Schall v. Camors Lemore's Estate Carriere's Estate/Opinion of the Court

The transactions out of which this controversy arose took place in the years 1913 and 1914. At that time Le More and Carriere carried on business as partners in the cities of New Orleans, La., and Mobile, Ala. Afterwards, and in the month of May, 1914, upon an involuntary petition in bankruptcy, the firm and the individual members thereof were adjudged bankrupts in the United States District Court for the Eastern District of Louisiana, New Orleans Division, and the present respondents were elected and qualified as trustees of both the partnership and the individual estates. The present petitioners, constituting the firm of Muller, Schall & Co., filed three proofs of claim, one against the partnership and one against each of the individual partners, all based upon the same transactions, which consisted of the purchase by claimants in the city of New York, through an agent of the bankrupt firm named Trippe, of certain bills of exchange and checks drawn by the firm upon Loudon, Paris, and Antwerp, aggregating about $70,000, all of which were sold to petitioners for full value on the faith of certain fraudulent representations not necessary to be specified, and, at maturity, were presented for payment, dishonored and protested, and notice thereof given to the firm. At the time of these transactions Le More was in Europe and Carriere in New Orleans, and neither of them participated in the particular transactions, although both were congnizant of them and responsible for the false representations. The particular drafts and checks were not signed or indorsed by either partner, and neither profited from their sale except through his interest in the firm. The transactions occurred in the ordinary course of the firm's business, except that they were fraudulent, and the proceeds of the drafts and checks went to the credit of the firm and were used in the conduct of its business. Petitioners' claim against the partnership is based upon the drafts and checks as partnership obligations in contract, and also upon the damages sustained by reason of the fraudulent representations. The claims against the individual estates of the partners in terms demand only damages for the false representations, but are relied upon as showing also, by inference, an individual liability in quasi contact or equitable debt.

The trustees petitioned the District Court that the latter claims should be expunged. After a hearing the referee in bankruptcy, for reasons expressed in an elaborate opinion, ordered that the claims against the individual estates should be 'expunged and disallowed,' and the rights of claimants to participate in dividends in such estates denied. Upon review, the District Court affirmed this order, and, upon appeal, its decree was affirmed by the Circuit Court of Appeals, 250 Fed. 6, 162 C. C. A. 178. A writ of certiorari brings the case here.

No question is made as to whether the referee's order, in wholly expunging the claims against the individual estates and denying to petitioners all participation therein, went too far in view of the provision of section 5f of the Bankruptcy Act July 1, 1898, c. 541, 30 Stat. 544, 548 (Comp. St. § 9589), that—

'Should any surplus remain of the property of any partner     after paying his individual debts, such surplus shall be      added to the partnership assets and be applied to the payment      of the partnership debts.'

If the decision be sustained, petitioners nevertheless will be entitled, upon establishing their claim against the partnership, to participate as partnership creditors in any surplus that may remain of individual assets after payment of individual debts. What was asserted and overruled was a right to double proof, establishing a separate and independent liability on the part of the individual partners that would give to the claimants, in addition to their participation in the partnership assets, a participation in the individual assets on equal terms with other individual creditors and in preference to other partnership creditors.

The first and fundamental question is whether a claim for unliquidated damages, arising out of a pure tort which neither constitutes a breach of an express contract nor results in any unjust enrichment of the tortfeasor that may form the basis of an implied contract, is provable in bankruptcy. This question was passed upon by the referee and by the District Court; it has been most elaborately argued pro and con in this court; its general importance in the administration of the Bankruptcy Act warranted a review of the case by certiorari; and hence it is proper that we dispose of it, without regard to whether a like result might follow, upon the particular facts of the case, from a decision of any subordinate question.

Considering, therefore, the question stated: Among other definitions included in section 1 of the Bankruptcy Act (Comp. St. § 9585) is this:

'(11) 'Debt' shall include any debt, demand, or claim     provable in bankruptcy.'

Sec. 63 (Comp. St. § 9647) runs as follows:

'Debts Which may be Proved.-a Debts of the bankrupt may be     proved and allowed against his estate which are (1) a fixed      liability, as evidenced by a judgment or an instrument in      writing, absolutely owing at the time of the filing of the      petition against him, whether then payable or not, with any      interest thereon which would have been recoverable at that      date or with a rebate of interest upon such as were not then      payable and did not bear interest; *  *  * (4) founded upon an      open account, or upon a contract express or implied. * *  *

'b Unliquidated claims against the bankrupt may, pursuant to     application to the court, be liquidated in such manner as it      shall direct, and may thereafter be proved and allowed      against the estate.'

In Dunbar v. Dunbar, 190 U.S. 340, 350, 23 Sup. Ct. 757, 761 (47 L. Ed. 1084), it was said:

'This paragraph b, however, adds nothing to the class of     debts which might be proved under paragraph a of the same      section. Its purpose is to permit an unliquidated claim     coming within the provisions of section 63a to be liquidated      as the court should direct.'

But in Crawford v. Burke, 195 U.S. 176, 187, 25 Sup. Ct. 9, 49 L. Ed. 147, the question whether the effect of paragraph b was to cause an unliquidated claim, susceptible of liquidation, but not literally embraced by paragraph a, to be provable in bankruptcy, was regarded as still open.

That clause b provides the procedure for liquidating claims provable under clause a if not already liquidated, especially those founded upon an open account or a contract express or implied, is entirely clear, and has been recognized repeatedly in our decisions. F. L. Grant Shoe Co. v. Laird, 212 U.S. 445, 447, 448, 29 Sup. Ct. 332, 53 L. Ed. 591; Central Trust Co. v. Chicago Auditorium, 240 U.S. 581, 592, 36 Sup. Ct. 412, 60 L. Ed. 811, L. R. A. 1917B, 580. Has it the further effect of admitting all unliquidated claims, including those of tortious origin?

Historically, bankruptcy laws, both in England and in this country, have dealt primarily and particularly with the concerns of traders. Our earlier bankruptcy acts invariably have been regarded as excluding from consideration unliquidated claims arising purely ex delicto. Act of April 4, 1800, c. 19, 2 Stat. 19; Dusar v. Murgatroyd, 1 Wash. C. C. 13, 8 Fed. Cas. 140, No. 4,199; Act of August 19, 1841, c. 9, 5 Stat. 440; Doggett v. Emerson, 1 Woodb. & M. 195, 7 Fed. Cas. 821, 826, No. 3,962; Act of March 2, 1867, c. 176, §§ 11 and 19, 14 Stat. 517, 521, 525; Rev. Stat. U.S., §§ 5014, 5067; Black v. McClelland, 3 Fed. Cas. 504, 505, No. 1,462; In Re Schuchardt, 8 Ben. 585, 21 Fed. Cas. 739, 742, No. 12,483; In Re Boston & Fairhaven Iron Works (C. C.) 23 Fed. 880.

Can it be supposed that the present act was intended to depart so widely from the precedents as to include mere tort claims among the provable debts? Its sixty-third section does not so declare in terms, and there is nothing in the history of the act to give ground for such an inference. It was the result of a long period of agitation, participated in by commercial conventions, boards of trade, chambers of commerce, and other commercial bodies. To say nothing of measures proposed in previous Congresses, a bill in substantially the present form was favorably reported by the Committee on the Judiciary of the House of Representatives in the First Session of the Fifty-Fourth Congress. Having then failed of passage, it was submitted again in the Second Session of the Fifty-Fifth Congress as a substitute for a Senate bill; after disagreeing votes of the two houses, it went to conference and as the result of a conference report became law. It is significant that section 63, defining 'Debts Which may be Proved,' remained unchanged from first to last, except for a slight and insignificant variance in clause (5) in the final print; the word 'interests' having been substituted for 'interest.' House Rept. No. 1228, 54th Cong., 1st Sess., p. 39; House Rept. No. 65, 55th Cong., 2d Sess, p. 21; Senate Doc. No. 294, 55th Cong., 2d Sess., p. 22. Evidently the words of the section were carefully chosen; and the express mention of contractual obligations naturally excludes those arising from a mere tort. Since claims founded upon an open account or upon a contract, express or implied, often require to be liquidated, some provision for procedure evidently was called for. Clause b fulfills this function, and would have to receive a strained interpretation in order that it should include claims arising purely ex delicto. Such claims might easily have been mentioned if intended to be included. Upon every consideration we are clear that claims based upon a mere tort are not provable. Where the tortious act constitutes at the same time a breach of contract, a different question may be raised, with which we have no present concern; and where, by means of the tort, the tort-feasor obtains something of value for which an equivalent price ought to be paid, even if the tort as such be forgiven, there may be a provable claim quasi ex contractu. Crawford v. Burke, 195 U.S. 176, 187, 25 Sup. Ct. 9, 49 L. Ed. 147; Tindle v. Birkett, 205 U.S. 183, 186, 27 Sup. Ct. 493, 51 L. Ed. 762; Clarke v. Rogers, 183 Fed. 518, 521, 522, 106 C. C. A. 64, affirmed 228 U.S. 534, 543, 33 Sup. Ct. 587, 57 L. Ed. 953.

Of course, sections 63 and 17 are to be read together. The reference in the latter section to 'provable debts,' defined in the former would be sufficient to show this. See Crawford v. Burke, 195 U.S. 176, 193, 25 Sup. Ct. 9, 49 L. Ed. 147; Tindle v. Birkett, 205 U.S. 183, 186, 27 Sup. Ct. 493, 51 L. Ed. 762; Friend v. Talcott, 228 U.S. 27, 39, 33 Sup. Ct. 505, 57 L. Ed. 718; Clarke v. Rogers, 228 U.S. 534, 548, 33 Sup. Ct. 587, 57 L. Ed. 953. It is petitioners' contention that section 17, as amended in 1903 (Act of February 5, 1903, c. 487, § 5, 32 Stat. 797, 798 [Comp. St. § 9601]), amounts to a legislative construction admitting tort claims to proof. The section as it stood before and the nature of the amendment, are set forth in the margin. We are referred to the committee's report (House Rept. No. 1693, 57th Cong., 1st Sess., pp. 3, 6) as indicating that by the law as it stood, in the opinion of the committee, claims created by fraud, but not reduced to judgment, were discharged; reference having been made to In re Rhutassel (D. C.) 96 Fed. 597, and In re Lewensohn (D. C.) 99 Fed. 73, affirmed 104 Fed. 1006, 44 C. C. A. 309, as contradictory decisions upon the point. But neither the report of the committee nor the language of the amendment gives the least suggestlon of an intent to enlarge the description of provable claims as set forth in section 63. On the contrary, the purpose was to limit more narrowly the effect of a discharge by enlarging the class of provable debts that were to be excepted from it. By the terms of the section, both before and after amendment, the scope of the exception was qualified by the fact that the discharge released the bankrupt only from 'provable debts.' And if the excepting clause as amended might seem to extend to some claims not obterwise provable, its own force must be deemed to be limited by referring to section 63 for the definition of provability. It is not admissible to give to this amendment, confessedly designed to restrict the scope of a discharge in bankruptcy, the effect of enlarging the class of provable claims.

Aside from section 17 or the amendment thereof, it has been held by the federal courts generally that section 63 does not authorize the liquidation and proof of claims arising ex delicto and unaffected by contract express or implied. In re Hirschman (D. C.) 104 Fed. 69, 70, 71; In re Yates (D. C.) 114 Fed. 365, 367; In re Crescent Lumber Co. (D. C.) 154 Fed. 724, 727; In re Southern Steel Co. (D. C.) 183 Fed. 498.

And that the amendment of section 17 does not enlarge the class of provable claims enumerated in section 63 has been recognized in several well-considered decisions of the federal courts which have held, upon satisfactory grounds, that pure tort claims are not provable. In re United Button Co. (D. C.) 140 Fed. 495, 499, et seq., on appeal Brown v. United Button Co., 149 Fed. 48, 52, 53, 79 C. C. A. 70, 8 L. R. A. (N. S.) 961, 9 Ann. Cas. 445; In re New York Tunnel Co., 159 Fed. 688, 690, 86 C. C. A. 556. In Jackson v. Wauchula Mfg. Co., 230 Fed. 409, 411, 144 C. C. A. 551, and again in the present case (250 Fed. 7, 162 C. C. A. 178), the Circuit Court of Appeals for the Fifth Circuit passed the question as unnecessary for the decision.

There is an argument ab inconvenienti, based upon the supposed danger that if tort claims be held not provable they may be preferred by failing debtors without redress under section 60, a and b (30 Stat. 562), amended February 5, 1903 (chapter 487, § 13, 32 Stat. 797, 799), amended June 25, 1910 (chapter 412, § 11, 36 Stat. 838, 842 [Comp. St. § 9644]), held to apply only to provable claims. Richardson v. Shaw, 209 U.S. 365, 381, 28 Sup. Ct. 512, 52 L. Ed. 835, 14 Ann. Cas. 981. See, also, Clarke v. Rogers, 228 U.S. 534, 542, 33 Sup. Ct. 587, 57 L. Ed. 953. We are not much impressed. If there be danger of mischief here, other than such as may be reached under the provisions of section 67e or section 70e (Comp. St. §§ 9651, 9654) respecting fraudulent conveyances and transfers (see Dean v. Davis, 242 U.S. 438, 444, 37 Sup. Ct. 130, 61 L. Ed. 419), the Congress may be trusted to supply the remedy by an appropriate amendment.

It is insisted by petitioners, further, that because the proofs of the individual claims establish the responsibility of each partner for the frauds, they are liable in solido not only as partners, but individually, and that, irrespective of whether the claims are provable in tort for the fraud, they are provable and were properly proved both against the individual partners and against the firm as claims in quasi contract or equitable debt. But as the basis of a liability of this character is the unjust enrichment of the debtor, and as the facts show that no benefit accrued to the individuals as a result of the frauds beyond that which accrued to the firm, the logical result of the argument is that out of one enrichment there may arise three separate and independent indebtednesses. Doubtless it would be conceded that a single satisfaction would discharge all of the claims; but we are dealing with a situation where by reason of insolvency it is not to be presumed that claims will be satisfied in full; and, as already pointed out, the effect of sustaining the right to double proof would be to give petitioners not only a right to share in the partnership assets on equal terms with other partnership creditors, but a participation in the individual assets on equal terms with other individual creditors and in preference to other partnership creditors. Section 5 of the Bankruptcy Act (30 Stat. 547, 548) establishes on a firm basis the respective equities of the individual and firm creditors. Hence the distinction between individual and firm debts is a matter of substance, and must depend upon the essential character of the transactions out of which they arise. And since in this case the tort was done in the course of the partnership business, for the benefit of the firm and without benefit to the partners as individuals, no legal or equitable claim as against the individuals that might be deemed to arise out of it, by waiver of the tort or otherwise, can displace the equities of other creditors, recognized in the Bankruptcy Act, and put petitioners in a position of equality with others who actually were creditors of the individual partners, and of preference over other firm creditors. Reynolds v. New York Trust Co., 188 Fed. 611, 619, 620, 110 C. C. A. 409, 39 L. R. A. (N. S.) 391.

Decree affirmed.