A, for his own accommodation, asked B to collect money for him
without compensation and to keep it until A called for it. B
collected the money and, without actual fraud or fraudulent intent,
deposited the proceeds to his own credit with his own fends. By an
unexpected revulsion, he was forced into bankruptcy before he had
paid it over, and made a composition with his creditors.
Held that the debt thus incurred by B to A was not a debt
created by fraud or embezzlement of the bankrupt, or while he was
acting in a fiduciary capacity within the exception provided for in
Rev.Stat. § 5117.
The word "fraud," as used in Rev.Stat. § 5117, means positive
fraud, or fraud in fact involving moral turpitude or intentional
wrong, and not merely implied fraud, or fraud in law.
The court stated the case as follows:
This is an action of general assumpsit originally brought in the
County Court of Franklin County, Vermont, by the late firm of
Hammond & Burt, of which the defendant in error, DeForest
Hammond, is the survivor, against the plaintiff in error, Sylvester
C. Noble, to recover the sum of $1,000 in money alleged to have
been received by him of and from them. The defendant pleaded the
general issue and also gave notice under the statute, as a special
defense, of his discharge by composition in bankruptcy, as provided
for by the United States statutes. The case was tried by a jury,
resulting in a verdict in favor of plaintiffs for $1,149.83, for
which, with costs, judgment was rendered. The Supreme Court of
the
Page 129 U. S. 66
state affirmed this judgment, and the defendant thereupon sued
out the writ of error which brings the case here.
The material facts in the case are as follows: in October, 1877,
the Central Vermont Railroad Company, having its principal office
in St. Albans, Vermont, where the plaintiff in error also resided,
was indebted to the firm of Hammond & Burt, residents of
Franklin in that state, in about the sum of $3,600. It was the
custom of that company to pay its debts of the character of this
one in installments, and at its own convenience. Hammond &
Burt, having experienced considerable difficulty in collecting
prior debts from the company, requested the plaintiff in error, as
a matter of accommodation to them, to collect said indebtedness for
them, and he consented to do so. In pursuance of this arrangement,
they called at his office on the second of October, 1877, he at the
time being out, and left for him an order of which the following is
a copy:
"ST. ALBANS, VT., Oct. 2, 1877"
"Central Vermont Railroad will please pay to S.C. Noble or order
the whole amount due to us."
"HAMMOND & BURT"
Immediately after they had left his office, the plaintiff in
error came in and, the order being handed to him, he stepped to the
door of the office, called to them as they were crossing the street
on their way to the depot, and asked them what he should do with
the money when collected. They testified that they then told him
"to keep the money until they called for it." He testified that
they told him "to keep and use the money until they called for it,"
or words to that effect.
On this order the plaintiff in error collected $1,000 from the
railroad company -- $500 on October 3 and $500 on October 12, 1877
-- and deposited these sums as collected in bank, to his own
credit, as he deposited his own funds. On the 26th of the same
month, he failed, and on the 6th of November, 1877, on the petition
of his creditors, was adjudged a bankrupt. Subsequently, an offer
of composition to his creditors was duly accepted and confirmed by
a majority of them, but was not accepted by these plaintiffs.
Page 129 U. S. 67
It appears from the bill of exceptions that "there was no
evidence tending to show any actual fraud or any fraudulent intent
in the defendant's mingling the money with his own and using it."
The jury returned a verdict for the defendants in error under
instructions from the court which authorized such a verdict only if
the instructions given by the defendant in error to the plaintiff
in error were to keep the money until they demanded it.
MR. JUSTICE LAMAR, after stating the facts as above, delivered
the opinion of the Court.
The case presented upon the record, as found by the jury, is
that of a produce dealer who, having been requested by parties to
collect money for them as an accommodation and without
compensation, and to keep it until they called for it,
Page 129 U. S. 68
proceeded to make such collection and, without actual fraud or
fraudulent intent, deposited the proceeds to his own credit with
his own funds, and who before he paid it over was, by an unexpected
revulsion, forced into bankruptcy, and made a composition with his
creditors. The question involved is whether the debt thus incurred
was within the exception provided for in § 5117 Rev.Stat., which is
as follows:
"No debt created by the fraud or embezzlement of the bankrupt,
or by his defalcation as a public officer, or while acting in any
fiduciary character, shall be discharged by proceedings in
bankruptcy."
The judge on the trial charged the jury that the money under
such circumstances was received in a fiduciary character, and that
the plaintiffs must recover. The Supreme Court of Vermont affirmed
the judgment of that court on the ground that though the above
charge was technically erroneous, it was harmless because the act
of the defendant in mingling the money with his own and using it,
was, in the face of the plaintiffs' instruction to keep it until
the called for it, a wrongful and fraudulent act, a betrayal by the
defendant of the trust reposed in him, and therefore a fraud which
created a debt that was not discharged by the defendant's
composition with his creditors under the provisions of the bankrupt
law.
The effect to be given to the phrases, "while acting in a
fiduciary character" and "created by the fraud of the bankrupt" has
been considered and fully settled by this Court in the following
cases:
Chapman v.
Forsyth, 2 How 202;
Neal v. Clark,
95 U. S. 704;
Wolf v. Stix, 99 U. S. 1;
Hennequin v. Clews, 111 U. S. 676;
Strang v. Bradner, 114 U. S. 555, and
Palmer v. Hussey, 119 U. S. 96. The
class of debts held by the decisions in those cases to be excepted
from the operation of bankrupt proceedings has been stated and
illustrated with a clearness and fullness which leaves but little
opening for any controversy with regard to the application of the
clause under consideration to particular cases.
Under the Bankrupt Act of 1841, which excepted from discharge
debts of the bankrupt, created in consequence of a defalcation as a
public officer, or as executor, administrator,
Page 129 U. S. 69
guardian, or trustee, or while acting in any other fiduciary
capacity, this Court, in
Chapman v. Forsyth, held that the
case enumerated in the act are cases not of implied but special
trusts; that the phrase "in any other fiduciary capacity" referred
not to those trusts which the law implies from the contract and
which form an element in every agency and in nearly all the
commercial transactions in the country, but to technical trusts,
and hence that a factor who had sold the property of his principal
and had failed to pay over to him the proceeds did not owe to him a
debt created in a fiduciary capacity within the meaning of the
act.
That decision is stated by MR. JUSTICE BRADLEY, in the opinion
in
Hennequin v. Clews, to have been "not only followed but
approved by the highest courts of several of the states."
Under § 5117, which is substantially a reenactment of the
provision of the act of 1841 in this regard, with the single
additional provision that "no debt created by fraud shall be
discharged," etc., this Court, on the line of the same reasoning,
has construed the word "fraud," as used in that section, to mean
positive fraud, or fraud in fact -- involving moral turpitude or
intentional wrong, as does embezzlement, and not implied fraud, or
fraud in law, and hence it does not apply to a debt created by the
purchase in good faith, from an executor, of bonds belonging to his
decedent's estate at a discount, although such an act was held to
be a constructive fraud.
Neal v. Clark, supra. Nor does it
include such fraud as the law implies from the purchase of property
from a debtor with intent thereby to hinder and delay creditors in
the collection of their debts.
Wolf v. Stix, supra. Nor
does it refer to a debt arising from the conversion by a party to
his own use of bonds held by him merely as a collateral security
for the payment of a debt, or the performance of a duty, and which
he fails to restore after the payment of the debt or performance of
the duty to the person who entrusted them to his keeping.
Hennequin v. Clews, supra. In all these cases, the
defendant was held to be released by the subsequent discharge in
bankruptcy.
The decisions of the state courts in a great number and
Page 129 U. S. 70
variety of cases, as shown by the citations in the brief of
counsel for plaintiff in error, are in accord with the
construction, by this Court, of these clauses of the section in
question, and have applied it to cases of agents, factors,
commission merchants, and bailees who have failed to account for
proceeds of the sale of property committed to them for that
purpose, or moneys received upon collections entrusted to them.
The finding of the jury that the agreement of the plaintiff in
error was to collect the money and keep it until the defendants in
error called for it cannot be taken to imply an obligation to keep
and deliver to them the identical bills or coins. Even if the
agreement between the parties might be construed as creating a
trust in some sense, it was clearly not such a trust as comes
within the provisions of the Bankrupt Act. Nor can the subsequent
mingling by the plaintiff in error of the money collected with his
own constitute the actual, positive fraud contemplated by that act,
but only such an implied fraud as is involved in most or all cases
of conversion of property or of breach of contract.
The judgment of the Supreme Court of Vermont is in conflict with
the principles laid down by the decisions of this Court as well as
the general drift of those of the several state courts, and is
therefore reversed, and
The case is remanded to the court below, with an instruction
to grant a new trial, and to take such further proceedings as may
not be inconsistent with this opinion.
