1. The word "fraud," as used in the thirty-third section of the
bankrupt law of 1867, which provides that
"No debt created by the fraud or embezzlement of the bankrupt,
or by defalcation as a public officer, or while acting in a
fiduciary capacity, shall be discharged under this act,"
means positive fraud or fraud in fact involving moral turpitude
or intentional wrong, and not implied fraud or fraud in law, which
may exist without the imputation of bad faith or immorality.
2. Accordingly, where a party paid an executor for a portion of
the assets of an estate which he purchased at a discount, but
without any actual fraud, and where he was, with the executor, who
failed to account therefor, held liable for a devastavit,
held that his subsequent discharge in bankruptcy was a
complete defense to an action against him for such devastavit.
The facts out of which this case arises, so far as it is
material to state them, are substantially these:
William Fitzgerald, Jr., of the State of Virginia, by his will,
which was admitted to probate in 1857, directed his executor to
sell his entire landed estate and distribute the proceeds among
those entitled to them according to the provisions of the will. The
lands were sold as directed in the same year, the purchasers giving
bonds, with security, payable to the executor as such. Two of these
bonds, each dated Dec. 1, 1857 -- one for $1,000, due Nov. 18,
1859, with interest from Nov. 18, 1858, and the other for $2,293,
due, with like interest, Nov. 18, 1860 -- were sold and assigned by
the executor, in June, 1859, to Griffith D. Neal, the plaintiff in
error, for the sum of $2,780, who sold them to Richard Jones for
$3,056. The latter collected them. When this transaction occurred,
the executor, who was a brother of the testator, was a man of large
property and undoubted solvency. Neal made no inquiry as to the
condition of the estate, but the executor gave as a reason for
selling the bonds that the estate was in debt to him for moneys
advanced.
In 1860, a suit was instituted against the executor in the
Circuit Court for Pittsylvania County, Virginia, to obtain a
settlement of his accounts and a distribution of the estate. In
1861,
Page 95 U. S. 705
in obedience to an order of court, he gave a new bond, with
Clark and Holland as sureties, and in 1868 they were made
defendants, and a decree was asked against them for whatever sum
should be ascertained to be due from the executor. In 1869 -- ten
years after Neal had purchased the bonds, about seven years after
the executor had become insolvent and removed from the state, and
without any question having been previously raised as to Neal's
liability -- Clark and Holland exhibited their bill in the same
court against the executor, the distributees, Neal, Jones, and
others. They allege that the executor, in disposing of the bonds,
committed a
devastavit of the estate, and that, in view of
the circumstances under which he received them, Neal became a
participant in that
devastavit, and is liable to the
distributees for the amount of the bonds. They ask that as sureties
of the executor, they be substituted to the rights which the
distributees have against Neal by reason of his alleged unlawful
appropriation of the testator's assets. In the event of any
judgment against them, they pray that it be rendered to be first
satisfied by the purchaser of the notes.
In the District Court of the United States for the District of
Virginia, Neal was duly adjudged a bankrupt, and received his
certificate, dated Feb. 11, 1869, showing his discharge from all
debts and claims which, by the bankrupt law, were provable against
his estate, and which existed on the 25th of January, 1868, "except
such debts as were exempted from the operation of a discharge in
bankruptcy."
Neal pleaded his discharge in bar of the action against him, but
the Circuit Court for Pittsylvania County gave judgment against him
and Jones for the amount of the two notes purchased from the
executor. That judgment, so far as it held Neal liable, was
affirmed in the Supreme Court of Appeals of Virginia, but, so far
as it related to Jones, was reversed. Thereupon Neal brought the
case here.
Page 95 U. S. 706
MR. JUSTICE HARLAN delivered the opinion of the Court.
This case involves the meaning of the word "fraud," as used in
the thirty-third section of the bankrupt law of 1867. That section
provides that
"No debt created by the fraud or embezzlement of the bankrupt,
or by defalcation as a public officer, or while acting in a
fiduciary capacity, shall be discharged under this act."
In the very able opinion of the Court of Appeals, it is said
that
"All the cases agree in the principle that a purchaser from an
executor of personal property of the testator for valuable
consideration need not inquire, and has no means of inquiry,
whether the condition of the testator's estate requires a sale of
the property, and is not bound to see to the application of the
purchase money, but may fairly presume that the sale is rightly
made, and that the purchase money will be properly applied, and
that such a purchaser can only be made liable on the ground of a
fraudulent participation with the executor in the commission of a
devastavit of his testator's estate. In other words, that the
purchaser must be guilty of a fraud in that respect."
"The only diversity in the cases," continues that court,
"seems to have arisen from the different views of the judges as
to the nature of the fraud within the meaning of the principle
--
Page 95 U. S. 707
that is, whether there must be actual fraud, or whether it is
enough that there is implied or constructive fraud, or gross
negligence, which may be equivalent to fraud."
Upon an elaborate review of the authorities, mainly its own
previous decisions, and upon consideration of all the evidence,
that court reached these conclusions:
1st, that the executor had committed a devastavit by selling the
bonds at a discount, since the needs of the estate did not require
it and since they had not become his property by reason of any
advances made by him or otherwise.
2d, that Neal was not chargeable with actual fraud, but, in view
of the circumstances attending his purchase, he had committed
constructive fraud, which implicated him in the
devastavit.
3d, that "fraud," in the thirty-third section of the bankrupt
law of 1867, included both constructive and actual fraud, and
consequently that Neal, although guilty of constructive fraud only,
was equally liable with the executor who had wasted the estate and
failed to account for the amount of the bonds assigned to Neal.
Whether Neal, according to the previous decisions of the
Virginia courts, was guilty of constructive fraud and upon that
ground became liable to the distributees as a participant in the
devastavit of the estate it is not within our province upon this
appeal to inquire. Our jurisdiction extends to the reexamination of
the final decree, only so far as it involves the construction of
the bankrupt law and the denial, by the state court, of rights
claimed by the bankrupt under that law.
We concur in the view expressed by the state court that Neal was
not guilty of actual fraud. The evidence does not show that he
entertained any purpose himself to commit a fraud or to aid the
executor in committing one. The fair inference from all the
testimony is that he purchased the bonds in good faith, not
doubting the power or the right of the executor to sell and having
no reason to believe that he meditated any wrong to those
interested in the estate which he was administering. Indeed, it
appears from the opinion of the state court, that, a few months
prior to the purchase, a commissioner had reported a settlement of
the executor's accounts showing a
Page 95 U. S. 708
balance due the latter of $765.41. That settlement was of
record.
But we do not concur in the construction which the state court
gave to the thirty-third section of the bankrupt law of 1867. In
reaching this conclusion, we have not been assisted by any express
decisions upon the question before us.
The Bankrupt Act of 1841 exempted from discharge debts
"created in consequence of a defalcation as a public officer, or
as executor, administrator, guardian, or trustee, or while acting
in any fiduciary capacity."
The question arose under that act whether a factor who had sold
the property of his principal and had failed to pay over the
proceeds was a fiduciary debtor within the meaning of that clause.
This Court, in
Chapman v.
Forsyth, 2 How. 202, said:
"If the act embrace such a debt, it will be difficult to limit
its application. It must include all debts arising from agencies
and, indeed, all cases where the law implies an obligation from the
trust reposed in the debtor. Such a construction would have left
but few debts on which the law could operate. In almost all the
commercial transactions of the country, confidence is reposed in
the punctuality and integrity of the debtor, and a violation of
these is, in a commercial sense, a disregard of a trust. But this
is not the relation spoken of in the first section of the act."
"The cases enumerated, 'the defalcation of a public officer,'
'executor,' 'administrator,' 'guardian,' or 'trustee,' are not
cases of implied, but special, trusts, and 'the other fiduciary
capacity' mentioned must mean the same class of trusts. The act
speaks of technical trusts, and not those which the law implies
from the contract. A factor is not, therefore, within the act."
A like process of reasoning may be properly employed in
construing the corresponding section of the act of 1867. It is a
familiar rule in the interpretation of written instruments and
statutes that "a passage will be best interpreted by reference to
that which precedes and follows it." So also, "the meaning of a
word may be ascertained by reference to the meaning of words
associated with it." In Broom's Legal Maxims, p. 450, it is
said:
"It is a rule laid down by Lord Bacon that
copulatio
verborum indicat acceptationem in eodem sensu -- the coupling
of words together shows that they are to be understood
Page 95 U. S. 709
in the same sense. And where the meaning of any particular word
is doubtful or obscure, . . . the intention of the party who has
made use of it may frequently be ascertained and carried unto
effect by looking at the adjoining words."
The same author says (p. 455):
"In the construction of statutes, likewise, the rule
noscitur a sociis is very frequently applied, the meaning
of a word and consequently the intention of the legislature being
ascertained by reference to the context and by considering whether
the word in question and the surrounding words are in fact
ejusdem generis and referable to the same subject
matter."
Applying these rules to this case, we remark that in the section
of the law of 1867 which sets forth the classes of debts which are
exempted from the operation of a discharge in bankruptcy, debts
created by "fraud" are associated directly with debts created by
"embezzlement." Such association justifies, if it does not
imperatively require, the conclusion that the "fraud" referred to
in that section means positive fraud, or fraud in fact, involving
moral turpitude or intentional wrong, as does embezzlement, and not
implied fraud or fraud in law, which may exist without the
imputation of bad faith or immorality. Such a construction of the
statute is consonant with equity and consistent with the object and
intention of Congress in enacting a general law by which the honest
citizen may be relieved from the burden of hopeless insolvency. A
different construction would be inconsistent with the liberal
spirit which pervades the entire bankrupt system.
It results from what has been said that the debt or claim
asserted against Neal was not "created by the fraud . . . of the
bankrupt" within the meaning of the thirty-third section of the law
of 1867. His discharge in bankruptcy affords him complete
protection. The court erred in adjudging otherwise.
The judgment of the Supreme Court of Appeals of Virginia will
therefore, be reversed with directions to reverse the decree
rendered against Neal in the Circuit Court for Pittsylvania County
and to remand the case to the last-named court with an order
requiring it to dismiss the original and cross-bill of Clark and
Holland against Neal with costs, and for other proper action in
conformity to this opinion, and it is
So ordered.
