Case ID: ad_93/html/0320-01.html
Source: Caselaw Access Project
Author: {"author": "Ingraham, J.: McLaughlin, J. (dissenting):", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

A. G. Hyde & Sons, Respondent, v. Tobias Lesser, Appellant.
    
      Jlescission of a sale to a partnership, induced by fraud,—an action for damages is maintainable against the partner .guilty of the fraud—his discharge in bankruptcy is no defense —proper parties to an action to enforce the contract.
    
    "Where goods are sold to a firm in reliance upon fraudulent representations made by a member of the firm as to its financial condition, if the. purchaser elects to rescind the sale because of such fraudulent representations, and replevies a portion of the goods, he may maintain, an action to recover the damages sustained by him in consequence of the fraud against the partner who made such false representations without joining the other partners.
    If he brings the action to enforce the contract of sale, he is obliged to join all of the partners.
    The vendor’s right- of action against the partner who made the fraudulent representations is not affected by a discharge in bankruptcy obtained by such partner subsequent to the sale.
    The words “in any fiduciary capacity,” used in section 17 of the Federal Bankruptcy Act, which provides “a discharge in bankruptcy shall release a.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,” do not qualify the words “fraud” or “embezzlement,” or “misappropriation” but simply the word “defalcation.” McLaughlin and Hatch, JJ., dissented on other grounds.
    Appeal by the defendant, Tobias Lesser, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 12th day of November,’ 1903, upon the decision of the court, rendered after a trial at the New York Special Term, sustaining the plaintiff’s demurrer to the first and second separate defenses set up in the defendant’s answer.
    
      Alexander Blumenstiel, for the appellant.
    
      James J. Allen, for the respondent.
   Ingraham, J.:

The action is brought to recover the damages sustained by the plaintiff by the sale of certain goods and merchandise, induced by the false and fraudulent representations of the defendant as to the financial condition of a firm of which the defendant was a member. The answer, after denying the allegations of the complaint, sets up two separate defenses to which the plaintiff demurred. The first defense is that at the time of the purchase of the goods and the creation of the debt set forth in the complaint the defendant, with one Simon Lesser and Israel Lesser, were copartners in business, having the firm name of “ Lesser Brothers ; ” that the goods sold by the plaintiff were sold to the firm of Lesser Brothers as a firm, and that the merchandise so purchased was received by the firm of Lesser Brothers and charged to the said firm by the plaintiff, and that Simon Lesser and Israel Lesser, as copartners, are necessary parties defendants. For a second separate defense the answer sets up a discharge in bankruptcy subsequent to the delivery of the goods to the firm of Lesser Brothers and prior to the commencement of this action. The court below sustained the demurrer to both defenses.

■ The complaint alleges that the plaintiff’s assignor, relying upon statements made by the defendant as. to the financial condition of the.firm, did “sell and deliver to the said firm of Lesser Brothers, at their request, goods and merchandise, consisting of cotton goods, to the amount and of the value of $2,335.82.” If there was a defect of parties plaintiff, the defect appeared upon the face of the complaint, and the objection should have been taken by demurrer.

' (Code Civ. Proc. § 488, subd. 6.) It is only where the objection does not appear on the face of the complaint that it can be taken by-answer (Code Civ. Proc. § 498), and not having been taken by demurrer it was waived (Code Civ. Proc. § 499). The action, however, is not to enforce the contract of sale. The complaint alleges that upon discovering the fraud the plaintiff’s assignor elected to rescind the sale as void, and instituted proceedings to recover the possession of the goods sold, which had been obtained by means of, and relying upon, the fraud, and recovered goods of the value of $900, but was unable to obtain the remainder of the goods, and that by reason of the premises the plaintiff’s assignor wholly lost all of the said goods and merchandise so wrongfully taken from him by the said firm of Lesser Brothers, except the part replevied as aforesaid, to his damage in the sum of $1,423.90, with interest from the 2d day of October, 1896.

A cause of action based upon these allegations is to recover damages for the fraud, and not to recover for' the goods sold and delivered based upon any contract of the firm of which the defendant was a member. The rescission of the sale and the recovery of the goods, based upon the election to rescind, would prevent an action based upon the contract of sale, as that contract was rescinded by the vendors. Having recovered a portion of the goods, there only remained a cause of action for the damáges caused by the fraud, and that cause of action is what is here sought to be enforced. If the action had been to enforce, a contract of sale, then all of the partners would be necessary parties, as the contract was joint; but where the cause of action is based solely upon fraud of the defendant, and the recovery sought is the damages caused by su.eh fraud, the action is in tort, and can be maintained against any one responsible for the fraud. ■ It is' quite clear, therefore, that the first separate defense is insufficient.

The second defense is based upon a discharge in bankruptcy, and the court below held that this cause of action was not affected, by the. discharge. Section 17 of the Bankruptcy Law (30 U. S. Stat. at Large, 550), provides, that “a discharge in bankruptcy shall release a 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.” That the indebtedness here sought to be enforced was one created by the defendant’s fraud is clear, and was not discharged, unless the words “ in any fiduciary capacity ” in subdivision 4 qualify the entire subdivision of the section, so that the debt was discharged unless the debt Was created by the defendant’s fraud in a fiduciary capacity. Where a fraud has been committed there follows a liability of the guilty party for the damages created by the fraud. The phrase “ while acting as an officer, or in any fiduciary capacity,” has direct reference to a defalcation, and applies to a defalcation, and not to the former words in the subdivision, “ fraud, ” “ misappropriation,” or “ embezzlement.” This construction was affirmed in Frey v. Torrey (70 App. Div. 167; affd. on opinion below, 175 N. Y. 501). It was there said that the words fraud,” “ etribezzlement ”' and misappropriation ” are not qualified by the clause “while acting as an officer, or in any fiduciary capacity.” It is claimed by the learned counsel for the appellant that this case is not •an authority, as the money there sought to be' recovered ■ was obtained by fraud where a fiduciary relation existed; but in that case the plaintiff deposited with the defendant, a private banker, $150, which he sought to recover, basing his cause of action upon a fraud of the defendant in receiving deposits when he was hopelessly insolvent. No fiduciary relation exists between a bank and his customer, as by the deposit the customer becomes a creditor of the banker for the amount of the deposit. The decision in that case is a controlling authority.

It follows that the judgment appealed from must be affirmed, with costs.

Van Brunt, P. J., and O’Brien, J., concurred; McLaughlin and Hatch, JJ., dissented.

McLaughlin, J. (dissenting):

I am unable to concur in the opinion of Mr. Justice Ingraham. Each of the defenses demurred to is pleaded as a separate and furthér defense and the first subdivision of each recites that the defendant reiterates all the allegations hereinbefore contained.” The answer preceding the separate defenses contains allegations which deny material portions of the complaint and which are incorporated by the recital in each separate defense. If the recitals, were redundant and seriously affected plaintiff’s right to demur to the affirmative defenses coupled with them, then they might have been stricken out on motion. (Code Civ. Proc. § 545; Stieffel v„ Tolhurst, 55 App. Div. 532; State of South Dakota v. McChesney, 87 Hun, 293.) But so long as they remain a demurrer cannot be successfully interposed, even though the new matter pleaded does not constitute a defense. This is precisely what this court has decided in at least two recent cases. ( Uggla v. Brokaw, 77 App. Div. 310 ; Holmes v. Northern Pacific R. Co., 65 id. 49.) These are still in force, and so far as I am-aware have not been questioned. In view of them I think the judgment appealed from should be reversed and the demurrer overruled, with costs to the appellant .in this court and the court below.

Hatch, J., concurred.

Judgment affirmed, with costs.