In re Bullis

The petitioner upon this motion was adjudicated a bankrupt September 19, 1900. There were two judgments entered against him in 1895, one of $3,586.40, and one of $341,745.65, and this motion was for the purpose of relieving the petitioner from the liability of these judgments. The judgment creditor contests the application, on the ground that the judgments were recovered by reason of the fraud of the said Bullís and one Barse.

The question before us involves the construction of subdivisions 2, 4, § 17, c. 3, of the national bankrupt law of 1898. Section 17, so far as applicable, provides:

“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 pretenses or false representations, or for wilful 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.”

The action in which the judgments were rendered was not one at law for fraud and deceit, but was a suit in equity, and, in order to appreciate the situation, it becomes necessary to analyze the complaint and the decision of the court.

The complaint, therefore, is one in equity, demanding that the defendants comply with their several agreements, and charging that the defendants, in their attempted compliance therewith, falsely and

A trial was had at a special term in New York county, and at the close of the evidence it appeared that Bullís and Barse were unable to perform specifically, and the court dismissed the complaint, declining to entertain jurisdiction for the purpose of awarding damages in lieu of strict performance. The judgment entered on this decision was reversed by the general term (O’Beirne v. Bullis, 80 Hun, 570 , 30 N. Y. Supp. 588 ), and, upon an appeal taken by the defendant railroad company, this judgment of reversal was affirmed by the court of appeals (O’Beirne v. Railroad Co., 151 N. Y. 372 , 45 N. E. 873 ). A new trial was had in the meantime upon the answers interposed by Bulks and Barse before Mr. Justice Barrett, and elaborate and explicit findings of fact were made by him, fully sustaining the charges contained in the complaint and upon whi.ch the allegations of fraud were based. The special term, among other facts, found that, before the execution of the several agreements referred to, said “Bulks and Barse pretended and represented to the said firm of I. B. Newcombe & Co. that the said 30,000 acres of land were timbered, free and clear of all incumbrances, and contiguous and adjacent to the line of the defendant railroad company, as the same was then constructed and projected, and that said land was covered by a large quantity of merchantable timber, which would be sufficient to and would actually provide said railroad with at least 70 tons of freight to the acre, for conveyance over said railroad at rates from 25 to 50 cents per ton, in addition to the percentage accruing to said defendant railroad company from divisions with other lines;” further that, before said agreements were entered into at the request of Bulks and Barse, engineers were sent from New York to inspect the timber on the land to be conveyed to said trustee; that “they were escorted through certain timber lands” .by said Bulks, and the lands through which they “were escorted by said Bulks were heavily timbered,” and that said Bulks “stated that said lands were to be placed under said mortgage” to said trustee, and a report in accordance with this statement was made by said engineers, and upon this report said Newcombe & Co. “embarked in the enterprise, and entered into said scheme of consolidation and extension”; that said lands so “defined and pointed out by said Bulks were worth from $18 to $20 an acre”; again that said Bulks and Barse “had stated and represented to Newcombe & Co.” that the mortgage was to be a first lien, the lands to be well timbered and “contiguous and tributary to said lines of railroad”; that said trust mortgage was approved and accepted in the belief that said representations were true in fact, and that Bulks and Barse were “in good faith performing their said covenants.” The court further found:

“(93) That the statements and representations of said defendants Bullís and Barse with respect 'to said timber lands, mentioned and referred to in

said Exhibits ‘A,’ ‘B,’ and ‘0,’ and Schedule ‘A’ annexed to the complaint, were fraudulent, and made with intent to deceive. (94) That the plaintiff was in fact deceived by said statements and representations. (95) That said statements and representations were false and untrue. (96) That said agreement was in fact fraudulently made with respect of the lands agreed to be conveyed by said Bullis and Barse.” That a great part of the lands included in the deed were not the property of Bullis, and the value of that owned by him and not timbered was $13,350, while that apparently covered by the deed, but not owned by him, was worth $175,502.77, and a considerable part of that included in the conveyance was incumbered.

In the conclusions of law the court decides it has “jurisdiction to proceed in this cause, by reason of the fraud practiced by the defendants Bullis and Barse in the premises,” ancTby the “fact that the plaintiff has been deceived by the fraudulent statements and misrepresentations of the defendants.” It directed “immediate specific performance” by them by their conveying to the trust company “30,000 acres of land free and clear of all incumbrances, and contiguous and tributary to the lines of the railroad of the defendant * * * timbered and profitable to said defendant railroad company, and of the market value of at least $18 per acre.” Finally, the court directs and decides;

“That the defendants Spencer S. Bullis and Mills W. Barse at once pay to the Central Trust Company of New York the sum of $'.’92,125.00, with interest thereon at the rate of 5 per cent, per annum from the 1st day of February, 1892, for the pro rata benefit of the plaintiff, James R. O’Beirne, and all other holders of the first mortgage bonds of the defendant the Allegany & Kinzua Railroad Company.”

The judgment entered upon this decision was affirmed. O’Beirne v. Bullis, 2 App. Div. 545 , 38 N. Y. Supp, 4 ; Id., 158 N. Y. 466 , 53 N. E. 211 .

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 that the bulk of the tract was not timber land, was incumbered, and was not adjacent to the railroad lines described. Lands so located, and with heavy growing timber, had been shown to the engineers selected to inspect it, and a conveyance to a trustee of the lands represented was sought by the action. The gist, the intrinsic ingredient, of the action was cohsequently the fraudulent scheme,—the false representations of these defendants. As was said by the court of appeals in its first review of the case (151 N. Y., at page 384, 45 N. E. 876 ); “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/’ Jurisdiction was held to exist in the court of equity to award damages in lieu of decreeing specific performance in case the proof disclosed the inability to enforce a precise compliance with the agreements. When it developed upon the second trial that specific performance was unavailing, the trial court retained jurisdiction to proceed “by reason of the fraud practiced by the defendants Bullis and Barse.” The backbone of the action, whether viewed

“A representation as to a tact, made knowingly, falsely, and fraudulently, for the purpose of obtaining money from another, and by means of which such money is obtained, creates a debt by means of a fraud involving moral turpitude and intentional wrong. It is not necessary to enlarge upon the subject. It is so plainly a fraud of that description that its mere statement obtains our ready assent.”

In the authorities which I have examined no stress is laid upon the form of the action. While an action of fraud to the mind of a lawyer signifies the common-law action of fraud or deceit, the wording of the subdivision under discussion evidently was not framed with that precise remedy in view. The expression “judgments in actions for frauds” conveys no such signification as that mentioned, and may include any positive intentional fraud which.was the basis of a judgment and was of the substance of the recovery. The statute is to be construed liberally to discharge the insolvent from the burden of the obligations which he is unable to pay in full, but that liberality may not be extended to an insolvent to release him from a judgment which was recovered against him by reason of his “positive fraud and intentional wrong,” whatever may have been the form of the action in which the recovery was had. The primary purpose of the statute is to enable an insolvent debtor to be relieved from the burden of his obligations. One exception that has pervaded all of our bankrupt laws is that, where the insolvent has become

“The fact that the judgment was in an action for fraud, or willful or malicious injury, may, perhaps, not appear by the judgment itself. That is not necessary; it is sufficient if it appear from the record of the case. If the record show that the action was for any of the causes specified, then the judgment is not barred by a discharge. The action must have been based on the fraud or the willful or malicious injury. It is not enough that there may have been incidental or immaterial false and fraudulent representations in connection with the transaction, if the action is not based on them.”

And also at page 202:

“The debt, as we have seen under subdivision 2, § 17, Bankr. Law 1898, is not released by a discharge, although in the form of a judgment. But the record must show that the debt is so created. If a judgment is rendered in an action, the record of which shows material, traversable allegations of fraud, which were necessarily determined, then the judgment is conclusive.”

In Re Rewensohn (D. C.) 99 Fed. 73 , Justice Brown says:

“In cases of this kind no purely technical considerations as to the precise form of the action should be regarded.”

In Burnham v. Pidcock, 58 App. Div. 273 , 68 N. Y. Supp. 1007 , the action in which the judgment was recovered was for conversion. Neither the judgment nor anything in the record showed that fraud or fraudulent representations were an essential element of the cause of action, although the court, in its opinion, stated the act which constituted the conversion was fraudulent. The court held that the nature of the action must be gathered from the record, instead of from any extrinsic source. The court uses this language at page 275, 58 App. Div., page 1009, 68 N. Y. Supp.:

“The judgments which are excepted from the effect of a discharge in bankruptcy are, as it is expressed in the statute, judgments for fraud. The phrase means that the fraud is the gravamen of the action in which the judgment is recovered, and that proof of the fraud is essential to the right of recovery. It does not include a judgment in which, the right of recovery is based upon an act which is not essentially fraudulent, although in that action fraud may be incidentally shown.”

That case is not an authority • which is helpful to the appellant. In the present case the record shows that fraud was the marrow of the cause of action, and the sole ground for retaining jurisdiction and awarding damages was the fraudulent conduct of Bullís and Barse. No resort need be had to extraneous proof to show that fraud was not an incident, but the vital factor, in the action. The findings of fact passed upon by the trial judge are minute and circumstantial, and abound in facts from which the turpitude and deceit of the defendants are established. These findings are supplemented by conclusions of law, and the whole followed by the formal judgment, which bears the signature of the justice presiding, so that the record consists of the decision- and judgment made by the jus

“The theory upon which the decision proceeded was that they devised a traudulent 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.”

With the fraud of the petitioner so marked a constituent in the record of which the judgment is a part, we are constrained to hold that he is not entitled to the cancellation of the judgment, as it is within the prohibition of subdivision 2 of section 17, referred to.

The counsel for the respondent devotes much space in his brief to an argument that subdivision 4 of section 17 applies to this appeal. _ The position is that the terms “fraud, embezzlement, misappropriation,” in that subdivision, relate to an individual, while the word “defalcation” alone applies to one “acting as an officer or in •a fiduciary capacity.” We cannot assent to that construction. In the corresponding section (33) of the act of 1867, the interpretation ■contended for may have been tenable. In the present section, however, the exceptions have been remodeled and reclassified, and the intention apparently was to make subdivision 2 applicable to frauds, ■etc., perpetrated by an individual failing debtor, but protected him by limiting the prohibition against his discharge to frauds, false representations, etc., embodied in a judgment and provable by the record. Subdivision 4 was then designed to relate to an officer, or one acting in a trust capacity, and was enlarged in its scope" by erecting a barrier to the discharge of such a culpable debtor who had been guilty of “fraud, embezzlement, misappropriation” as well as “defalcation.” A person faithless in a public or' trust capacity is the more flagrant malefactor, and hence it may have been deemed advisable to extend the barrier to his receiving the benefit of a discharge permitted by the statute to include the other delinquencies named. The natural rendition of subdivision 4, as well as its grammatical construction, seems to favor this interpretation. If -any debt created by fraud, embezzlement, or" misappropriation is to be excepted from the application of the statute, then there is no necessity of subdivision 2 making a judgment essential to prevent the granting of the discharge under the statute. The bare proving the debt was created by fraud would be sufficient to raise a bar to ■the release of the insolvent therefrom, which would be tantamount to emasculating subdivision 2. We conclude, however, that the petitioner is barred by subdivision 2 from obtaining the cancellation

The order is affirmed, with $10 costs and the disbursements of this appeal. All concur.