Noble v. Hammond/Opinion of the Court

The case presented upon the record, as found by the jury, is that of a produce dealer who, having been requested by parties to collect money for them as an accommodation, and without compensation, and to keep it until they called for it, proceeded to make such collection, and, without actual fraud or fraudulent intent, deposited the proceeds to his own credit with his own funds; and who before he paid it over was, by an unexpected revulsion, forced into bankruptcy, and made a composition with his creditors. The question involved is whether the debt thus incurred was within the exception provided for in section 5117 Rev. St., which is as follows: '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.' The judge on the trial charged the jury that the money under such circumstances was received in a fiduciary character, and that the plaintiffs must recover. The supreme court of Vermont affirmed the judgment of that court, on the ground that, though the above charge was technically erroneous, it was harmless, because the act of the defendant, in mingling the money with his own and using it, was, in the face of the plaintiffs' instruction to keep it until the called for it, a wrongful and fraudulent act, a betrayal by the defendant of the trust reposed in him, and therefore a fraud which created a debt that was not discharged by the defendant's composition with his creditors under the provisions of the bankrupt law. The effect to be given to the phrases, 'while acting in a fiduciary character,' and 'created by the fraud of the bankrupt,' has been considered and fully settled by this court in the following cases: Chapman v. Forsyth, 2 How 202; Neal v. Clark, 95 U.S. 704; Wolf v. Stix, 99 U.S. 1; Hennequin v. Clews, 111 U.S. 676, 4 Sup. Ct. Rep. 576; Strang v. Bradner, 114 U.S. 555, 5 Sup. Ct. Rep. 1038; and Palmer v. Hussey, 119 U.S. 96, 7 Sup. Ct. Rep. 158. The class of debts held by the decisions in those cases to be excepted from the operation of bankrupt proceedings has been stated and illustrated with a clearness and fullness which leaves but little opening for any controversy with regard to the application of the clause under consideration to particular cases. Under the bankrupt act of 1841, which excepted from discharge debts of the bankrupt, creatated in consequence of a defalcation as a public officer, or as executor, administrator, guardian, or trustee, or while acting in any other fiduciary capacity, this court, in Chapman v. Forsyth, held that the case enumerated in the act are cases not of implied but special trusts; that the phrase, 'in any other fiduciary capacity,' referred, not to those trusts which the law implies from the contract, and which form an element in every agency, and in nearly all the commercial transactions in the country, but to technical trusts; and hence that a factor who had sold the property of his principal, and had failed to pay over to him the proceeds, did not owe to him a debt created in a fiduciary capacity within the meaning of the act. That decision is stated by Mr. Justice BRADLEY, in the opinion in Hennequin v. Clews, to have been 'not only followed, but approved, by the highest courts of several of the states.' Under section 5117, which is substantially a re-enactment of the provision of the act of 1841 in this regard, with the single additional provision that 'no debt created by fraud shall be discharged,' etc., this court, on the line of the same reasoning, has construed the word 'fraud,' as used in that section, to mean positive fraud, or fraud in fact,-involving moral turpitude or intentional wrong, as does embezzlement, and not implied fraud, or fraud in law; and hence it does not apply to a debt created by the purchase in good faith, from an executor, of bonds belonging to his decedent's estate at a discount, although such an act was held to be a constructive fraud. Neal v. Clark, supra. Nor does it include such fraud as the law implies from the purchase of property from a debtor with intent thereby to hinder and delay creditors in the collection of their debts. Wolf v. Stix, supra. Nor does it refer to a debt arising from the conversion by a party to his own use of bonds held by him merely as a collateral security for the payment of a debt, or the performance of a duty, and which he fails to restore after the payment of the debt or performance of the duty to the person who intrusted them to his keeping. Hennequin v. Clews, supra. In all these cases the defendant was held to be released by the subsequent discharge in bankruptcy.

The decisions of the state courts in a great number and variety of cases, as shown by the citations in the brief of counsel for plaintiff in error, are in accord with the construction, by this court, of these clauses of the section in question, and have applied it to cases of agents, factors, commission merchants, and bailees who have failed to account for proceeds of the sale of property committed to them for that purpose, or moneys received upon collections intrusted to them. The finding of the jury that the agreement of the plaintiff in error was to collect the money and keep it until the defendants in error called for it cannot be taken to imply an obligation to keep and deliver to them the identical bills or coins. Even if the agreement between the parties might be construed as creating a trust in some sense, it was clearly not such a trust as comes within the provisions of the bankrupt act. Nor can the subsequent mingling by the plaintiff in error of the money collected with his own constitute the actual, positive fraud contemplated by that act, but only such an implied fraud as is involved in most or all cases of conversion of property or of breach of contract. The judgment of the supreme court of Vermont is in conflict with the principles laid down by the decisions of this court, as well as the general drift of those of the several state courts, and is therefore reversed, and the case is remanded to the court below, with an instruction to grant a new trial, and to take such further proceedings as may not be inconsistent with this opinion.