transactions were evidenced by writings applying to them, and this litigation may be traced to the following letter, pursuant to which plaintiff delivered to the bank bonds of the par value of $ 150,000:

"American State Bank, Wichita, Kan.

FEBRUARY 9, 1923.

"GENTLEMEN--We are handing you herewith $ 150,000 par value municipal bonds, payment for which we acknowledge, and which we agree to repurchase upon your or our demand at par, plus six per cent interest from this date.

"Yours truly,

H. M. DOBBIN, Cashier."

The two instruments, whether read together or separately, show they were not contracts to buy from the bank as owner bonds previously delivered to the bank by plaintiff. The nature of the use, in fact, made of the instruments was described by witnesses. Description of the practice disclosed the writing dated February 9 constituted a memorandum of pledge of bonds as security for a loan of money payable on demand of either party.

Among the bonds pledged pursuant to the "loan letter" of February 9 were bonds of Hill county, Montana, of the par value of $ 28,000. The loan was paid by plaintiff in three payments of $ 50,000 each, made on February 10, February 14, and February 26. On final payment the loan letter was stamped paid. The Hill county bonds remained on deposit in a special place in the vault of the bank, which was a recognized place of safe deposit under the terms of the insurance policy. Afterwards Phil Drumm, cashier of the bank, asked plaintiff's permission to use plaintiff's bonds as collateral security for loans to the bank by its correspondents. Permission to do this was denied because plaintiff might need the bonds at any time. About April 9 Drumm did hypothecate the bonds to the National Bank of Commerce of St. Louis, Mo. Early in June plaintiff requested the bank to deliver the bonds at plaintiff's branch office in Kansas City, Mo. On June 9 the bonds arrived there, with a draft attached in favor of the St. Louis bank for $ 28,000. Plaintiff had no previous knowledge of misappropriation of the bonds. Plaintiff directed its Kansas City office to take up the St. Louis draft by draft on plaintiff, which was paid by plaintiff on June 12. By this means plaintiff regained possession of its bonds.

Proof of the foregoing facts established liability to plaintiff on the insurance policy. The bonds had been unlawfully abstracted, plaintiff was compelled to pay $ 28,000 to obtain possession of them, and a cause of action on the policy for the amount of the loss arose. This brings us to the defense--that the liability was discharged by subsequent course of dealing between plaintiff and the bank.

On June 12 Hoffman, then cashier for plaintiff, demanded of Drumm that plaintiff be given credit for $ 28,000 on the books of the bank. Drumm promised to give the credit, and Hoffman charged the bank with the amount on plaintiff's books. On June 16 Hoffman discovered Drumm had not given plaintiff credit on the books of the bank. Pursuant to personal interview at the bank on that day between Hoffman and Drumm, Drumm entered the amount on plaintiff's pass book, and made out a deposit slip from which an entry of credit was made on the books of the bank.

Plaintiff's account on the books of the bank shows debits and credits on June 11, 12, 13, 14, 15, 16 and 18. June 17 was Sunday. The bank was closed by the bank commissioner on the morning of June 19, before it opened for business. When the bank closed plaintiff had a large credit balance. The aggregate amount included the $ 28,000 item. The assets of the bank were exhausted, the state bank guaranty fund was insolvent, and after distribution of assets plaintiff still had an unpaid balance due it of $ 16,618. Plaintiff was given judgment for that amount.

Drumm's promise of June 12 to give plaintiff credit for the value of the bonds made no funds available to plaintiff whereby plaintiff might recoup its loss. Concerning the entry made on plaintiff's books, Hoffman testified as follows:

"Q. Now then, you demanded credit for Brown-Crummer of the bank for that particular item of $ 28,000, didn't you? A. Yes.

. . . .

"Q. And you told the man that 'you hadn't any business selling my bonds'? A. Yes.

"Q. And he told you some story that didn't suit you, and you said, 'I want credit for them'? A. Yes.

. . . .

"Q. And so then you, immediately following that conversation, made the entry on your books of $ 28,000 as a charge against the bank? A. Yes.

. . . .

"Q. You wanted to get payment of the $ 28,000 that you had paid out for the purpose of getting your bonds back. That was the purpose of that telephone? A. Yes.

"Q. You had your conversation with Drumm, and as a result of that conversation you then put that entry on Brown-Crummer's books, taking credit for $ 28,000? A. No; the conversation didn't have anything to do with my books. It was Drumm I was hollering at.

"Q. I say, as a result of that conversation you entered it on your books? A. No; it wouldn't be the result of the conversation; I would make that entry anyhow.

. . . .

"Q. Now then, you were taking credit on your books because of the agreement that you had with Drumm, weren't you? A. No.

"Q. What were you taking it for? A. Because Drumm owed it to me.

"Q. Drumm owed it to you? A. Yes.

"Q. And he agreed to pay it to you? A. Yes.

"Q. And that is why you were taking credit on your books? A. Drumm didn't have anything to do with my books.

"Q. Why were you taking credit, I am asking you? Why were you taking credit on your books? A. Because the bank owed it to me. It didn't make any difference whether I agreed with Drumm or not. He didn't have anything to do with it.

"Q. You wouldn't put it there, would you? A. Where else would I put it? Where else would I put it?

"Q. You knew before you telephoned to Drumm that you were making a--going to make claim against him for $ 28,000 for having sent your bonds down to St. Louis? A. Yes.

"Q. . . . And you made the entry because of the conversation you had with Drumm? A. No.

"Q. Why didn't you make the entry before you telephoned to Drumm, then? A. Well, I don't know. . . . It wouldn't change the entry whether I talked with him before or after. . . . I made that entry on my books to offset this draft."

The court made the following finding of fact:

"As a matter of bookkeeping and for information of his own company, Hoffman made...