Case ID: ny-st-rep_33/html/0717-01.html
Source: Caselaw Access Project
Author: {"author": "Brown, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

William F. Lawrence et al., Resp’ts, v. Arvin W. Harrington, App’lt.
    
      (Court of Appeals, Second Division,
    
    
      Filed October 28, 1890.)
    
    1. Bankruptcy—Acts of fraud—U. S. R. S., §5117.
    Plaintiffs delivered a certain note to defendant’s fi:m to have discounted. Said firm discounted the note, and converted the proceeds to their own use, and subsequently went through bankruptcy. Held, that this was not a “fraud” within the meaning of the bankrupt act, so as to take the claim out of the operation of that act.
    
      3. Same.
    The fraud intended by the bankrupt law is a positive fraud or fraud in fact, as distinguished from constructive fraud founded upon some breach of duty.
    3. Same—New promise.
    Where the petition was filed November 34, ISTT, and prior to July, 1881, payments were made on the account, such payments did not revive the same from the bankruptcy discharge as being a new promise to pay.
    4. Same.
    Work performed by_ defendant’s firm for the plaintiffs while the debt was an existing obligation, under an agreement that the amount be credited upon the old account, takes the case out of the operation of the statute of limitations.
    Appeal from a judgment of the general term of the second judicial department, which affirmed a judgment entere d upon a decision of the court without a jury.
    The action was [commenced July 8, 1887, and was for moneys expended for the use of the firm of Eosseau & Harrington, of which the defendant is the surviving partner. The defense pleaded was the discharge of said firm in bankruptcy, and that the claim was barred by the statute of limitations.
    The petition in bankruptcy was filed on November 24th, and said firm were adjudicated bankrupts on December 3, 1877.
    Prior to November, 1877, the plaintiffs had loaned said firm their promissory notes payable to said firm’s order as follows:
    Note due December 28, 1877....................... $337 18
    “ December 31, 1877....................... 334 25
    “ February 26, 1878....................... 410 73
    “ March 3, 1878................... 339 27
    Under the agreement relating to these notes defendant’s firm should have paid them. They failed to do so, and the two first named notes were paid by plaintiffs at maturity. The two latter were renewed, and when the renewal notes matured on May 28 and June 4, 1878, plaintiffs paid them.
    In addition to the above notes, the complaint set out several small payments made for the defendant’s firm subsequent to the filing of the petition, and which were not affected by the discharge in bankruptcy, and for which defendant admitted his liabilility, provided they were not barred by the statute of limitations.
    The trial court found as facts that, by reason of said payments, said Eosseau & Harrington, on January 4, 1879, “were indebted to plaintiffs in the sum of $1,483.31, no part of which has been paid except $203.48 paid on account on and prior to July 9, 1881, and the sum of $96.36 paid on account during the years 1883 and 1884.”
    “ That after November 24, 1877, said defendant and Eosseau & Harrington made frequent promises, both oral and written, to pay the amount of their indebtedness to plaintiff.”
    The court further found “that on or about July 10, 1877, said Eosseau & Harrington obtained and appropriated to their own use the proceeds of a promissory note made by plaintiffs and by them entrusted to said Eosseau & Harrington, amounting to $671.43, which amount plaintiffs were obliged to pay.” And it appeared that plaintiffs upon several occasions sent their notes to said firm, who endorsed them and procured them to be discounted at a bank and sent the proceeds to the plaintiffs.
    That the note mentioned in the last quoted finding was sent to said firm for such, purpose, and that the two notes hereinbefore mentioned as falling due December 28 and 31, 1877, were loaned by plaintiffs to said firm to take up the note of $671.43.
    The court refused to find that no payment had been made by defendant or his firm after May 31, 1881, and that no agreement had ever been made by defendant or his firm, after the commencement of the bankruptcy proceedings, to pay the plaintiffs’ claim.
    To which refusals, as well as to the findings above quoted, the defendant excepted.
    
      Q. B. Wellington, for app’lt; James W. Hunt, for resp’ts.
   Brown, J.

There is no dispute between the parties but that the two notes which matured February 26th and March 3d, respectively, were covered by the discharge in bankruptcy, but the respondents assert that the other notes, having had their origin in the conversion by defendant’s firm of the proceeds of the note of $671 on July 10, 1877, were taken out of the operation of the discharge in bankruptcy by the thirty-third section of the bankrupt act, § 5117 of the Eevised Statutes, which declares that “ no debt created by fraud or embezzlement of the bankrupt, or by his defalcation as a public officer, or while acting in a fiduciary character, shall be discharged under this act.”

This question, we think, is settled by authority against the respondents’ contention. Hennequin v. Clews, 111 U. S., 676 ; S. C., 77 N. Y., 427; Neal v. Clark, 95 U. S., 704; Chapman v. Forsyth, 2 How., U. S., 202; Palmer v. Hussey, 87 N. Y., 303; Stratford v. Jones, 97 id., 586; Cronan v. Cotting, 104 Mass., 245.

These authorities have established the rule that conversion is not a “ fraud ” within the meaning of the bankrupt act, and that the expression “ fiduciary character ” has reference to cases of technical trust actually and expressly constituted, and does not include those which the law implies from the contract of the parties.

The fraud intended by the law is a positive fraud or fraud in fact as distinguished from constructive fraud founded upon some breach of duty.

The case of Bradner v. Strang, 89 N. Y., 299; 114 U. S., 555, is not in conflict with the authorities cited. In that case certain promissory notes were obtained from the plaintiffs by the defendants by false representations, and hence the case was one of positive fraud. It was clearly distinguished in this court and in the supreme court of the United States from the cases I have cited, and it illustrates the class of fraudulent debts and obligations which it was intended should not be discharged by the bankrupt law. It has no application to the present case.

The defendant’s firm came rightfully into possession of the note and its proceeds. They were the plaintiffs’ agents to procure its discount. They violated their duty in appropriating to their own use the proceeds and were guilty of conversion in so doing, but within the principle of the cases cited the debt was discharged by the bankruptcy proceedings.

To overcome, however, the effect of the discharge in bankruptcy the plaintiffs gave evidence from which the court found as a fact a new promise by the defendant and his firm to pay the debt made after the filing of the petition in bankruptcy.

As to the two notes which matured February 26th and March 3rd, we think this finding is sustained. These notes were renewed on or about February 25, 1878, by new notes made by the plaintiffs to the order of Bosseau & Harrington, and by that firm endorsed and passed to the - bank holding the original notes, and having been given for the accommodation of the defendant’s firm, we think the new promise to pay is to be implied from the contract of endorsement on the renewal notes, and such promise saved the debt from the operation of the discharge. Stilwell v. Coope, 4 Denio, 225; Lerow v. Wilmarth, 7 Allen, 463.

But as to the balance of the claim we are of the opinion that the finding is without evidence to support it.

The general term appear to have been of the opinion that a payment made upon the account in May or July, 1881, revived the same from the bankrupt discharge. In this we think that learned court erred.

All the authorities agree that a promise by which a discharged debt is renewed must be express and distinct. It cannot be implied or inferred; and so it was held that a payment of interest by the maker on a promissory note from which he had been discharged in bankruptcy did not revive his liability on the note. Institution for Savings v. Littlefield, 6 Cush., 210.

That payment of a part of a note so discharged and the endorsement thereon by the debtor of the sum paid was not sufficient to authorize a finding of a new promise to pay the residue of the debt. Merriam v. Bayley, 1 Cush., 77; Allen v. Ferguson, 18 Wallace, 1.

A different rule, prevails in case of a debt discharged in bankruptcy from that applied to the defense of the statute of limitations. In the latter case payment of a part of the debt is regarded as an acknowledgment of the existence of the debt and the law implies a promise to pay the residue. But in the case of a debt discharged in bankruptcy a promise cannot be inferred but must be express, and so all the cases agree that partial payments will not revive the debt. Hilliard on Bankruptcy, 266-267.

“Hoiking,” said Judge Hunt in Allen v. Ferguson, “is sufficient to revive a discharged debt unless the jury are authorized by it to say that there is an expression by the debtor of actual intention to bind himself to the payment of the debt.”

It follows from these authorities that a new promise could not be implied from the payment referred to. The other evidence in the case showed only a promise to do certain work for the plaintiffs and apply it upon the account. This could not be construed into a promise to pay the debt in any other way than that stipulated in the agreement, and the expressions contained in defendant’s letters to the effect that “we do not calculate you will suffer any loss by us,” “ we will do the best we can and all that is in our power to save you harmless,” are not indicative of an intention to pay at all events. Allen v. Ferguson, supra ; Elwell v. Cunner, 136 Mass., 102.

In the case cited language of similar import was used, but the court held it insufficient to revive the debt. We are of the opinion that the finding of a new promise to pay the indebtedness is not supported by the evidence, except as to the two notes renewed in February, 1878, and as to these notes the question still remains whether the cause of action thereon was not barred by the statute of limitations.

The renewal notes matured May 28th and June 4th, 1878, and were then paid by the plaintiffs, and the cause of action thereon was then complete.

In the years 1883 and 1884 work was performed by defendant’s firm for the plaintiffs under an agreement that the amount thereof should be credited upon the old account, and credits were accordingly given, and the question now is whether such credits may be considered as payments which will take the case out of the operation of the statute of limitations.

We are of the opinion that they should have that effect A payment generally upon a debt within six years before the commencement of an action thereon will take it out of the statute, and it makes no difference whether the payment is in money or goods. The claim of the appellant is that these credits having been made under a special agreement have no greater effect than that stipulated in the agreement under which the work was performed, and in the absence of any evidence as to the refusal of the defendant to fulfill that agreement, they cannot be taken as an acknowledgment of the debt or as evidence of a promise to pay in money.

There would be some force in this argument if the debt had been barred by the statute at the time the work was performed. But the debt was at that time an existing obligation enforceable against defendant’s firm. The evidence was that defendant’s firm did the work, and agreed to allow plaintiffs to credit one-half thereof on the old account.

There was no condition attached to the credit, and it must be treated as if the payment had been made in money. Its effect was to arrest the operation of the statute and to enlarge the time during which an action upon the debt could be brought This action was commenced within six years after the first credit made in 1883, and the defense of the statute of limitations was, therefore, properly overruled.

The judgment should be reversed, a new trial granted, with costs to abide the event, unless the respondents shall within twenty days stipulate to reduce the judgment by deducting there-

from $671.43, with interest thereon from January 4, 1879, in which case the judgment so reduced is affirmed, without costs to either party in this court.

All concur, except Haight, J., absent 
      
       Reversing 15 N. Y. State Rep., 867.