Morse & Rogers v. C. & H. Kaufman

Whittle, L, delivered the opinion of the court. This case involves the construction of paragraphs 2 and 4 of section 11 of the Bankruptcy Act of 1898. It appears that between April 1 to May 12, 1897, defendants in error, retail shoe dealers in the city of Richmond, purchased a bill of goods from plaintiffs in error, a corporation doing a wholesale business in Hew York; that on May 18, 1897, defendants in error made an assignment of all their assets for the benefit of creditors; and that on May 4, 1899, the individual members and the firm filed petitions in bankruptcy in the District Oourt of the United States for the Eastern District cf Yirginia, and were discharged September 22, 1899. Subsequently, plaintiffs in error instituted an action at law against defendants in error in the Circuit Court of the city of Richmond upon the account referred to. The declaration contained the common counts in assumpsit, and a special count, that the goods were procured by the false pretences, false representations, and fraud of the defendants. There was a demurrer to the declaration (presumably for the misjoinder of counts on contract and in tort), which was overruled; and also a plea of non-assumpsit, a plea denying the [224] fraud, and a plea setting up the discharge in bankruptcy. At the trial, after the evidence for the plaintiff had been introduced, the defendant demurred to the evidence, in which the plaintiff joined. The jury having returned a verdict in the usual form, the court sustained the demurrer to the evidence, and rendered judgment for the defendants. It was insisted, 'on behalf of the plaintiffs in error, that as the jury would have been warranted, by the circumstances of the case, in finding that it was not the purpose of the defendants to pay for the goods when purchased, and that the debt was created in fraud, it was not discharged by the bankruptcy of the defendants, and that the trial court should, therefore, have overruled the demurrer to the evidence, and given judgment for the plaintiffs. If the correctness of the foregoing premises be admitted, the conclusion contended for would have followed under section 33 of the Act of 1861; for that section, in terms, declares that no debt created by the fraud of the bankrupt shall be discharged. But the provisions of the Act of 1898 are essentially different from those of the Act of 1861 in respect to debts which are not to be affected by a discharge in bankruptcy. The subdivisions of section 11 of the Act of 1898, bearing upon the question under consideration, are as follows: “Debts not affected by a discharge. A discharge in bankruptcy shall release a bankrupt from all of his provable debts, except such as: . . . “ (2), 'are judgments in actions for frauds, or obtaining property by false pretences or false representations, or for willful and malicious injuries to the person or property of another; ... or “ (4), were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity.” It will be observed that the first part of section 33 of the [225] Act of 1867, in. relation to debts created 'by fraud, is carried into paragraph 2 of section 17, supra, with the qualification that there must be a judgment in actions for frauds; while the latter part of section 33, in respect to fiduciary debts, is incorporated in paragraph 4. Plaintiffs’ claim is not within the exception of paragraph 2, because no judgment had been obtained upon it in an action for fraud. The manner in which the demand is evidenced, as-well as its original nature, is an essential ingredient in determining whether or not the particular debt will be barred by a. discharge. Subdivision 2 does not except from the operation of a discharge claims created by fraud, or by obtaining property by false statements, or by willful and malicious injury to the person or property of another, but judgments recovered in actions for fraud on claims arising out of those conditions. By the plain language of the paragraph, the demand will be barred by a discharge in bankruptcy, unless reduced to judgment, and unless the judgment, read in connection with the pleadings in the case, shows that it was recovered in an action for fraud, or obtaining property by false pretences or false representations, or willful and malicious injuries to the person or property of another. This construction was placed upon the enactment by the District Court of the United States for the Northern District of Iowa, in a well-considered opinion. In re Rhutassel, 2 Am. B. R. 697 (96 Fed. 597). In that case the wisdom of the limitation is commended as a protection to bankrupts ag’ainst constant worry and pressure from creditors claiming that debts due them had been created by false statements with respect to the financial condition of the debtor. But whatever may have been the motive for the enactment, the language is unambiguous, and cannot be enlarged and ex [226] tended by judicial interpretation to embrace subjects beyond its purview. See also In re Lewensohn, 3 Am. B. R. 596, 99 Fed. 73; Burnham v. Piddock, 5 Am. B. R. 42; Dry Goods Co. v. Hudson, 6 Am. B. R. 657. It would seem to be equally clear that the demand of plaintiffs in error is not within the exception of subdivision 4 of section 17. It is not pretended that the claim was created by the bankrupt’s “fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity.” The contention that “fraud” should be segregated from the qualifying, language, “while acting as an officer or in any fiduciary capacity,” is without merit. Such interpretation would not only destroy the grammatical structure of the sentence, and contravene its plain meaning, but would likewise be inconsistent with paragraph 2 of the same section, that a creditor should have obtained a judgment in an action for fraud, in order to •override a discharge in bankruptcy. See In re Lewensohn, supra; Bracken v. Milner, 5 Amer. B. R. 23, 104 Fed. 522; In re Bullis, 7 Am. B. R. 238, 249. The learned editor of the American Bankruptcy Reports, who is also the author of Collier on Bankruptcy, has appended the following note to the report of the case In re Rhutassel, supra: “It would seem from the above opinion, and it is undoubtedly true, that the debts created by fraud, mentioned in paragraph 4 of section 17 of the Bankruptcy Act, are only debts of a bankrupt who was ¡an officer, or who w;as acting in a fiduciary capacity. The word ‘fraud,’ as used in that subdivision, like .the words "‘embezzlement and defalcation,’ is limited to officers and fiduciaries.” It is unnecessary to discuss this case in any other aspect. "What has been said is predicated upon the theory, most favorable to the plaintiffs in error, that the jury would have been warranted, under the circumstances of the case, in inferring that [227] the debt was fraudulent in its inception. The demand asserted was barred by the discharge in bankruptcy of defendants in error, and there was no error in the proceedings complained of detrimental to plaintiffs in error. The judgment of the Circuit Court must be affirmed. Affirmed.