104 F. 522 | U.S. Circuit Court for the District of Western Missouri | 1900
A jury having been waived by the parties, the above-entitled cases were submitted to the court on the evidence, arguments, and briefs of counsel. As they involve practically the same questions of fact and law, they will be considered in one opinion.,
The plaintiffs for many years past were resident citizens of the state of Ohio. They had known the defendant from his boyhood, and had the utmost confidence in his personal integrity and business capacity. Shortly after the Civil War he located in the city of Springfield, Mo., and plaintiffs, who were partners in the mercantile business, and J. P. Bracken in his individual capacity, made arrangements with the defendant to loan money for them in southwest Missouri, secured by mortgages or deeds of Dust on real estate. The defendant was to loan at given rates of interest, and report the description and quality of the land tendered as security to the plaintiffs for their approval. The notes taken for loans were to be executed to the plaintiffs, or whichever of them was making the loan, and the notes and deeds of trust were to be sent by defendant to them. The defendant was to look to the borrowers alone for Ms commission for services. He was to collect the annual interest for the plaintiffs, and look after the securities and the colleclions, and remit promptly to the plaintiffs all collections. Beginning back in the 80’s plaintiffs sent him money under this arrangement, which they continued to do until some time early in the 90⅛. In some of the deeds of trust taken by the defendant his name was inserted as trustee, and in some of the loans made by him for plaintiffs other persons were made trustees in the deeds of trust. Beginning perhaps as far back as 1884, payments of annual interest due under the loans were not paid promptly, according to the defendant’s reports by letter to the plaintiffs. These delinquencies increased as time wore on, and, upon inquiries made by plaintiffs of the defendant as to the cause thereof, he wrote them various excuses and explanations, making them occasional remittances to quiet their importunities. But matters grew worse, until in 1894 and 3895 the defendant almost ceased to make any replies to plaintiffs’ repeated inquiries of him; and in June, 3895, one of the plaintiffs went to Springfield, Mo., to investigate these matters. After pressing the defendant for explanations for two or three days, he admitted that he had collected the moneys sued for in these actions at various times prior thereto, and had appropriated the same to Ms use in private transactions, with the expectation that some favorable turn would take
Some of the claims for damages to the partnership of J. P. Bracken and O. M. Bracken were assigned to J. P. Bracken. His action for damages embraces his claims based on his individual loans and on the interest of O. M. Bracken’s claims for damages assigned to him. The action in behalf of J. P. & O. M. Bracken is based on damages resulting from their joint claims. Prior to the institution of these suits, the defendant, Milner, on his voluntary petition, was adjudged a bankrupt. He reported these claims sued on in his schedules as among his liabilities. Having received his final discharge in bankruptcy, he pleaded the same as a release from the claims sued on. He also interposes the plea of the statute of limitations. ,
The controlling question in this case is the effect of the discharge in bankruptcy on the claims sued for, and involves the construction of subdivision 4, § 17, Bankr. Act, which declares that “a discharge in bankruptcy shall release the bankrupt from all of his provable debts except such as were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity.” The conduct of the defendant in respect of his stewardship is so reprehensible that at the hearing of this case the inclination of my mind was to hold him liable on all of these claims. But an examination of the rulings of the supreme court on kindred statutes has unsettled these first impressions. The question turns upon the proper construction of the words, “defalcation while acting in any fiduciary capacity.”
This question first came before the supreme court in Chapman v. Forsyth, 2 How. 202, 11 L. Ed. 236, under the bankrupt act of 1841. The language of the corresponding provision of that act excepted from the operation of a discharge in bankruptcy “debts created in consequence of defalcation as a public officer, or as executor, administrator, guardian, or trustee,, or while acting in any other fiduciary capacity.” The case under consideration there was that of a factor who had defaulted in accounting for a balance due his principal. It was held that such person was not acting in a fiduciary capacity,
The comprehensive purport of this ruling was recognized by Judge Pardee in Fulton v. Hammond (C. C.) 11 Fed. 291, who differentiated the phraseology of the act of 1841 from the corresponding section in the bankrupt act of 1867, which omitted from the context the words “executor, administrator, guardian, and trustee,” and employed the general term, “while acting in any fiduciary character.” The argument of the learned judge was that, as the conclusion of the supreme court in the Chapman Case was largely influenced by the association of the words, “fiduciary capacity,” with the words, “executor, administrator, guardian, and" trustee,” the omission of the latter words from the act of 1867 indicated an intention to enlarge the comprehension of the term, “in any fiduciary capacity.” Accordingly he held that an agent who obtained possession of a note
But in the case of Neal v. Clark, 95 U. S. 704, 24 L. Ed. 586, which arose under the act of 1867, the court held that the term “fraud” was designated by its association with the term “embezzlement,” and was employed in the statute of 1867 in the same sense as in the statute of 1841, and meant positive fraud, involving moral turpitude, as distinguished from implied fraud, arising from passive conduct, which equity created. After quoting the language, supra, in Chapman v. Forsyth, the court observed: “A like process of reasoning may be properly employed in construing the corresponding section of the act of 1867.”
The question again came before the supreme court under the act of 1867, in Hennequin v. Clews, 111 U. S. 676, 4 Sup. Ct. 576, 28 L. Ed. 565, in which it is noted (pages 680, 681, 111 U. S., page 578, 4 Sup. Ct., and page 567, 28 L. Ed.) that some of the courts had taken the view of that act that “agents, factors, commission merchants, etc., acted in a fiduciary character, on the view that the act was conceived in broader and more general terms than the act of 1841”; while another class took the view “that the act of 1867 used the phrase, ‘acting in a fiduciary character,’ in the sense which it had received by construction in' the act of 1841.” After enumerating those diverse authorities, the court said: “We have examined these cases, and others bearing on the subject, but do not deem it necessary to refer to them more particularly, inasmuch as the question has recently been fully considered by this court, and the decision in Chapman v. Forsyth has been followed.”
Among the cases cited by the court as holding the latter view is that of Cronan v. Cotting, 104 Mass. 245, in which it was distinctly held that the term, “in any fiduciary character,” in the act of 1867, was employed by congress in the same sense, and with the same application, given to it by the supreme court in Chapman v. Forsyth, under the act of 1841. The court said:
“It is true that in the act of 1841 the phrase followed an enumeration of certain trusts of a marked character, and the association was regarded as an indication of the intent of congress in the use of that phrase. But that intent having been ascertained and declared by a judicial construction of the act, - the language thenceforth bore a legal significance, in accordance with that construction. When the same, or substantially the same, language was subsequently used, for a similar purpose, in the bankrupt act of 18(57, it is to be presumed that it was so used in view of the construction and legal import which had become attached to it by the interpretation of the proper constitutional tribunal.”
The court further said that:
“The inference is quite as legitimate that congress omitted the enumeration of specific trusts, for the very reason that the term ‘fiduciary capacity’ had, by judicial construction, received a fixed definition, and with intent that the phrase should carry that definition into the new act. The specific enumeration was omitted because all were included in the general expression ‘fiduciary.’ ”
This reasoning seems to me to be conclusive.
The supreme court in Hennequin v. Clews, supra, applied the construction given by it under the act of 1841 to the term “fiduciary
So the supreme court of Massachusetts in the Cronan Case, supra, held that the term, “fiduciary character” did not include the obligation of a creditor, to whom the debtor delivered the property in pledge, with directions to sell and apply the proceeds in satisfaction of the debt, and to pay over to the debtor the balance remaining after such satisfaction. The court said:
“We are inclined to the opinion that the phrase implies a fiduciary relation existing previously to, or Independently of, the particular trausaction from which the debt arises. * ⅛ s The debt, in this case, arose exclusively out of a single transaction between the parties. Its creation involved no element other than that of contract. The existence of the liability did not spring from any breach of trust. ⅛ * * The debt did not result from, but preceded, that default.”
In Upshur v. Briscoe, 138 U. S. 365, 11 Sup. Ct. 313, 34 L. Ed. 931, the court reviewed the decisions construing the phrase “fiduciary capacity” in the act of 1867, and readopted the language of the court in Chapman v. Forsyth. The court again asserted that, “within the meaning of the exception, a debt is not created by a person while acting in a ‘fiduciary character,’ merely because it is created under circumstances in which trust or confidence is reposed in the debtor, in the popular sense of those terms.” The court quoted with approval the foregoing language of the supreme court of Massachusetts in the Cronan Case.
Judge Brown, in Re Basch (D. C.) 97 Fed. 761, has applied the same construction to tlie term “fiduciary capacity” under the present bankrupt act, and held that a debt due by the bankrupt in the character of a commission merchant, arising out of his failure to account for the value of goods consigned to him for sale on commission, en a contract to return the goods or their specific proceeds, is not a debt created by the bankrupt’s “fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity,” and was therefore released by bis discharge in bankruptcy.
Applying these authoritative principles to this case, what was the character of Milner in respect of his default in failing to remit the moneys collected by him in those cases, where the collections were not made under foreclosure of the deeds of trust in which he was trustee? In such case his authority to collect did not arise from any provisions or recitations in the deeds of trust, but simply by virtue of his agency under the contract to collect the interest and principal, and remit the same to the plaintiffs. Was there any more special trust and confidence reposed in him than that reposed by any principal in the agent selected to take his money for invest
A different question arises in tibie instance where the defendant was trustee in some of the deeds of trust, which he of his own motion foreclosed, and appropriated the money arising from the sales. He did not report to plaintiffs, or either of them, the facts of such sales and the receipt of the money arising therefrom. On the contrary, he concealed these facts from the beneficiaries in the deeds of trust, and led them, by his letters, to believe that the debtors were delinquent, and the deeds of trust were in force. He had himself made trustee in certain of the deeds of trust, and thereby accepted the office. As such he was trustee of an express trust, and was therefore acting under a technical trust created by an instrument of writing. His duties as such trustee were clearly defined by the instrument, which empowered him to sell the mortgaged premises, in case of default, to the highest bidder, for cash, at public vendue; and on the payment of the purchase money he was to “receive the proceeds of sale, out of which shall be paid, first, the cost and expenses of this trust, and, next, all amounts expended as aforesaid, for taxes and other purposes, with interest as above mentioned, and, next, the amount that may remain unpaid on said note and interest thereon; ⅜ * * and the said party of the second part [the defendant] covenants faithfully to perform and fulfill the trust herein created.” He received the money under the foreclosure sales as a technical trustee, and was bound by his office as such to pay over to the cestui que trust “the amount that may remain unpaid on said note.” In other words, he received such money while acting, in the strictest sense, in a “fiduciary capacity.” His liability, therefore, on these causes of action is not released by his discharge in bankruptcy. In this category are the collections made by him under the deeds of trust given by Giles P. Newbill and George B. Ramsay. While he was trustee under the deed of trust given by Jeffries, his collection of the debt thereby secured was not as trustee by foreclosure. It was paid to Mm voluntarily by Jeffries as the recognized agent of the plaintiffs, and therefore comes witMn the class of cases first discussed in this opinion.
A different question is presented in respect of what is known as the Neighbors transaction. On February 16, 1881, the defendant-loaned for the two Brackens the sum of $550 to W. D. Neighbors, secured by a deed of trust on real estate, executed to John W. Lisenby as trustee. This deed of trust he caused to be foreclosed by the trustee, and at the sale thereunder, on the 28th day of July, 1882, he bid the land in in his own name at the price of $500. But for some unexplained reason the trustee’s deed was not made to
In respect of the statute of limitations pleaded by defendant in these actions, it is sufficient to say that under section 4290, Rev. St. Mo. 1899. it is provided that “if any person, by absconding or concealing himself, or by any other improper act, prevent the commencement of an action, such action may be commenced within the time herein limited after the commencement of such action shall have ceased to be so prevented.” As already shown, this defendant did not only conceal from the plaintiffs the fact of his having collected this money while they were residing in a distant state, but by his letters and whole conduct he purposely led them to believe that the debts had not been collected or the mortgages foreclosed. In such case the plaintiffs had five years in which to bring the action after the discovery of the fraud. The discovery was not made until June, 1895, and the suits were brought in March, 1900.
The defendant is entitled, on the accounting, to a credit for the value of the Arkansas land, estimated at the time when the three-years condition expired, which would have been in August, 1898. The evidence touching the value of this land is quite meager. It is rugged, unimproved land. A letter in evidence from the defendant to plaintiffs, stating to them that he could furnish them a purchaser therefor at §2.50 an acre, virtually recommending its acceptance, indicates that he did not regard it of greater market value. The only other evidence touching this issue was the statement that the plaintiffs had asked §10 an acre for the land. Dealing most liber
The only remaining question, then, is as to where this credit should be placed. As the deed was made to J. P. & O. M. Bracken, the credit should go on their joint claims against the defendant, and, on equitable principles, should be applied to the first default, and therefore the court applies it to the claim arising on the Neighbors transaction. Judgment will go against the defendant for the amount of the defalcation on the Bamsay and Newbill debts, and for the balance due on the Neighbors debt, after allowing a proper credit tor the Arkansas land
