Shattuck v. Haworth

Mr. Justice Gordon delivered the opinion of the court, In the case of Neal v. Clark, 5 Otto 704, it is ruled, “ That the word ‘ fraud,’ as used in the 33d section of the Bankrupt Law of 1867, which provides that, ‘ no debt created by the fraud or embezzlement of the bankrupt, or by defalcation of 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 bad faith or immorality.” Applying this rule to the case in hand, we are obliged to disagree with the court below in overruling the defendant’s plea of a discharge in bankruptcy. There is, so far as we can see, no evidence of an intentional fraud, a design to cheat the plaintiff out of the proceeds of his oil certificates. The head and front of Shat-tuck’s alleged offending is, that he deposited the certificates in bank, to his own instead of Haworth’s credit, and so, as it is said, converted them to his own use. This, however, was’ only a question of how he should have conducted the business with which he was intrusted. The plaintiff alleges that the certificates and their proceeds should have been deposited to his credit; not that there was any contract so to do; not that Haworth directed that it should be so done, but because the character of the agency was such that legally the business should have been so conducted. Admit that [456] this statement of the case is correct, and that Shattuck’s act in depositing the certificates to his own credit, or that of his firm, was a violation of a legal duty, it by no means follows, as the learned judge alleges, that this, of itself, constituted a fraud in fact, for it may have been intended only as a convenient method of disposing of the business he had in hand, or it may have resulted in an ignorance of his duty, and in either of the cases supposed, though it might constitute a legal or constructive fraud, it would not constitute an actual fraud, or fraud in fact, such as comes within the 33d section of the Bankrupt Act. But we cannot see how, legitimately, the question even of constructive fraud is raised from the evidence in this case. There was a loss, to be sure, but it resulted from no evil intent or action of Shattuck, but from the breaking of the bank, and we cannot understand how the plaintiff would have been benefited had the money and certificates stood on the bank’s books in his own name; at best it was but water spilled upon the ground, it could not be gathered again; it was lost, but lost by the fault of neither of the parties contestant. Looking then at the evidence what do we find ? The purchase by Shattuck & Irwin of certain oil certificates for the plaintiff, and which they agreed to hold for him and deliver to him on demand. So far as we can learn these certificates were never passed by endorsement, or otherwise, to Haworth, but remained in the possession and power of Shattuck & Irwin. They were negotiable; made so by the Act of May 15th 1874. Hence the meaning of this transaction was that this company should use this paper as-to them might seem proper, and upon demand made by the plaintiff, deliver to him, not these identical certificates, but certificates of a similar character and amount. If, then, this is the true meaning of the contract, it follows, of course, that if this paper was deposited in bank at all it must go to the credit of Shattuck & Irwin, for if it was indorsed to Haworth, and passed to his credit, that would be a delivery and an end of the contract between the parties. This, however, was not designed. For if Shattuck was a speculator so also was Haworth; he did not buy this, oil for the purposes of trade, but to sell, and, with its proceeds, buy again as the market might rise and fall; it was in this' way he intended to make money upon his investment. But in order to do this he must have some person who was engaged in the business to handle his capital for him; for this reason he did not take a transfer of the certificates sold to him by Shattuck & Irwin, but allowed them to remain in their hands. In pursuance of this same design, he writes to the defendant under date of April 5th, * * * “ Buy me two thousand; use your own judgment. * * * Keep me posted and buy one or two when you think best, and no reflections.” So on the 16th of the same month: “ Every body seems to think [457] its going lower, so we will work on small margins; sell then; when it drops 5c., pick up.” Again, on the 8th of June : u I think it a good time to get options. * * * You keep watch of them, and when you think she has struck the bottom, get me some.” Also, June 14th : “Buy me from three to five thousand options, buyers, this year, any place from $2 to $2.10. * * * if spot should run up to $2, sell against them, or, if it goes to 95, if you think it is going back, sell at 95; use your own judgment; but think it is a good time to take some options, unless there is something new struck at Bullion, then it would be better to sell spot. If you get me some options, and spot should run up so you could cover even the 95, do the best you can, just as if you was doing for yourself, and no reflections.” Again, June 16th, some five days before the Exchange Bank closed, he writes : “ I wish you would loan out whatever certificates you may have of mine and also this one I send you. I am afraid of fire. Loan them subject to your call; if spot runs up a little I will sell them.” From the above it is manifest that the power of the defendant was most ample to sell, buy and loan ; all of which he did. The plaintiff’s capital, upon which this business was founded, was three thousand barrel certificates of the United Pipe-Line, mentioned in the receipts of Shattuck & Irwin of February 25th and 27th 1877. But in order to obey the instructions above written, if the defendant were to buy options, to sell in orders to cover, or meet, these options, to loan subject to his own call, he must have the absolute control of the certificates and of the money realized from them. For the plaintiff to say to Shattuck, sell, buy, loan on your own call and on your own judgment, and at the same time to expect that the certificates and money, hypothecated for the loans, should go into bank to the credit of himself, the plaintiff, involves ideas so utterly inconsistent with the ordinary rules governing such business as to be incredible. As we have said before, had the original certificates been endorsed over to the plaintiff, that would have been an end of Shat-tuck’s power, and it would have been vain to have told him to sell that over which he had no control. Just so with the loans, the character of which Haworth seems to have well understood, for he says : “ I understood if the broker loaned certificates and took the money at the market price, by tendering this money, he could redeem the certificates,” and in the same connection he says Shattuck told him he had loaned his certificates at $1.58. Now, if the defendant was not to retain this money in his own name, to have it in such a shape that he could draw on it when the certificates were to be redeemed, why direct him to loan subject to his own call? His call without the money to give it force would certainly not be an effectual one. And this matter the plaintiff understood just as well as any one else. He says, in answer to the question: “ What do [458] you suppose he did with the money when he loaned your certificates?” “I suppose he took care of it; probably put it in the bank; never asked him anything; he never told me he put it into the bank to my credit; I told him to be careful of my certificates and not lose them or their proceeds.” And again; to the question : “ When he had money to pay, how did you suppose he got that money?” “I supposed when he would sell he would have some money again, and when he would buy again he would buy with that money.” Nothing more than this is necessary; it is an epitome of the whole transaction. Shattuck was to buy and sell, use the property and money, as in his own transactions, and account to Ha-worth for the final proceeds. His orders from his principal were : “ Do the best you can, just as if you were doing for yourself, and no reflections." So it turns out that so far from Shattuck’-s having committed an actual, intentional fraud, such as would deprive him of the benefit of his certificate in bankruptcy, he has not even committed a constructive one. When the bank closed and shut out both him and the plaintiff, he was just where he had previously been ; in the full discharge of the duties imposed upon him by his contract with the plaintiff. Judgment reversed, and a new venire ordered.