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Kilbourn v. Western Surety Co.

February 27, 1951

KILBOURN
v.
WESTERN SURETY CO.



Huxman

Before PHILLIPS, Chief Judge, and HUXMAN and MURRAH, Circuit Judges.

HUXMAN, Circuit Judge.

This was an action by appellant, Jack E. Kilbourn, against John A. Shay and Paul Shay, d/b/a Shay's Used Cars of Evans, Colorado, and the Western Surety Company, surety on their bond.

The amended complaint set out the bond executed by the surety, pursuant to the provisions of Chapter 78 of the Session Laws of Colorado, 1945. The material provisions of the bond provided that the surety "shall pay all judgments and costs adjudged against said Principal on account of fraud or fraudulent representations and for any violation or violations of said law during the term of said license and all lawful renewals thereof, * * *."*fn1

The first cause of action alleged that Kilbourn sold a Pontiac Sedan to the Shay Brothers and received in exchange a check for $2700, drawn on the First National Bank of Greeley; that payment was refused on this check because of insufficient funds; that the check was issued by Shay Brothers for the purchase of an automobile, knowing there were no funds available for its payment and with the intention and design of defrauding plaintiff of the title and possession of the automobile. Judgment was asked for the amount of the check against Shay and the surety on its bond.

The second cause of action alleged that Joe H. Burtrum of Joplin, Missouri, sold Shay Brothers two automobiles and two trucks for $6300, and received in return $1625.00 cash and three checks totaling $4675, issued on the National State Bank of Cheyenne, Wyoming, payable to Shay Brothers and signed "Bill Little"; that the checks were endorsed by Shay Brothers to Burtrum; that they were issued on a nonexistent bank; that Little and Palmer and the Shay Brothers knowingly and fraudulently issued said checks with the intent to defraud Burtrum. It was alleged that on December 16, 1948, Burtrum assigned to Kilbourn his claim with reference to these checks and that assignment was ratified by written assignment dated January 12, 1950. Judgment was asked against Shay Brothers and against the Surety.

The Surety Company admitted the status of the parties and the issuance of the bond, but denied all other allegations. It pleaded as a special defense to the second cause of action that Kilbourn was not the real party in interest. So far as material, Shay Brothers admitted the allegations of the first and second causes of action, except the allegations with respect to fraud and misrepresentation and admitted owing the money set forth in the complaint.

The Surety Company filed a motion for summary judgment which was sustained by the court, and this appeal followed.

The Surety Company contended in the trial court, as it does here, that Kilbourn's statements in his deposition, together with the allegations of the complaint, leave no disputed issue of fact, and show as a matter of law that there was no actionable fraud with respect to the transactions upon which the first cause of action was predicated. As to the second cause of action, its position is that Kilbourn was not the real party in interest.

Kilbourn's deposition, on which, in part the Surety Company's motion for summary judgment was predicated, was taken at the behest of the Surety Company. In it, Kilbourn testified that he had been doing business with Shays for about six months and had sold them approximately 15 cars; that his understanding with John A. Shay at the time he delivered the automobile referred to in the first cause of action was that he would leave the title and take the check of $2700; that if the automobile was sold, Shays would notify him and he would cash the check, and that until the automobile was sold, he would have the right to retake it at any time he saw fit. He was not questioned further about his understanding or purpose in taking a check under these circumstances. He testified that prior to this transaction he had in some instances, when he delivered cars to Shays, received immediate payment and at other times had agreed to hold their checks. In no instance, prior to the transaction here involved, were Shays' checks short. He testified that 17 days after the above transaction he came out to Colorado and found the automobile was missing from Shay's Used Car Lot; that he investigated and found it had been mortgaged and had also disappeared; that he thereupon presented the check for payment but it was returned marked "short".

With respect to the second cause of action, Kilbourn testified that he came out to Colorado between the time he delivered his automobile and the time he discoverd his automobile was missing, upon business not involved in this case and that at that time he had an oral assignment from Burtrum to collect or do "whatever he saw fit" with with respect to Burtrum's automobiles and trucks; that it was then that he was given the cash and checks referred to in his second cause of action; that he took the cash and checks and that it was thereafter discovered that they were drawn on a non-existent bank.

At a pre-trial conference, the written assignment referred to in Kilbourn's amended complaint was admitted in evidence over the objection of the Surety Company. It appears from this assignment that it was executed after this action was commenced. By its terms, it purports to be an original assignment and a ratification of the oral assignment. It purports to make Kilbourn Burtrum's agent for collection of all sums due him from the Shays, and "to have and to hold the same to the said Jack E. Kilbourn * * * with power to collect the same in my name and as my attorney hereunto duly authorized to his own use."

In support of its position with respect to count one, the Surety Company invokes the negotiable instrument law to the effect that the check for the car was delivered upon the condition that it would be paid for upon the happening of certain contingencies, that is, if the automobile was sold and that it, therefore, never became a completed instrument until that contingency occurred; that a mere promissory representation cannot under these circumstances constitute the basis of an action for fraud and deceit.

The fallacy of this reasoning is that the liability of the Surety Company does not arise under the negotiable instrument law, but under a statute obviously intended to insure the integrity of a used car dealer in the conduct of his business, and to protect those dealing with him from fraud on his part. The statute is general*fn2 and is broad enough to cover loss from civil as well as criminal fraud. And that is the protection of the bond itself. In it the surety agrees ...


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