1. A creditor to whom a bankrupt owes money on a promissory note
and against whom the bankrupt has committed an act of conversion by
an unauthorized sale of personal property mortgaged to secure the
note may prove on the note, " a fixed liability as evidenced by an
instrument in writing," Bankruptcy Act, § 63(1), or may waive the
tort and prove on the implied assumpsit, § 63(4), but he cannot
escape the discharge by electing to ignore the bankruptcy
proceedings and suing on the tort. P.
293 U. S.
331.
2. Section 17(2) of the Bankruptcy Act, which excepts from
discharge liabilities for "willful and malicious injuries" to the
property of another, does not embrace a technical conversion,
committed against the mortgagee of personal property by the
mortgagor in possession, by an unauthorized sale, if the act was
not in fact willful or malicious, but done innocently in the honest
though mistaken belief that authority to sell existed. P.
293 U. S.
331.
3. Section 17(4) of the Bankruptcy Act, which excepts from
discharge liabilities of a bankrupt created by his fraud,
embezzlement, etc., while acting in any "fiduciary capacity,"
refers to strict trusts,
Page 293 U. S. 329
existing before the wrongs creating the excepted liabilities are
committed, and not to trusts
ex maleficio arising from the
wrongs themselves. P.
293 U. S.
333.
4. A dealer in automobiles purchased a car by means of a loan of
money, to secure which he delivered to the lender his promissory
note for the amount borrowed, a chattel mortgage covering the car,
a "trust receipt" agreeing to hold the car as the property of the
lender for the purpose of storage, and not to sell, pledge, or
otherwise dispose of it without the lender's consent in writing,
and, finally, a bill of sale, absolute in form.
Held:
That the transaction amounted merely to a mortgage for the
security of the loan with a covenant by the mortgagor not to sell
without the mortgagee's consent, and did not constitute the former
a fiduciary for the latter within the meaning of § 17(4) of the
Bankruptcy Act. P.
293 U. S.
334.
273 Ill.App. 628 reversed.
Certiorari to review the affirmance of a judgment recovered by
the Acceptance Company against Davis in an action of trover
counting on the sale of a mortgaged automobile. Davis' special plea
of a discharge in bankruptcy was overruled. The Supreme Court of
Illinois refused leave to appeal.
MR. JUSTICE CARDOZO delivered the opinion of the Court.
A discharge in bankruptcy, pleaded as a defense to a declaration
in trover for the conversion of a chattel, has been ruled by the
courts below not to constitute a bar. The question is whether upon
the evidence and the findings the bar should have been upheld.
Page 293 U. S. 330
The petitioner was a dealer in automobiles, selling them at
retail and maintaining a salesroom where his wares were displayed.
To put himself in funds for the acquisition of the cars, he
obtained loans from the respondent, the Aetna Acceptance Company,
in thirty-five or more transactions. In particular, he borrowed
$1,181.87 on July 10, 1929, procuring title thereby to an Auburn
sedan. This was 90 percent of the cost of the car, the residue of
the price being paid out of his own money. At once upon receipt of
the sedan, he delivered to the respondent a set of four papers: a
promissory note for $1,181.87 to the order of the respondent
payable in sixty days; a chattel mortgage covering the automobile
and securing payment of the note; a trust receipt, acknowledging
receipt of the automobile, and agreeing to hold it as the property
of the respondent for the purpose of storage, and not to sell,
pledge, or otherwise dispose of it except upon consent in writing,
and finally a bill of sale absolute in form.
On August 3, 1929, the automobile, then on exhibit in the
petitioner's showroom, was sold by one of his salesmen, and
thereupon or soon afterwards petitioner received the price. There
is a stipulation that the sale was made without concealment and in
the ordinary course of business, though without written consent.
According to the petitioner's testimony, notice of the transaction
was given the same day to one of the respondent's officers. There
is also testimony tending to support the inference that, on many
other occasions, cars held upon like terms had been sold without
express consent, and the proceeds accounted for thereafter. On this
occasion, the petitioner promised to make prompt remittance of a
check, subject to an offset or credit growing out of other
dealings. He did not keep his promise. Instead, he filed a petition
in bankruptcy on September 13, 1929, obtaining later his discharge
after duly listing the respondent in his schedule of creditors.
Page 293 U. S. 331
The filing of that petition was followed by this action for
conversion. The trial judge, overruling the special plea of a
discharge, gave judgment in favor of the respondent for damages and
costs. The Illinois Appellate Court affirmed. There was a refusal
of leave to appeal to the Supreme Court of the state, permission
being requisite because of the amount involved. The case is here on
certiorari.
The effect of a discharge in bankruptcy is to "release a
bankrupt from all of his provable debts," with excepted liabilities
enumerated in the statute. Bankruptcy Act § 17, 11 U.S.C. § 35.
There is no dispute that the respondent had a provable debt. It
might have proved upon the note, "a fixed liability, as evidenced
by . . . an instrument in writing." Bankruptcy Act § 63a(1), 11
U.S.C. § 103(a)(1). If its grievance was the sale, it might have
proved "upon a contract express or implied," § 63a(4), waiving the
tort and standing upon the implied assumpsit.
Crawford v.
Burke, 195 U. S. 176,
195 U. S. 193;
Tindle v. Birkett, 205 U. S. 183.
What it did is not decisive.
Crawford v. Burke, supra; Tindle
v. Birkett, supra. Enough that a method of proof had been
provided to be used at its election.
The debt being provable, the next inquiry must be whether the
liability back of it is within one of the excepted classes. For
present purposes, only two of the exceptions, § 17(2) and (4), will
have to be considered. The others, by concession, have no relation
to this case. Subdivision 2 excludes from the release "liabilities
for . . . willful and malicious injuries to the person or property
of another." Subdivision 4 excludes the liabilities of a bankrupt
"created by his fraud, embezzlement, misappropriation, or
defalcation while acting as an officer or in any fiduciary
capacity."
1. The respondent contends that the petitioner was liable for a
willful and malicious injury to the property
Page 293 U. S. 332
of another as the result of the sale and conversion of the car
in his possession. There is no doubt that an act of conversion, if
willful and malicious, is an injury to property within the scope of
this exception. Such a case was
McIntyre v. Kavanaugh,
242 U. S. 138,
where the wrong was unexcused and wanton. But a willful and
malicious injury does not follow as of course from every act of
conversion without reference to the circumstances. There may be a
conversion which is innocent or technical, an unauthorized
assumption of dominion without willfulness or malice.
Boyce v.
Brockway, 31 N.Y. 490, 493;
Laverty v. Snethen, 68
N.Y. 522, 527;
Wood v. Fisk, 215 N.Y. 233, 239, 109 N.E.
177;
Stanley v. Gaylord, 1 Cush. 536, 550;
Campau v.
Bemis, 35 Ill.App. 37;
In re De Lauro, 1 F. Supp.
678, 679. There may be an honest but mistaken belief,
engendered by a course of dealing, that powers have been enlarged
or incapacities removed. In these and like cases, what is done is a
tort, but not a willful and malicious one. Turning to the findings
here, we see that willfulness and malice have been unmistakably
excluded.
Cf. In re Dixon, 21 F.2d 565, 566;
In re
Burchfield, 31 F.2d
118, 119. The trial court made a special finding as follows:
"The court finds that the defendant in this case was not actuated
by willful, malicious or criminal intent in disposing of the car in
question." In these circumstances, the respondent is not helped by
the later and general finding that the petitioner was "guilty of
legal conversion of the property, as described in the count in
trover." The special controls the general, just as upon the verdict
of a jury.
Walker v. New Mexico & S.P. R. Co.,
165 U. S. 593,
165 U. S. 598;
Victor American Fuel Co. v. Peccarich, 209 F. 568,
571.
Nothing in the judgment of the Illinois Appellate Court is at
war with the exculpatory finding made upon the trial. The Appellate
Court repeats the words of the
Page 293 U. S. 333
trial judge without hint of disapproval. Its only comment is
that, under the law of Illinois, malice and wrongful intent are not
necessary constituents of a cause of action in trover. This, of
course, is true, but, though true, it is beside the mark. The
discharge will prevail as against a showing of conversion without
aggravated features.
2. The respondent contends that, irrespective of willfulness or
malice, the petitioner is within the exception declared by
subdivision 4, his liability arising, it is said, from his fraud or
misappropriation while acting in a fiduciary capacity. The meaning
of these words has been fixed by judicial construction for very
nearly a century.
Chapman v.
Forsyth, 2 How. 202, decided in 1844, is a decision
to the effect that, within the meaning of a like provision in the
Act of 1841, a factor does not act in a fiduciary capacity; the
statute "speaks of technical trusts, and not those which the law
implies from the contract." 2 How. at p.
43 U. S. 208.
The scope of the exception was to be limited accordingly. Through
the intervening years, that precept has been applied by this Court
in varied situations with unbroken continuity.
Neal v.
Clark, 95 U. S. 704;
Hennequin v. Clews, 111 U. S. 676,
111 U. S. 682;
Noble v. Hammond, 129 U. S. 65,
129 U. S. 68;
Upshur v. Briscoe, 138 U. S. 365;
Crawford v. Burke, supra; Tindle v. Birkett, supra.
Cf. Cronan v. Cotting, 104 Mass. 245;
Clair v.
Colmes, 245 Mass. 281, 139 N.E. 519. It is not enough that, by
the very act of wrongdoing out of which the contested debt arose,
the bankrupt has become chargeable as a trustee
ex
maleficio. He must have been a trustee before the wrong and
without reference thereto. In the words of Blatchford, J.: "The
language would seem to apply only to a debt created by a person who
was already a fiduciary when the debt was created."
Upshur v.
Briscoe, supra at p.
138 U. S. 378.
Was petitioner a trustee in that strict and narrow sense?
Page 293 U. S. 334
We think plainly he was not, though multiplicity of documents
may obscure his relation if the probe is superficial. The only
writing at all suggestive of a trust is the one that is
characterized as a trust receipt. What effect would be given to it
if it stood alone, there is no occasion to consider. It does not
stand alone, but is a member of a group which must be read with a
collective meaning. The note, the chattel mortgage, the trust
receipt, and the bill of sale were made at the same time. We must
view them all together. Clearly the respondent's only interest in
the car was as security for the debt; this is the central fact, the
coordinating element, that unifies the whole transaction. The bill
of sale may seem to make the creditor a purchaser; whatever its
recitals, it is a mortgage in another form.
Whittemore v.
Fisher, 132 Ill. 243, 24 N.E. 636. The trust receipt may state
that the debtor holds the car as the property of the creditor; in
truth, it is his own property, subject to a lien.
Barchard v.
Kohn, 157 Ill. 579, 585, 586, 41 N.E. 902. The substance of
the transaction is this, and nothing more -- that the mortgagor, a
debtor, has bound himself by covenant not to sell the mortgaged
chattel without the mortgagee's approval. The resulting obligation
is not turned into one arising from a trust because the parties to
one of the documents have chosen to speak of it as a trust.
Cf.
In re Butts, 120 F. 966, 971;
Bloomingdale v. Dreher,
31 F.2d 93. The relation would be no different if the duty had been
stated in terms of covenant alone, without descriptive epithet. A
mortgagor in possession before condition broken is not a trustee
for the mortgagee within the meaning of this statute, though he has
charged himself with a duty to keep the security intact.
Cf.
Ten Eyck v. Craig, 62 N.Y. 406, 422.
No question as to a cause of action arising from a conversion of
the proceeds of the sale with willfulness and
Page 293 U. S. 335
malice, as distinguished from one arising from the conversion of
the car itself, is before us on this record.
The judgment is reversed, and the cause remanded for further
proceedings not inconsistent with this opinion.
Reversed.