Jackson v. National Bank

71 P.2d 1057, 146 Kan. 424, 1937 Kan. LEXIS 161

• Court: Supreme Court of Kansas
• Decided: September 25, 1937
• Docket: No. 33,413
• Status: Published

Opinions

The opinion of the court was delivered by

Allen, J.:

This was an action at law for deceit. Defendant’s demurrer to plaintiffs’ second amended petition was sustained by the trial court, and plaintiffs appeal.

This litigation arises out of the far-flung financial frauds and forgeries of the Finneys. The amended petition, setting up four separate counts and covering forty-nine pages, may be summarized as follows:

The plaintiffs are members of a copartnership engaged in the business of stock brokers and commission merchants, with their principal offices in New York City. Branch offices are maintained in Chicago, Ill., Kansas City, Mo., and elsewhere. The defendant, National Bank of Topeka, is a corporation engaged in the banking business in the city of Topeka.

Ronald Finney, with offices at Topeka and Emporia, was engaged in the business of buying, selling and trafficking in municipal bonds and negotiable securities. For several years prior to and until on or about the 28th day of July, 1933, he was engaged in financial transactions with defendant bank. He was a depositor of funds, and from time to time a borrower of large sums of money from defendant bank.

Warren W. Finney, the father of Ronald Finney, was president of the Fidelity State and Savings Bank of Emporia, and a director of the Farmers State Bank of Neosho Falls. He was actively engaged in buying, selling and trafficking in municipal bonds and negotiable securities, and prior to July 28, 1933, was engaged in financial transactions with the defendant bank.

The petition alleges:

“That prior to and during all the times complained of herein, the defendant bank knew that said Ronald Finney and Warren W. Finney had been for years under distrust by the banking departments, both of the United States and of the state of Kansas, and said bank lacked confidence in the honesty and integrity of said Ronald Finney and Warren W. Finney to the extent that on and after March 15, 1933, it was exerting every possible effort to cause the removal of all commercial paper, securities and bonds which said Ronald Finney and Warren W. Finney had placed in said bank in connection with their transactions with said bank, and knew that said Ronald Finney and said Warren W. Finney were not worthy of trust and confidence.”

The origin and nature of plaintiffs dealings with Ronald Finney are thus stated:

“On April 27, 1933, Ronald Finney opened an account with the plaintiffs for the purpose of having plaintiffs, as brokers and agents for him, purchase, sell and otherwise deal in various commodities, stocks, bonds, and securities, and in connection with said account advance to him and for his account large sums of money; that said Ronald Finney thereafter carried on large and numerous transactions with plaintiffs in his said account with them, and in connection with such dealings and as an incident thereto, Ronald Finney borrowed from the plaintiffs, and the plaintiffs advanced to Ronald Finney and for his account, large sums of money from time to time, and on account of his transactions with the plaintiffs Ronald Finney became indebted to plaintiffs in large sums of money upon an open and general account; that for the purpose of securing said account and indebtedness and to procure credit and the advancement from time to time of moneys from plaintiffs, and to induce the extension of credits thereon and procure without delay the advancement of moneys upon said account, Ronald Finney did from time to time deliver to and deposit with plaintiffs various instruments purporting to be the bonds or obligations of various municipal subdivisions of the state of Kansas, negotiable by delivery, which instruments are hereinafter described, and the plaintiffs advanced various sums of money, as hereinafter stated, upon the purported bonds delivered by said Ronald Finney as security therefor.”

It appears that the account of plaintiff with Ronald Finney began on April 27,1933, and ended on July 27,1933. The following statement shows the bonds delivered by Ronald Finney to the plaintiffs, and the advances made to Finney, and sets forth the respective dates of such transactions:

Advances to Finney

May 29 ........... $25,000.00

May 29 ........... 5,000.00

June 2 ............ 10,000.00

June 6 ............ 10,000.00

June 9............ 261.48

June 12 ........... 10,000.00

June 28 ........... 11,000.00

June 29 ........... 10,000.00

July 5 ............ 3,500.00

July 7 ............ 12,000.00

July 7 ............ 25,000.00

July 11 ........... 30,000.00

July 17 ........ 7,000.00

July 17 ........9,000.00

July 20 ........... 5,000.00

July 21 ........... 30,000.00

July 22 ........... ,15,000.00

July 22 ...........' 85,000.00

July 27............ 50,000.00

Bonds Received from Finney

May 29 ........... $30,000.00

July 7 ............ 35,000.00

July 11 ........... 60,000.00

July 21 ........... 276,200.00

It is alleged that all of the bonds delivered by Ronald Finney to the plaintiffs were forged, spurious and counterfeit, except certain bonds of the face value of $48,700, which were genuine.

The controversy involves four separate blocks of bonds — one block of $30,000; one block of $151,600; one block of $208,500 and one block of $25,000. All of the bonds here in question deposited with the plaintiffs were delivered to the plaintiffs by Ronald Finney except the block of bonds of the face value of $25,000, which were delivered by Ronald Finney to the defendant bank; and thereafter on July 7, 1933, upon the direction of Ronald Finney, these bonds were delivered to the plaintiffs by the defendant bank. The legal questions arising on this block of $25,000 of bonds are entirely separate and distinct from the legal questions concerning the three blocks of bonds first noted. Bearing in mind this distinction, the allegations in the petition concerning the first three blocks of bonds will be stated, and thereafter the alleged cause of action as to the block of bonds of the face value of $25,000' will be considered.

In the first block of bonds of $30,000 delivered to the plaintiffs, one bond of $1,000 is conceded to be genuine. As to the other .bonds in that block, aggregating $29,000, it was alleged that prior to May 29, 1933, the defendant bank was the owner and in possession of certain bonds of the purported face value of $29,000; that the bonds were forged, spurious and counterfeit and of no value whatsoever — all of which the Finneys knew and all of which the defendant bank then and there well knew.

It was further alleged:

“That prior to May 29, 1933, National Bank of Topeka sold and delivered said purported bonds to Warren W. Finney and Ronald Finney; that at the time of said sale and delivery of the said purported bonds, Warren W. Finney and Ronald Finney intended and planned, and the National Bank of Topeka knew that they intended and planned, to deliver, transfer and negotiate said forged, spurious and counterfeit bonds to innocent purchasers for value, and to place said forged, spurious and counterfeit bonds into the channels of commerce, and to obtain money from such persons as would lend or advance money on the supposed security of said purported bonds in the belief that they were genuine and valid, by falsely and fraudulently representing to them that they were genuine and valid legal obligations of the respective municipal subdivisions of the state of Kansas by which on their face they were purported to have been issued, and by concealing from such intended innocent purchasers for value the fact that all of said purported bonds were forged, spurious and counterfeit, and of no value whatsoever.

“That on or about May 29, 1933, said Ronald Finney delivered to the plaintiffs said purported bonds of the purported face value of $29,000; that for the purpose of inducing the plaintiffs to advance money to and for the account of said Ronald Finney on the supposed security of said purported bonds of the purported face value of $29,000, said Ronald Finney then and there, orally and by offer and delivery thereof, falsely and fraudulently represented to the plaintiffs that said purported bonds had been issued by, and evidenced valid and subsisting legal obligations of, the city of Kansas City, Kan.; that together with said purported bonds of the purported face value of $29,000, said Ronald Finney at the same time delivered to the plaintiffs a certain treasury certificate for $1,000, . . . which, so far as plaintiffs know, evidences an authentic and genuine obligation of the government of the United States and was accepted by plaintiffs as such.”

As to the block of bonds of the face value of $151,600, it was alleged that on or about June 30, 1933, the defendant bank was the owner and in possession of certain purported bonds of a purported face value of $151,600, and purporting on their face to have been issued by, and to evidence valid and subsisting legal obligations of various municipal subdivisions of the state of Kansas; that in this block of bonds certain bonds of the purported face value of $90,000 were forged, spurious and counterfeit. This was followed by recitals similar to the allegations as to the block of bonds of $29,000, above set forth.

As to the third group of bonds above mentioned of the purported face value of $208,500, it was alleged that the defendant bank, prior to July 11, 1933, was the owner and in possession of these bonds, that they were forged, spurious and counterfeit. This was followed by recitals similar to the allegations as to the block of bonds of $29,000, above set forth.

Coming now to the block of bonds of the face value of $25,000, which were delivered to the defendant bank by Ronald Finney and which were by the bank, under the direction of Ronald Finney, delivered to the plaintiffs, the petition alleges:

“That on or about May 17, 1933, National Bank of Topeka, with the knowledge, consent and at the direction of Ronald Finney, sent to the plaintiffs at their branch office at Kansas City, Mo., a letter .in words and figures as follows:

“ ‘This will advise that Mr. Ronald T. Finney has left with us $25,000 par value Kansas municipal bonds represented by $20,000 Kansas City, Kan., and $5,000 Stevens county, Center township. These bonds have been left with us to be later placed in joint account as collateral on future trading which he may have with your good company.

“ ‘No doubt you have a special form of interim receipt which you desire used and we will appreciate it if you will send us the form you wish used in this transaction. In the meantime, we will hold the bonds subject to confirmation in accordance with yours and Mr. Finney’s instructions.’

“That on or about July 7, 1933, National Bank of Topeka, with the knowledge, consent and at the request of Ronald Finney, delivered to plaintiffs certain purported bonds of the purported face value of $25,000, and purporting on their face to have been issued by, and to evidence valid and subsisting legal obligations of,.the municipal subdivisions of the state of Kansas, and in the amounts, as described in the following receipt which the National Bank of Topeka then and there took from the plaintiffs therefor, which said receipt is in words and figures as follows:

‘“Received of the National Bank of Topeka the following bonds left with you by Ronald Finney for our account’:

(Bonds here listed)

“That none of said purported bonds had ever in fact been issued by, or evidenced any valid or subsisting legal obligation of the respective municipal subdivision of the state of Kansas by which on its face it was purported to have been issued, but that all of them were forged, spurious and counterfeit, and of no value whatsoever; all of which Ronald Finney then and there well knew, and all of which the bank then and there well knew. .

“That at the time of said delivery of said purported bonds, Ronald Finney intended and planned, and National Bank of Topeka knew that he intended and planned, to obtain money from the plaintiffs on the supposed security of said purported bonds in the belief that they were genuine and valid, by falsely and fraudulently representing to plaintiffs that they were genuine and valid legal obligations of the respective municipal subdivisions of the state of Kansas by which on their face they were purported to have been issued, and by concealing from plaintiffs the fact that all of said purported bonds were forged, spurious and counterfeit, and of no value whatsoever. ‘

“That for the purpose of inducing the plaintiffs to advance money to and for the account of Ronald Finney on the supposed security of the said purported bonds of the purported face value of $25,000, the defendant bank and Ronald Finney then and there falsely and fraudulently represented to the plaintiffs by means of the aforesaid letter, dated May 17, 1933, and by means of a certain letter, dated June 16, 1933, sent by the defendant bank, with the knowledge, consent and at the request of Ronald Finney, to the plaintiffs and by the plaintiffs received, which letter is in words and figures as follows:

“ ‘This will advise that we hold the following bonds which have been deposited with us by Ronald Finney for your account’:

“ ‘As before stated, the foregoing bonds have- been deposited with us by Ronald Finney to secure his account with you and are left with us subject to your order. We understand from your manager, Mr. Stebbings, of your Kansas City office, that you have a certain interim certificate which you ordinarily use in cases of this kind. If you have such an instrument and will forward same to us we will endeavor to have it properly executed.’

and by means of the delivery to plaintiffs of said purported bonds of the purported face value of $25,000, that said purported bonds had been issued by, and evidenced valid and subsisting legal obligations of, the respective municipal subdivisions of the state of Kansas by which on their face they were purported to have been issued.”

It was also alleged in the petition that in October, 1932, defendant held certain instruments purporting to be certain warrants issued by a school district located in the town of Green, Clay county, Kansas, which defendant had previously received from Ronald Finney as securities for advances made to him; that defendant discovered in October, 1932, that the entire issue, of which the warrants held by it purported to be a part, had been called in, paid and destroyed by the issuing school district; that defendant requested Ronald Finney to redeem the warrants and pay defendant the money advanced on the security of such warrants, which was done.

The second count is identical with the first count except that here the Finneys are alleged to have been trafficking in “purported” bonds instead of “forged” bonds. It is set forth in the brief for plaintiffs that—

“The only material difference between count first and count second is that the latter does not allege that when the defendant sold and delivered the forged bonds to the Finneys, they intended and planned, to the defendants’ knowledge, to obtain money on the supposed security of said forged bonds from innocent persons for value.”

Tlje third count sets out the letters of May 17, 1933, and June 16, 1933, above quoted, in which defendant advised plaintiffs that Ronald Finney had deposited bonds of the face value of $25,000 with defendants to be held subject to directions of the plaintiffs and Ronald Finney, sets up the same allegations as in the first count, and further alleges that these letters created a relationship • of trust or agency between defendants and plaintiffs; that defendant knew said bonds were forged, and owed the plaintiffs a duty to notify them of all matters within their knowledge; that defendant violated that duty by nondisclosure.

The fourth count is thus summarized in plaintiffs’ brief:

“Count fourth is in all respects the same as count first except that count fourth alleges additionally that all the acts and transactions therein set forth were in furtherance of a conspiracy to which the defendant, the two Finneys, and one Thomas B. Boyd, then state treasurer of the state of Kansas, were parties, and which was entered into for the purpose of uttering, delivering, transferring and negotiating forged Kansas municipal bonds to innocent purchasers for value, to place them into the channels of commerce, and to obtain money from innocent persons who would lend money on the supposed security of these forged bonds in good faith reliance upon their apparent genuineness. Count fourth also sets forth additional facts relative to the purported bonds of a purported face value of $151,600 (among which were $90,000 purported face value of forged Kansas municipal bonds), showing that the defendant, the Finneys and Boyd also defrauded the state of Kansas of $150,000, of which the defendant directly benefited to the extent of $146,172.71.

“In essence, therefore, count fourth alleges that the defendant, the two Finneys and Boyd entered into a conspiracy to place forged Kansas municipal bonds in circulation, and obtain money from innocent purchasers for value on the supposed security of said forged bonds; that the conspiracy was carried out, and that among the innocent victims of said conspiracy were the plaintiffs who, in good faith reliance upon the apparent genuineness of the forged bonds, parted with large sums of money and suffered a net loss of $236,895.87.”

Defendant filed motions to strike and to make definite and certain, which were overruled. Defendant filed a demurrer to plaintiffs’ petition, asserting want of legal capacity in the plaintiffs to sue, improper joinder of several causes of action and failure of the petition to state facts sufficient to constitute a cause of action. The trial court sustained the demurrer, and the only question presented is the legal sufficiency of the petition.

Defendants assert: It is not claimed in the petition that plaintiffs ever made any inquiries of the defendant in regard to Ronald Finney, that any of the bonds were purchased from the defendant by the plaintiffs in reliance upon any representations, express or implied, made by defendant to the plaintiffs; that on July 7, 1933, plantiffs had actual notice of the forgery of the bonds because the petition shows that on that date plaintiffs received from Ronald Finney a certain bond, and at that time plaintiffs had in their possession a bond of the identical description, which they had received from Ronald Finney on May 29, 1933. That it is not alleged in the petition that defendant had any actual knowledge that any of the bonds received by plaintiffs from Finney were forged; that on the other hand, with the exception of the block of bonds of $30,000 received by plaintiffs on May 29, 1933, all of the bonds received from Finney were received by plaintiffs after they had in their possession positive information, by reason of said duplicate bond received on July 7,1933, that Ronald Finney was trafficking in forged bonds; that it is not charged that defendant had any knowledge on May 29, 1933, that Ronald Finney on that date had sold plaintiffs bonds of the face value of $30,000, nor is it alleged that at the time plaintiffs purchased said bonds they had any knowledge whatsoever that said bonds had ever been owned by the defendant, or that plaintiffs had ever relied upon any representations, either express or implied, made by the defendants. That on July 7, 1933, as shown by the account above set forth, the plaintiffs had advanced to Ronald Finney a total of $121,761.48 and had up to that time received from Finney only $30,000 face value of bonds; that on July 20, 1933, as shown by said account, plaintiffs had advanced to Finney $171,761.48, and that the total amount of bonds received from Finney to that date amounted to $125,000. That on July 21, 1933, the advances made by plaintiffs to Ronald Finney exceeded the face value of bonds received from him by $47,761.48, and it was only after a block of bonds had been received from Finney on that date that the bonds received from Finney exceeded the advances made to him. That these facts demonstrate that plaintiffs made their investments on their independent investigations and not in reliance upon any representations, express or implied, made by defendant. Defendant further asserts that no facts or circumstances are alleged that would show defendant knew that said bonds were forged; that the plaintiffs, as shown by the petition, were bond brokers and were far more skilled in matters pertaining to municipal bonds than were the defendants. Defendant also insists that as to the block of bonds of $25,000 deposited by Finney with the defendant bank and referred to in the letters above quoted, the defendant was not a trustee or agent of the plaintiff, but merely acted as a gratuitous bailee, and therefore owed no duty to plaintiffs as alleged in plaintiffs’ petition.

The plaintiffs contend that the recitals on the face of the forged bonds constituted false representations because they showed such purported bonds to be genuine, whereas the contrary was true. That by selling and delivering these forged bonds to the Finneys, the defendant bank caused these false representations to be placed in circulation, in the course of which such false representations reached the plaintiffs and caused them damage; that such representations must be deemed to have been made by the defendant to any person who in good faith became the holder for value of such bonds. Plaintiffs rely on Lobdell v. Baker, 1 Met. (Mass.) 193; 3 Met. (Mass.) 469; Polhill v. Walter, 3 B. & Ad. (Eng.) 114; Shotwell v. Mali, 38 Barb. (N. Y.) 445; Windram v. French, 151 Mass. 547, 24 N. E. 914; Bank v. Byers, 139 Mo. 627, 41 S. W. 325, and other cases of like import in support of their contentions.

We think the petition stated a cause of action for deceit, and that the lower court committed error in sustaining the demurrer to plaintiffs’ petition.

In State, ex rel, v. National Bank of Topeka, 142 Kan. 792, 52 P. , this court had under consideration the sufficiency of a petition involving the Finney frauds. It was there said:

“With the foregoing question out of the way, defendant’s contention that the amended petition did not state a cause of action should not be difficult of solution. Bearing in mind that for the purpose of testing the sufficiency of the amended petition every material fact alleged and every reasonable inference justified thereby are to be construed favorably to the pleader, just what can be said to be wanting to a sufficient statement of the state’s cause of action? The state alleges that through the alleged maneuvers of defendant and the state treasurer and W. W. Finney it has lost $150,000. It alleges that the various alleged steps by which that loss was caused were knowingly participated in by the defendant. It takes nothing from the materiality and gravity of these allegations for the defendant at this time to argue that so far as the defendant bank was concerned the transaction had the prima facie semblance of regularity. When this case is tried to a jury that argument may serve the defendant to good purpose. But for the purposes of this appeal, the defendant bank admits the truth of all the material allegations of plaintiffs’ petition. Therefore, it would be a travesty on justice for this court to hold that it does not state a cause of action. It is needless in this opinion to stress the outstanding features of the petition which compel this conclusion.”' (p. 795.)

The petition alleges that the defendant bank sold forged bonds to the Finneys, knowing that the bonds were forged and knowing that the Finneys planned to dispose of them to innocent purchasers for value. These bonds are shown by the allegations to have purported on their face to be genuine and valid obligations of certain municipal subdivisions of the state of Kansas. The recitals on the face of the bonds constituted false representations, because they showed such purported bonds to be genuine on their face, whereas the exact contrary was true. By selling and delivering these forged bonds to the Finneys, the defendant bank caused the false representations to be placed in circulation. The forged bonds of apparent genuineness were payable to bearer on their face, and were designed to pass freely from hand to hand by mere delivery. Knowing that they were forged and that the recital therein was false, the defendant, by giving currency to such false statements, is liable for damages to any bona fide purchaser of these forged bonds.

The sufficiency of the allegations in an action for fraud and deceit has frequently been passed on by this court. (Meyer v. Wilson, 131 Kan. 717, 293 Pac. 738; Youmans v. Kansas Tel. Co., 132 Kan. 360, 295 Pac. 697; Campbell v. Gooch, 131 Kan. 456, 292 Pac. 752; Bolinger v. Giles, 118 Kan. 761, 236 Pac. 658; Curtis v. Stilson, 38 , 16 Pac. 678; North Am. Life Ins. Co. v. Dyatt, 121 Kan. 873, 250 Pac. 341; Sluss v. Brown-Crummer Inv. Co., 143 Kan. 14, 53 P. 2d 900; Blankinship v. Porter, 142 Kan. 284, 47 P. 2d 72.)

The petition alleges “That for the purpose of inducing the plaintiffs to advance money to and for the account of Ronald Finney on the supposed security of the said purported bonds of the purported face value of $25,000, the defendant bank and Ronald Finney then and there falsely and fraudulently represented to the plaintiffs by means of the aforesaid letter dated May 17, 1933, and by means of a certain letter dated June 16, 1933, . . . and by means of the delivery to plaintiffs of said purported bonds of the purported face value of $25,000, that said purported bonds had been issued by, and evidenced valid and subsisting legal obligations of the respective municipal subdivisions of the state of Kansas.”

Here is a direct allegation that the defendant bank, by the letters quoted and by the delivery of the bonds, fraudulently represented to the plaintiffs that the bonds were genuine, when in fact they were forged. Under the rule often announced by this court that in testing the sufficiency of a petition as against a demurrer every material fact well pleaded, and every reasonable inference therefrom, are to be construed favorably to the pleader, we think the petition stated a cause of action and that the trial court erred in sustaining the demurrer to the petition. The judgment is reversed.