Bullis v. O'Beirne/Opinion of the Court

This action involves the construction of § 17 of the bankrupt act of 1898 (30 Stat. at L. 550, chap. 541, U.S.C.omp. Stat. 1901, p. 3428), as it stood prior to the amendment of February 5, 1903 [32 Stat. at L. 797, chap. 487]. So far as it pertains to this case, this section is as follows:

'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 pretenses or false representations, or for wilful and malicious injuries to the person or property of another,. . . (4) were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in a fiduciary capacity.'

In Crawford v. Burke, decided at this term, 195 U.S. 176, ante, p. 9, 25 Sup. Ct. Rep. 9, this court held that subd. 4 of this act was limited to frauds, embezzlements, misappropriations, or defalcations while acting in an official character, or in a fiduciary capacity, and did not apply to other debts or obligations fraudulently created. The question, therefore, presented in this case, is, Was the judgment against Bullis and Barse, as finally reached in the New York courts, one in 'an action for fraud' within the meaning of the act? It is distinctly charged in the complaint, and found in the judgment, that the agreement was fraudulently made; that Bullis and Barse falsely and fraudulently pretended that the large tract of timber land which they were to put under the mortgage for the security of the bondholders was free from all encumbrances; that it was near the line of the projected railroads, and covered by a large quantity of merchantable timber; when, in fact, as Bullis and Barse well knew, the 30,000 acres of timber land actually mortgaged was not free from encumbrances, but was subject to $159,000 and interest of prior encumbrances, and that it was waste land from which the timber had been removed; that the lands were not adjacent to the lines of the railroads; that the timber was not accessible, and that a large portion of the land to be conveyed was not owned by either of the defendants; that all of these facts were well known to Bullis and Barse when they made the false and fraudulent representations aforesaid, and were relied upon to the prejudice of the bondholders. The New York courts found that the agents of the New York brokers attempting to negotiate the bonds, when they went to see the lands, were shown those not included in the mortgage, and which were falsely and fraudulently pointed out as being the intended lands. Under these allegations and proofs the New York courts have seen fit to render a money judgment, not for specific performance, as upon contract, but for the frauds charged against the defendants.

As was said of the action and the relief granted, in the opinion of the appellate division (68 App. Div. 508, 73 N. Y. Supp. 1047, affirmed in 171 N. Y. 689, 64 N. E. 1119): 'The action for specific performance, in the strictest sense thereof, was founded upon the actual, positive fraud of the defendants Bullis and Barse. They had in fact, in pretended compliance with their agreements, conveyed to the designated trustee 30,000 acres of land. The plaintiff alleged that the defendants fraudulently included in this conveyance lands not owned by the grantors, and the bulk of the tract was not timber land, was encumbered, and was not adjacent to the railroad lines described. . . . The gist, the intrinsic ingredient of the action, was consequently the fraudulent scheme-the false representations-of these defendants.'

Considerable argument was made by the learned counsel for the plaintiff in error as to the essential allegations of a pleading where relief for fraud is sought. It is said that there is no averment in the complaint in this case of knowledge or intent to deceive upon the part of the plaintiff in error; but it is averred that the representations were falsely and fraudulently made, with the intent to further the pecuniary interest of the plaintiff in error, and were known to be false when made. Such allegations have frequently been held the equivalent of averments of specific intent. Indeed, it is difficult to perceive how a statement falsely and fraudulently made can be otherwise than intended to deceive. A statement fraudulently made, with knowledge of its falsity, must necessarily be intended to deceive. Bank of Montreal v. Thayer, 2 McCrary, 1, 7 Fed. 625, and cases cited in the opinion. It is argued that Bullis, one of the defendants, regarding the case as one for fraud, demanded a jury trial, which was denied him, and that this shows the character of the case. But, as appears in the opinion of the New York court of appeals (158 N. Y. 466-468, 53 N. E. 211), when the demand for a jury trial was made the defendants had not set up their inability to perform the contract, but had taken issue upon the allegations of fraud and misrepresentation. In this attitude of the case it was held that a jury trial was properly denied.

But it is unnecessary to further consider questions of practice peculiar to the jurisdiction where the judgment was rendered. Whether the complaint sufficiently charged fraud to warrant the judgment given is not a Federal question. Forsyth v. Vehmeyer, 177 U.S. 177, 180, 44 L. ed. 723, 725, 20 Sup. Ct. Rep. 623. The question for this court is whether the judgment rendered by the New York court is in an action for fraud. If so, it is excepted from the effect of a discharge in bankruptcy.

We think an inspection of the record as well as the interpretation put upon the pleadings and judgment by the courts of New York in the various trials and proceedings had show that the relief was granted upon the ground of fraud. When the case was first before the New York court of appeals, Judge Gray, delivering the opinion of that court, said:

'The theory of the complaint and the tendency of the proof upon the trial were that a fraudulent scheme was devised by Bullis and Barse, having for its object the consolidation of certain railroad properties, owned and controlled by them, and the issuance of a large number of bonds by the consolidated company, which should be placed with the public at par through the cooperation of Newcombe & Company, whose assistance to the scheme, in the negotiation of the bonds, should be gained by representations and agreements of such a nature, as to the timber tracts to be furnished as additional security under the mortgage, that the bonds would appear to be attractive and salable securities. We are not called upon, at the present time, to pass upon the liability of Bullis and Barse for the parts they have played in the development and consummation of this scheme, inasmuch as they have gone back to a new trial; but, on the face of this record, that the evidence amply warranted the findings by the trial court is not to be denied; and it would have justified the granting of relief to the plaintiff had the case been in a shape to make that possible.' 151 N. Y. 372-384, 45 N. E. 873-876.

When the case was sent back for trial, after it had been held that it might be retained for the assessment of damages, in its conclusions of law the supreme court at special term decided that it 'had jurisdiction to proceed in the cause by reason of the fraud practised by the defendants Bullis and Barse in the premises.' This manner of exercising jurisdiction by the lower court was expressly affirmed by the supreme court at general term (2 App. Div. 545, 38 N. Y. Supp. 4), and finally by the court of appeals of New York (158 N. Y. 466, 53 N. E. 211). In the latter case the court said: 'The theory upon which the decision proceeded was that they [Bullis and Barse] devised a fraudulent scheme for the consolidation of certain railroads owned and controlled by them, issued bonds upon false representations as to the timber lands to be furnished as added security under the mortgage to make the bonds secure and salable; that upon those facts the court would have been justified in granting relief to the plaintiff against them, and that the corporation, having been the instrumentality employed by them, was also liable. Thus it was that the liability of the appellants was involved in the decision. We adhere to the principle of our decision upon that appeal.'

It is thus apparent that the courts of New York, in conformity to their own practice, have rendered a judgment against Bullis and Barse by reason of the fraudulent scheme found, and because of the fraudulent representations made to and relied upon by the parties to whom the relief was granted. The Federal question is, Is such a judgment entitled to be discharged in bankruptcy? Under the bankrupt law of 1867 it was provided: 'No debt created by the fraud or embezzlement of the bankrupt, or by his defalcation as a public officer, or while acting in any fiduciary character, shall be discharged by proceedings in bankruptcy; but the debt may be proved, and the dividend thereon shall be a payment on account of such debt.' Rev. Stat. § 5117.

In the law of 1898, for reasons which have been the subject of much diversity of view in the courts, but which were sufficient in the judgment of Congress in passing the act to necessitate a change, it is provided, instead of exempting debts created by fraud from the operation of the discharge, that only judgments in actions for fraud shall be exempted. Under this act (as it was before the passage of the act of February 5, 1903) claims grounded in fraud will not be exempted unless reduced to judgment; but the essential character of the fraud which is here meant has not been changed. By the decisions of this court, which are collected in the opinion delivered in Forsyth v. Vehmeyer, 177 U.S. 177, 180, 44 L. ed. 723, 725, 20 Sup. Ct. Rep. 623, it was held, reviewing the former cases in this court, that, under the act of 1867, the fraud referred to meant positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, and not implied fraud, which may exist without an imputation of bad faith. 'Such a construction of the statute,' it was said in Neal v. Clark, 95 U.S. 704, 709, 24 L. ed. 586, 587, '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.' This language, we think, equally applies to the present case. The difference is that, under the act of 1898, claims for fraud prosecuted to judgment will not be exempted. The reason for this change, as suggested by Mr. Justice Brown, in delivering the opinion in Crawford v. Burke, may be that Congress did not intend to offer any inducement to change unliquidated claims into actions for fraud, and therefore limited the exception from the operation of the discharge to such cases only as had been litigated and reduced to actual judgment. When such is the case we think a correct interpretation of the law does not require a close examination into the form of the action to determine whether technically it is one ex delicto or otherwise, but the real question is, Was the relief granted in the judgment based upon actual, as distinguished from constructive, fraud of the bankrupt? If the judgment is thus founded, whatever the form of the action, it is the intent and purpose of the law that the bankrupt shall not be discharged from it, but shall still rest under its obligation, so far as the bankrupt law is concerned.

As thus interpreted, we think there can be no question that the judgment rendered in this case was based upon the fraud of Bullis and Barse. The facts charged and found showed false and fraudulent representations as to the character of the property which was to be the security of those who should purchase the bonds, and resulted in depriving them wrongfully of valuable rights. These findings were held sufficient in the state tribunals to warrant relief on the ground of fraud, and the judgment in this case is, in our opinion, in an action for fraud within the meaning of the bankrupt law.

The judgment of the Supreme Court of New York is, therefore, affirmed.