The same person, considered in different capacities, may act as
the giver and receiver of a fraudulent preference, and so held in a
case where a trustee of several trusts, with knowledge of his
insolvency, transferred property to one of the trusts to which he
was indebted.
See Bush v. Moore, 133 Mass. 192.
The obligation resting on a defaulting testamentary trustee to
restore the value of the assets embezzled is of a contractual
character and the debt is provable although it is fraudulent and
excepted from the discharge. Under the laws of Massachusetts, there
may be a contractual obligation of one trust to another for
payments improperly made from assets of the latter for the benefit
of the former.
Bremer v. Williams, 210 Mass. 256.
Section 17 of the Bankruptcy Act enumerates debts provable under
§ 63a which are not discharged, and among them are included those
that arise by the conversion of trust funds. Equality between
creditors is necessarily the ultimate aim of the Bankruptcy
Page 228 U. S. 535
Act, and even if the dividend be very mall, the court will not
construe the act so as to allow one creditor to be preferred above
the others.
There may be unity of the person and differences in capacities,
but such unity imputes knowledge of the purpose for which the
different capacities were exercised.
183 F. 518 affirmed.
The facts, which involve the provisions of the Bankruptcy Act in
regard to preferences and provable debts, are stated in the
opinion.
Page 228 U. S. 539
MR. JUSTICE McKENNA delivered the opinion of the Court.
Petition by appellee as trustee in bankruptcy of the estate of
John O. Shaw to recover a preference.
The facts are these: the bankrupt, John O. Shaw, was, for a long
time prior to the adjudication in bankruptcy, trustee under the
will of Samuel Parsons, late of Newton, in the County of Middlesex,
Massachusetts, of two trusts -- one for the benefit of Charles A.
James H., and Henry B. Parsons, and the other for the benefit of E.
F. and E. A. Parsons.
After the proceedings in bankruptcy had been commenced, Shaw
resigned the trusts, and his resignation was accepted by the
Probate Court of Middlesex County on the March 25, 1908, and
appellant, George Lemist Clarke, was appointed trustee of the
trusts and duly qualified.
In the month of January, 1908, and within four months before the
filing of the petition in bankruptcy against him, and whilst he was
insolvent, Shaw was largely indebted to each of the trusts and to
himself as trustee, and transferred from himself individually to
the trusts and to himself as trustee thereof as follows: to the
trust for C.A. Parsons
et al., seven of the $1,000
collateral trust 4% bonds of the American Telephone & Telegraph
Company (numbers specified) and two $1,000 Chicago, Burlington
& Quincy Railroad Company 3 1/2% Illinois Division (numbers
specified); to the trust of E. F. and E. A. Parsons, twelve $1,000
Northern Pacific-Great Northern 4% joint bonds, Chicago, Burlington
& Quincy collateral.
The transfers were made by Shaw with knowledge of his
insolvency, and with intent to prefer the trusts and himself
Page 228 U. S. 540
as trustee, and the effect (it is alleged) of such preference,
if not avoided, will be to enable the trust estates and himself as
trustee thereof (being one of his individual creditors) to obtain a
greater percentage of his debts than any other of his creditors of
the same class.
The petition prayed that the bonds be declared to be the bonds
of petitioner, appellee here, and that Clarke, appellant here, be
ordered to execute such instruments as might be necessary to
transfer the title to and possession of all the bonds to
petitioner,
The answer of appellant denied only that the transfers were made
within four months of the bankruptcy, that Shaw was at the time of
the transfer insolvent, that all the trusts were his creditors then
or have become so since within the meaning of the statute, and
denies that he intended by the transfers to give a preference or
that they constitute a preference.
The decree of the district judge was that five of the seven
Telephone and twelve of the Northern Pacific-Great Northern
Railroad Company 4% joint bonds, and all of the coupons thereon
payable after January, 1908, were the property of the trustee in
bankruptcy, appellee here.
It was further adjudged that the American Telephone &
Telegraph Company collateral trust 4% bonds (numbered 20,818 and
20,819) were in part the property of the appellant as trustee and
of appellee as trustee. The bonds were directed to be sold. The
decree was affirmed by the circuit court of appeals.
The district court found the facts. They are summarized in its
opinion as follows:
"The bankrupt, being insolvent, and knowing himself to be
insolvent, was discovered by the surety on his bond as trustee
under the Parsons will not to be in the possession of some of the
securities which formed a part of the trust estate, and which
should have been in his possession as
Page 228 U. S. 541
trustee. He was being urged by the surety to make good this
shortage. For the purpose of doing so, he placed the bonds in
question in a safe deposit box, taken and agreed on by himself and
the surety as a separate place of deposit for the securities
belonging to this trust. In the box were placed also those
securities belonging to the trust funds which had not gone out of
his possession. All the securities thus placed in the box and held
as constituting the trust funds have since remained there. The
bankrupt has been removed as trustee, and the respondent, his
successor in the trust, has at present the possession and control
of the contents of the box, including the bonds in question."
"The bankrupt had at the time more than twenty-five other trust
estates in his charge as trustee. There was, in the case of each, a
shortage for which he was responsible, and he knew the fact to be
so. The total amount of those shortages exceeded $350,000."
"It has not been shown that any of the bonds used as above to
make good the shortage in the Parsons trust estate, or that any of
the money wherewith the bankrupt purchased those bonds can be
identified as belonging to any one of the other trust estates in
the bankrupt's charge. He drew out and used to purchase certain of
the bonds a savings bank deposit of $1,500 belonging to one of the
Parsons trust funds, but, with that exception, the money wherewith
the bonds were bought as well as the bonds themselves must, for the
purposes of the questions to be decided, be regarded as the
bankrupt's individual property at the time he set them apart in the
manner stated, to be thereafter held as trust property."
The question in the case is Do these facts show a preference
within the meaning of the bankruptcy law?
Putting to one side the identity of Shaw as an individual and
Shaw as the trustee of the trusts, there are the elements of a
preference. In other words, there is indebtedness; Shaw is indebted
to all of the estates of which he
Page 228 U. S. 542
was trustee. He used his individual property to pay the
indebtedness to the Parsons trust, and he then gave that trust a
preference over the others. It was enabled to the extent of the
property transferred to obtain a greater percentage of its debts
than the other trusts. What, then, stands in the way of setting the
transfer aside? The debt was not a provable one in bankruptcy, it
is contended, and on that contention the case is rested, and to it
we may direct our considerations, and in that, the provisions of
the statute become necessary elements.
Section 60a, as amended, is as follows:
"A person shall be deemed to have given a preference if, being
insolvent, he has, within four months before the filing of the
petition, . . . made a transfer of any of his property, and the
effect of the enforcement of such . . . transfer will be to enable
any one of his creditors to obtain a greater percentage of his debt
than any other of such creditors of the same class."
A creditor is defined to be "anyone who owns a demand or claim
provable in bankruptcy may include his duly authorized agent,
attorney, or proxy."
Debt includes any debt, demand, or claim provable in bankruptcy.
Transfer includes the sale and every other and different mode of
disposing of or parting with property, or the possession of
property, absolutely or conditionally, as a payment, pledge,
mortgage, gift, or security.
Appellant deduces from these definitions that no question of a
preference can arise except when the transfer is made to the owner
of a provable claim or to his agent, and that no claim is provable
except when enumerated in § 63a, and none other can be liquidated
under paragraph b. Of the claims enumerated in § 63a, the fourth is
the only one with which we are concerned. It is as follows: "(4)
Founded on an open account, or upon a contract, express or
implied." The final contention of appellant is that one, to receive
a preference, must be a
Page 228 U. S. 543
creditor of the bankrupt upon a contract, express or implied. It
is not enough that there be some kind of legal or equitable claim
against the bankrupt. These postulates laid down, he builds upon
them an argument of great technicality to show that the trusts of
Shaw were not his creditors, and therefore could not receive from
him a preference. An obligation to the trusts is not denied, but it
is an obligation, it is asserted, which was represented entirely by
his bond, and had no remedy but by a suit on the bond. The
liability of Shaw, it is further contended, considered
independently of the bond, was in the nature of a pure tort
liability which could not be waived and the remedies of a contract
availed of.
That some torts may be waived and be the basis of provable
claims is decided in
Crawford v. Burke, 195 U.
S. 176,
195 U. S. 187.
Crawford and one Valentine were stockbrokers and dealers in
investments. They had in their possession certain shares of stock
which they held as a pledge and security for the amount due them by
Burke on the stock. They sold Burke's reversionary interest in the
stock, whereby it was wholly lost. He sued them in trover. They set
up their discharge in bankruptcy. It was held, the Court speaking
through Mr. Justice Brown, to be clear that the debt of Burke was
embraced within the provisions of paragraph a, as one "founded upon
an open account, or upon contract, express or implied," and might
have been proven had he chosen to waive the tort and take his place
with other creditors of the estate. The discharge in bankruptcy was
held on other provisions of the act not to be a defense. The case
was applied and followed in
Tindle v. Birkett,
205 U. S. 183,
205 U. S. 186,
in an action to recover damages claimed to have been sustained by
false and fraudulent representations. It was decided that the claim
was one provable under § 63a as "founded upon an open account or
upon a contract, express or implied." It is, however, said that
these cases are explained and limited
Page 228 U. S. 544
in
Grant Shoe Co. v. Laird Co., 212 U.
S. 445, to instances "where there is a claim arising out
of a contract, but of such a nature that there is at the same time
an independent remedy in tort." To make this distinction available,
appellant must establish his contention that there was no
contractual relation, either between Shaw and his trusts or the
cestuis que trust of the trusts -- in other words, that
the sole liability was upon Shaw's bond. There is no other remedy,
is the repeated insistence, and that only after a final accounting
has been had in the probate court, showing a liquidated balance due
from the accountant. Then, and not until then, as we understand
appellant, a creditor emerges with a provable claim. Appellant,
however, halts somewhat at the logic of his argument, and ventures
to say that a decision in his favor does not necessarily involve a
decision that a claim upon the bond of the defaulting trustee could
not be proved for a dividend in the name of the probate judge. But
is not this concession in opposition to the relation asserted to
exist between a provable debt, and a transfer of property on
account of it being a preference?
We have considered the contentions of appellant somewhat
minutely, so as to fully present them. The lower courts, while
giving attention to the technical elements of appellant's
arguments, cut through them to apply the fundamental purpose of the
bankruptcy law -- that is, equality between creditors. The district
court, following
Bush v. Moore, 133 Mass.198, decided in
1882 under a provision of the Massachusetts insolvency laws which
was similar to the provision in the Bankruptcy Act of the United
States, found no difficulty in the same person, considered in
different capacities, acting as giver and receiver of a fraudulent
preference. The court of appeals met the contention of appellant
that there must be a contractual relation, and decided that it
existed both on account of the bond and independently of the
bond.
Page 228 U. S. 545
The court said:
"It is true that, in the ordinary course, enforcing the bond
would be at the end of the proceedings, and not at the beginning.
Nevertheless, as the equitable rules which govern in bankruptcy
always look to the end, and disregard the intervening details as
only steps to reach the end, there was in this case a contract from
the beginning -- that is, the bond -- which was capable of
liquidation on the rules explained in
Tindle v. Birkett,
205 U. S.
183. . . . Aside from this, and independently of the
bond, we believe there is an obligation resting on a defaulting
testamentary trustee to restore the value of the assets embezzled
which is of a contractual character."
But this, appellant contends, is to evolve "two moral persons
out of one embezzler." The criticism only can be made by putting
out of view what the "one embezzler" represents. He is one being,
but acts in more than one capacity, and in all of his capacities he
has duties and obligations. The relation of a trustee to the trust
property is not the same as his relation to his individual
property. He certainly may incur obligations to the trust. He can
only satisfy the obligations out of his individual property, and by
doing so may deplete it, make it deficient to satisfy its
obligations. These are realities, not fictions. We must overlook
essential things to disregard them, and hence the decision in
Bush v. Moore, supra. Moore was the guardian of his son,
and wrongfully appropriated to his own use the moneys of his ward.
Within six months preceding his insolvency, and being insolvent,
intending to restore the funds he had appropriated, he deposited in
the defendant bank the necessary sum derived from his private
property. His assignees in insolvency sued in equity to recover the
sum as a preference, alleging that he at the time was insolvent,
and acted in contemplation of insolvency. The Massachusetts statute
made void any payment or conveyance of property by an insolvent "to
any creditor or person having a claim against
Page 228 U. S. 546
him" and gave power to the assignee to recover the property.
These contentions were made: (1) the ward was not a creditor of
the guardian or a person having a claim against him; (2) the act of
the guardian did not constitute a preference which was avoidable by
reason of his insolvency; (3) had the misappropriation continued,
there would have been no claim by the ward which could not have
been the foundation of a suit; (4) his remedy was to summons the
guardian into the probate court, and then, upon adjudication there,
or if he failed to account, there would have been only the remedy
for failure to account or to comply with the decree of the
court.
The contentions, it will be observed, were like those made in
the case at bar. They were all rejected. It was held that the title
to the property continued in the ward, the guardian having its
custody only, and, he having wrongfully used it, there was a just
claim on the part of the ward that the integrity of the fund should
be restored. The court said:
"The title to the property of one under guardianship continues
always in the ward; the guardian has its custody merely. If,
availing himself of the custody, he wrongfully uses it, there is a
just claim on the part of the ward that the integrity of the fund
shall be restored. It is not important in what form the ward is
compelled to seek his remedy, or that the wrongful act of the
guardian will not immediately afford a ground of action against
him. Even if, upon a settlement in the probate court, it might have
been held that the lawful and proper charges of the guardian would
exceed the amount of his spoliations, there was not the less a just
claim that the ward's property which had been unlawfully dealt with
should be replaced."
To the contention that two persons were necessary to consummate
a preference, one to transfer and the other to receive the
property, the court answered:
"But, where
Page 228 U. S. 547
the same person acts as the giver and receiver of the security,
the concurrence and participation of two parties to the fraudulent
preference exists. . . . One individual acting in two capacities,
as debtor and on behalf of the creditor, may constitute the two
persons contemplated by the statute."
And, supplying the element of knowledge of the insolvency and
the preference required by the statute, the court said that the
ward was bound by the knowledge of his guardian.
The case is certainly determinative of appellant's contention
that accounting in the probate court was necessary as a condition
to a provable claim, or that a suit on a bond was the only remedy
available for the misappropriation of the funds by a guardian. This
applies as well to a trustee, and that there may be a contractual
obligation of one trust to another under the laws of Massachusetts
is decided in
Bremer v. Williams, 210 Mass. 256. In that
case, a person who was the sole trustee of two separate estates
paid the taxes due from one of them with money embezzled from the
other. It was held that the new trustee of the latter could
maintain suit in equity to recover from another unjustly enriched
by the embezzlement. The liability of the latter to the former, the
court said, grew out of an implied or constructive obligation, and
did not rest upon an express trust, and, being such, the statute of
limitations would be a bar in equity as well as in law. In other
words, the court recognized that, from the misuse of the funds, the
law would imply an obligation to repay. This ruling brings the case
at bar within
Crawford v. Burke and
Tindle v.
Birkett, even if their application be as limited as appellant
contends. It may be questioned if they are so limited. They
recognize the relation of § 63a to § 17. Section 17 excludes
certain debts from discharge -- among others, those created by the
bankrupt's "fraud, embezzlement, misappropriation, or defalcation
while acting as an officer in any fiduciary
Page 228 U. S. 548
capacity." It was said in
Crawford v. Burke: "If no
fraud could be made the basis of a provable debt, why were certain
frauds excepted from the operation of the discharge?" The question
was pertinent in view of the language of the section. It provides
that "a discharge in bankruptcy shall release a bankrupt from all
of his provable debts, except such as," etc. The relation of the
section was also recognized in
Friend v. Talcott,
228 U. S. 27. It is
there declared that § 17 enumerates the debts provable under § 63a
which are not discharged. Among them, we have seen, are those
created by fraud, embezzlement, misappropriation, or defalcation in
any fiduciary capacity. It would seem therefore to follow that the
conversion of trust funds creates a liability provable in
bankruptcy.
The court of appeals expressed the hardship of a contrary
conclusion. "Moreover," the court said,
"it will be a great hardship if the various estates of which
Shaw was trustee cannot recover any part of their loss of about
$350,000 by sharing in his bankrupt estate. This might, of course,
in this instance, be but a very small dividend, but in another
instance it might be very near the face of the default. Any
construction which would leave such a result as that cannot, of
course, be accepted unless fairly forced upon us."
In this, we think, the court was right. Equality between
creditors is necessarily the ultimate aim of the Bankrupt Law, and,
to obtain it, we must regard the essential nature of transactions,
not their forms or accidents. As we have said, there may be an
unity of the person in the individual and the trustee, of the
individual and the guardian; we must look beyond it to the
difference in his capacities and the duties and obligations
resulting from it. These duties and obligations are as distinct and
insistent as though exercised by different individuals, and have
the same legal consequences. The unity of the person has, of
course, an effect. It constitutes such relationship
Page 228 U. S. 549
between the different capacities exercised as to impute
knowledge of their exercise and for what purpose exercised.
Bush v. Moore, 133 Mass.198;
Atlantic Mills v. Indian
Orchard Mills, 147 Mass. 282;
Rogers v. Palmer,
102 U. S. 263;
Atlantic Bank v. Merchants' Bank, 10 Gray 532, cited in
United States v. State Bank, 96 U. S.
30,
96 U. S. 36.
Decree affirmed.
MR. JUSTICE HOLMES concurs in the result.