Source: https://supreme.justia.com/cases/federal/us/114/555/
Timestamp: 2019-04-21 08:14:48+00:00

Document:
The rule reaffirmed that the term "fraud," in the clause defining the debts from which a bankrupt is not relieved by a discharge under the Bankrupt Act, means positive fraud or fraud in fact involving moral turpitude or intentional wrong, not implied fraud, which may exist without bad faith.
A claim against a bankrupt for damages on account of fraud or deceit practiced by him is not discharged by proceedings in bankruptcy, nor is a debt created by his fraud discharged even where it was proved against his estate and a dividend thereon received on account.
the ground that the misrepresentations were made without their knowledge, especially where the firm appropriates the fruits of the fraudulent conduct of such partner.
This action was commenced by defendants in error as plaintiffs in a court of the State of New York, to recover of the plaintiffs in error a sum which they alleged they had been compelled to pay through false and fraudulent representations of one of the members of a partnership consisting of the defendants made in the course of partnership business. The defendants set up a discharge in bankruptcy. Judgment for the plaintiffs, which was affirmed by the supreme court, and the judgment of that court affirmed by the Court of Appeals. The case was remitted by the Court of Appeals to the supreme court when the final judgment was entered, which the defendants below, as plaintiffs in error, sued out this writ of error to review. The federal question involved was the effect of the certificate of discharge in bankruptcy. The facts which raise the question are stated in the opinion of the Court.
"debt created by the fraud or embezzlement of the bankrupt, or by defalcation as a public officer, or while acting in a fiduciary capacity, but the debt may be proved, and the dividend thereon shall be a payment on account of such debt."
cause of action accruing prior to July 3, 1875, the latter made defense, in part, upon the ground that their respective discharges in bankruptcy relieved them from all liability to plaintiffs. In the supreme court of New York there was a verdict and judgment in favor of the plaintiffs for the sum of $17,517.86. That judgment having been affirmed in the Court of Appeals, the question to be determined upon this writ of error is whether the claim or demand of the plaintiffs is one from which they were relieved by their discharges in bankruptcy. If the debt was of that character, the judgment below must be reversed; otherwise affirmed.
notes, for $4,325.50, $4,326.25, $4,327.13, and $4,327.15 each at four months, dated, respectively, on the 1st, 9th, 15th, and 20th days of February, 1875, and each payable to the plaintiffs at the office of the defendants in the City of New York and endorsed by the plaintiffs, and that on or about April 4, 1875, Strang represented to plaintiffs that his firm had not used nor been able to use those notes because they were made payable at their office, and requested plaintiffs to lend them four other notes of the same amount payable at the Metropolitan National Bank, in New York City, to be used in the place of those dated in February.
There was also evidence tending to prove that the plaintiffs, relying upon the representation that the February notes had not been used and that the defendants desired other notes to be used in their place, executed and delivered to the latter four other promissory notes, each at four months, for $4,850, $4,951.25, $4,860.30, and $4,970, respectively, dated 13th, 14th, 16th, and 20th of March, 1875, payable four months after date to their own order at the Metropolitan National Bank, New York, and by them endorsed; that at the time defendants requested to be furnished with the notes last described, they had in fact discounted and put in circulation the February notes, whereby the plaintiffs, as makers and endorsers, were compelled to pay the same to the holders; that when Strang applied for the March notes, the defendants knew that they were insolvent, but that fact was not known to plaintiffs; that he made such representations and procured said notes with the intent to defraud the plaintiffs, and that the latter was compelled to pay such part of the March notes as amounted, principal and interest, to the sum for which they obtained judgment below.
In the misrepresentations made by Strang to Lowery & Bradner, there was no active participation by his partners, the Messrs. Holland. But it was proven that the proceeds of the notes last obtained from plaintiffs, as well as the proceeds of the February notes, all went into the business of Strang & Holland Brothers.
amount plaintiffs were compelled to pay to bona fide holders of the March notes, proceeds upon the ground that the appellees have sustained damages by reason of the false and fraudulent representations made by Strang, on behalf of his firm, whereby the appellees were induce to execute and deliver to that firm the four notes dated in March, 1875. Is that claim for damages of the class from which the bankrupts were relieved by their respective discharges in bankruptcy?
In Neal v. Clark, 95 U. S. 709, it was held that, looking to the object of Congress in enacting a general law by which the honest citizen might be relieved from the burden of hopeless insolvency, the term "fraud," in the clause defining the debts from which a bankrupt is not relieved by a discharge under the Bankrupt Act, should be construed to mean positive fraud, or fraud in fact involving moral turpitude or intentional wrong, and not implied fraud or fraud in law, which may exist without the imputation of bad faith or immorality. This principle was affirmed in the recent case of Hennequin v. Clews, 111 U. S. 682, where will be found a reference to the leading cases in this country and in England. Under this rule, it is impossible to avoid the conclusion that the debt in question was created by positive fraud upon the part of Strang, representing his firm, if it be true -- and the jury proceeded upon the ground that such was the fact -- that he procured the notes, dated in March, by representing that the February notes had not been, and could not be, used by his firm, and that they desired other notes, so drawn as to be readily negotiated, to take their place, when, in fact the February notes had been previously put into circulation by the firm, and had then become obligations upon which the appellees were liable to the holders. There is no pretense in the evidence that the course of business between Strang & Holland Brothers and the plaintiffs would have entitled the former to obtain the March notes, so long as those dated in February were outstanding obligations against the latter. Hence, the necessity of deluding the plaintiffs by the false representation that the February notes had not been negotiated at the time the notes in question were obtained.
That representation -- as the jury in effect found -- was made with the intent to deceive the plaintiffs in reference to the actual state of things and to induce them to do what defendants knew they would not otherwise have done or been asked to do. If Strang's conduct does not constitute positive fraud or fraud in fact involving intentional wrong, it is difficult to conceive what circumstances would have amounted to fraud of that character.
1. While the plaintiffs might have based their claim entirely upon the legal obligation of defendants to take up the notes at their respective maturities, they were not bound to waive their right to proceed against the defendants for damages on account of fraud in procuring their execution. This action is brought to recover damages for the deceit practiced upon plaintiffs. The claim here asserted is not one from which the bankrupts are protected by their discharges, for it is not a claim provable against their estates in bankruptcy. Rev.Stat. §§ 5067-5072, inclusive, 5117, 5119.
created by the fraud of the bankrupt shall be discharged by the proceedings in bankruptcy, and that a debt so created may be proved, and the dividend thereon shall be a payment on account of such debt. Rev.Stat. §§ 5117, 5119. It is therefore clear that whether the claim asserted by plaintiffs is regarded as one arising out of the deceit or fraud of the defendants or as a debt created by their fraud, the discharges in bankruptcy do not constitute a defense.
1 Met. 560; Lothrop v. Adams, 133 Mass. 481; Blight v. Tobin, 7 Monroe 617; Durant v. Rogers, 87 Ill. 508; Collyer on Partnership, Wood's ed., §§ 446, 449, 450; Lindley on Partnership, Ewell's ed., § 302.

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