Opinion ID: 2395787
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Heading Rank: 1

Heading: The Board of Education case, 1954-1955 taxes.

Text: An obligee's compliance with a provision calling for notice of a claim within a specified time is regarded as a condition precedent to the recovery on the contract of suretyship. Jellico Grocery Co. v. Sun Indemnity Co. of New York, 272 Ky. 276, 114 S.W.2d 83; 72 C.J.S. Principal & Surety § 253. It is made so by KRS 134.270, reading: Neither the sheriff nor a surety shall be liable for any act or default of the sheriff in connection with his revenue duties unless notice of the act or default of the sheriff giving rise to a claim upon the bond has been given to the surety by the Department of Revenue, the county judge, the county attorney or other person asserting the claim within ninety days after discovery or at the latest within one year after the end of the year within which the bond was executed. This section was a proviso in former § 4134, Ky.Stats. It came into the statutes in 1934. Ch. 20, Acts of 1934; Mt. Vernon Independent Graded School District v. Clark, 281 Ky. 230, 135 S.W.2d 892. Before that enactment, a like provision of limitation conditioned on the absence of stipulated notice included in a tax collector's bond was held not binding because in derogation of the statutory requirements. Bankers' Surety Co. v. City of Newport, 162 Ky. 473, 172 S.W. 940. None of the present bonds contain a similar condition as to notice, but the statutory provision is, of course, effectual. The trial court found as a fact that a shortage occurred in the accounting of school funds for the fiscal year 1954-1955 in the sum of $15,256.07, but that it was not discovered until the completion of the audit in June, 1956, and thereafter proper and timely notice was given the surety. The court found another shortage in the school funds for the fiscal year 1955-1956 in the sum of $6,002.64. Timely notice of that default was given. An entry on the record of the school board on June 29, 1955, recites that the board would accept the figures of the sheriff as presented and any error    to be corrected and to not accept final settlement until the bill is paid, which appears to be according to the figures $16,116.44.  On July 14, 1955, Montgomery gave the treasurer of the board a check for that amount drawn on his account as sheriff. It bore the notation, Amount to complete settlement of 1954-1955 tax collection. The bank refused payment on account of insufficient funds. (His balance was $3,851.72.) This was reported to the board. The superintendent testified that he discussed the matter with the sheriff, who then claimed he had made a mistake or something was wrong with the check. After holding the check for perhaps a month or two, and being advised by the bank that there still were not sufficient funds on deposit to pay the check, the board turned it over to its attorney to collect. He appears to have taken no action. On October 14, 1955, the sheriff gave another check for the identical amount of the dishonored one. It was not deposited until November 9. It was then paid. Thus the board generously favored the sheriff in his default for nearly four months. It is quite certain that the board knew at that time that the check was satisfied with 1955-1956 collections. In December tax receipts seemed to be falling off, and then the board ordered an audit to be made of the sheriff's accounts. That was done in March and April, 1956. The audit revealed that the check for the balance of the 1954 taxes had been satisfied out of the 1955 collections. On April 17, 1956, the superintendent of schools wrote the surety company: The Magoffin County Board of Education has been having difficulty in collecting their portion of the taxes from the sheriff of Magoffin County over a period of some two or three years. The letter enclosed a copy of the auditor's report showing a shortage for 1954 and 1955 of $25,256.36 and demanded payment thereof. This was the first notice the surety had of any default. It came nine months after the cold check had been given by the sheriff. The superintendent testified that upon a chance meeting on the street soon after the incident he told the surety company's local agent in Salyersville about the dishonored check. The agent denied the conversation. The trial court did not accept or regard this as notice of the act or default of the sheriff, for he placed his decision upon the ground that there had been no discovery until the filing of the audit of the sheriff's accounts. The legal question is just what constitutes discovery of any act or default of the sheriff in connection with his revenue duties, as stipulated in KRS 134.270, above quoted. The word discovery has, of course, many connotations and meanings. In relation to default of an insured person, the obligee in the bond, it is generally said, is not required to act until there is actual knowledge of a dishonest act or loss, mere suspicion thereof not being sufficient. See Shatz v. American Surety Co., Ky., 295 S.W.2d 809, at page 816. But, as said in Fidelity and Guaranty Co. v. Western Bank, 94 S.W. 3, 5, 29 Ky.Law Rep. 639, after suspicion is aroused, the obligee in the bond ought to pursue its inquiries with reasonable diligence, and when satisfied that the defalcation exists, and the extent, or the substantial extent, of it, notice of the fact ought to be given promptly to the insurer. In that case there were several items of embezzlement by a bonded bank employee. On April 7, 1903, the bank's officers received information that aroused their suspicion concerning the employee's fidelity. But defalcation of an item of $1,459.43 was not definitely established until three or four days later, and then an effort was made to obtain a settlement. A thorough examination of the employee's accounts was then being made. The bond contained a provision that the employer should give notice to the insurer immediately upon discovery of any fraudulent act. We held that the failure of the bank to give notice of the default of the item until April 20 exonerated the surety from liability. To the same effect in principle is Jellico Grocery Co. v. Sun Indemnity Co. of New York, 272 Ky. 276, 114 S.W.2d 83, holding  that delay beyond the specified time for notice cannot be justified upon the contention that the extent of the loss had not been ascertained. Cogent reasons are given as to the fairness and importance of giving notice to the surety of any wrongful or dishonest act of a person whose fidelity has been guaranteed. See also 72 C.J.S. Principal and Surety §§ 150, 151; 50 Am. Jur., Suretyship, §§ 347, 348. No comment need be added to the full recitation of the facts in this case except to say that to believe the Board of Education and its officials did not have any more than a suspicion of wrongdoing by the sheriff would distort reality. They had actual knowledge that the sheriff was guilty of a misappropriation of the revenue collections well within ninety days. The effort of the appellees to avoid their dereliction in duty to the surety because there was a dispute as to the amount owing by the sheriff is strained and feeble. The only evidence of this is the sheriff's statement to them that he made a mistake. Indeed, he did  in appropriating the tax money to his own use and giving the worthless check. There was no dispute about the amount owing at the time, for the exact sum was paid three months later without question. The judgment for the Board of Education for the misappropriation of the 1954-1955 school taxes is erroneous.