Apperson v. Security State Bank

The opinion of the court was delivered by This action stems from a controversy over the application of funds to a payment on a promissory note executed by Joe R. Bailey (defendant) and payable to Security State Bank of Fort Scott (defendant-appellant). In 1966 defendant Bailey was the operator of a feed lot near Fort Scott, Kansas. In the fall of 1966 Bailey had 4,000 head of cattle in his feed lot, which were costing him $70,000.00 a month to feed. In addition to feed costs, Bailey testified he had expenses for help, equipment and upkeep. He was receiving $50,000.00 a month from the owners of the cattle — in other words, Bailey was losing money at the rate of more than $20,000.00 per month. In the spring of 1966 Bailey became hard pressed to continue his feed lot operations. He had borrowed to the loan limit from Citizens National Bank of Fort Scott and had other substantial indebtedness. In April 1966 Bailey secured his first loan from defendant Security State Bank (hereafter referred to as Bank). This loan was paid off shortly thereafter. On May 4, 1966, Bailey borrowed $32,828.00 from Bank; signed a six month promissory note due November 4, 1966) in that amount; and executed a security agreement upon 257 head of cattle which Bailey had previously shown to Floyd Dotson, who was president of Bank. In the early part of September 1966 Bank discovered Bailey did not own 176 head of the cattle covered by the security agreement. Bank confronted Bailey with a demand for immediate payment of the May 4 note. Bailey responded by offering Bank a security interest in a substantial amount of farm machinery, which Bailey claimed he owned free and clear. Dotson, for Bank, inspected the machinery and on Bailey's assurances a new security agreement was executed on September 8, 1966, by which Bailey gave Bank a security interest in the machinery. Thereafter Bank discovered that Bailey did not, in fact, own some of the machinery and, further, the part which he did own was encumbered by a prior security agreement. When Bank made [215 Kan. 726]