Source: https://www.law.cornell.edu/supremecourt/text/228/534
Timestamp: 2016-07-29 10:28:02
Document Index: 321054697

Matched Legal Cases: ['§ 13', '§ 63', '§ 63', '§ 63', '§ 63', '§ 17', '§ 17', '§ 63']

GEORGE LEMIST CLARKE, Trustee under the Will of Samuel Parsons, Appt., v. HENRY M. ROGERS, Trustee in Bankruptcy of the Estate of John O. Shaw. | US Law | LII / Legal Information Institute
Supreme Court aboutsearch liibulletin subscribe previews GEORGE LEMIST CLARKE, Trustee under the Will of Samuel Parsons, Appt., v. HENRY M. ROGERS, Trustee in Bankruptcy of the Estate of John O. Shaw.
228 U.S. 534 (33 S.Ct. 587, 57 L.Ed. 953)
Argued: April 16 and 17, 1913.
[HTML] Messrs. Felix Rackemann and Harrison M. Davis for appellant.
Argument of Counsel from pages 535-539 intentionally omitted
In the month of January, 1908, and within four months before the filing of the petition in bankruptcy against him, and whilst he was insolvent, Shaw was largely indebted to each of the trusts and to himself as trustee, and transferred from himself individually to the trusts and to himself as trustee thereof as follows: To the trust for C. A. Parsons et al., seven of the $1,000 collateral trust 4 per cent bonds of the American Telephone & Telegraph Company (numbers specified) and two $1,000 Chicago, Burlington, & Quincy Railroad Company 3 1/2 per cent Illinois Division (numbers specified); to the trust of E. F. and E. A. Parsons, twelve $1,000 Northern Pacific-Great Northern 4 per cent joint bonds, Chicago, Burlington, & Quincy collateral.
The transfers were made by Shaw with knowledge of his insolvency, and with intent to prefer the trusts and himself as trustee, and the effect (it is alleged) of such preference, if not avoided, will be to enable the trust estates and himself as trustee thereof (being one of his individual creditors) to obtain a greater percentage of his debts than any other of his creditors of the same class.
'The bankrupt, being insolvent, and knowing himself to be insolvent, was discovered by the surety on his bond as trustee under the Parsons will, not to be in the possession of some of the securities which formed a part of the trust estate, and which should have been in his possession as trustee. He was being urged by the surety to make good this shortage. For the purpose of doing so, he placed the bonds in question in a safe-deposit box, taken and agreed on by himself and the surety as a separate place of deposit for the securities belonging to this trust. In the box were placed also those securities belonging to the trust funds which had not gone out of his possession. All the securities thus placed in the box and held as constituting the trust funds have since remained there. The bankrupt has been removed as trustee, and the respondent, his successor in the trust, has at present the possession and control of the contents of the box, including the bonds in question.
Putting to one side the identity of Shaw as an individual and Shaw as the trustee of the trusts, there are the elements of a preference. In other words, there is indebtedness; Shaw is indebted to all of the estates of which he was trustee. He used his individual property to pay the indebtedness to the Parsons trust, and he then gave that trust a preference over the others. It was enabled to the extent of the property transferred to obtain a greater percentage of its debts than the other trusts. What, then, stands in the way of setting the transfer aside? The debt was not a provable one in bankruptcy, it is contended, and on that contention the case is rested, and to it we may direct our considerations, and in that the provisions of the statute become necessary elements.
'A person shall be deemed to have given a preference, if, being insolvent, he has, within four months before the filing of the petition, . . . made a transfer of any of his property, and the effect of the enforcement of such . . . transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.' 32 Stat. at L. 799, chap. 487, § 13, U. S. Comp. Stat. Supp. 1911, p. 1506.
Appellant deduces from these definitions that no question of a preference can arise except when the transfer is made to the owner of a provable claim, or to his agent, and that no claim is provable except when enumerated in § 63a, and none other can be liquidated under paragraph b. Of the claims enumerated in § 63a, the fourth is the only one with which we are concerned. It is as follows: '(4) Founded on an open account, or upon a contract, express or implied.' The final contention of appellant is that one, to receive a preference, must be a creditor of the bankrupt upon a contract, express or implied. It is not enough that there be some kind of legal or equitable claim against the bankrupt. These postulates laid down, he builds upon them an argument of great technicality to show that the trusts of Shaw were not his creditors, and therefore could not receive from him a preference. An obligation to the trusts is not denied, but it is an obligation, it is asserted, which was represented entirely by his bond, and had no remedy but by a suit on the bond. The liability of Shaw, it is further contended, considered independently of the bond, was in the nature of a pure tort liability which could not be waived and the remedies of a contract availed of.
That some torts may be waived and be the basis of provable claims is decided in Crawford v. Burke, 195 U. S. 176, 187, 49 L. ed. 147, 151, 25 Sup. Ct. Rep. 9. Crawford and one Valentine were stockbrokers and dealers in investments. They had in their possession certain shares of stock which they held as a pledge and security for the amount due them by Burke on the stock. They sold Burke's reversionary interest in the stock, whereby it was wholly lost. He sued them in trover. They set up their discharge in bankruptcy. It was held, the court speaking through Mr. Justice Brown, to be clear that the debt of Burke was embraced within the provisions of paragraph a, as one 'founded upon an open account, or upon contract, express or implied,' and might have been proven had he chosen to waive the tort and take his place with other creditors of the estate. The discharge in bankruptcy was held on other provisions of the act not to be a defense. The case was applied and followed in Tindle v. Birkett, 205 U. S. 183, 186, 51 L. ed. 762, 764, 27 Sup. Ct. Rep. 493, in an action to recover damages claimed to have been sustained by false and fraudulent representations. It was decided that the claim was one provable under § 63a as 'founded upon an open account or upon a contract, express or implied.' It is, however, said that these cases are explained and limited in Frederic L. Grant Shoe Co. v. W. M. Laird Co. 212 U. S. 445, 53 L. ed. 591, 29 Sup. Ct. Rep. 332, to instances 'where there is a claim arising out of a contract, but of such a nature that there is at the same time an independent remedy in tort.' To make this distinction available, appellant must establish his contention that there was no contractual relation, either between Shaw and his trusts or the cestuis que trust of the trusts; in other words, that the sole liability was upon Shaw's bond. There is no other remedy, is the repeated insistence, and that only after a final accounting has been had in the probate court, showing a liquidated balance due from the accountant. Then, and not until then, as we understand appellant, a creditor emerges with a provable claim. Appellant, however, halts somewhat at the logic of his argument, and ventures to say that a decision in his favor does not necessarily involve a decision that a claim upon the bond of the defaulting trustee could not be proved for a dividend in the name of the probate judge. But is not this concession in opposition to the relation asserted to exist between a provable debt and a transfer of property on account of it being a preference?
We have considered the contentions of appellant somewhat minutely, so as to fully present them. The lower courts, while giving attention to the technical elements of appellant's arguments, cut through them to apply the fundamental purpose of the bankruptcy law; that is, equality between creditors. The district court, following Bush v. Moore, 133 Mass. 198, decided in 1882 under a provision of the Massachusetts insolvency laws which was similar to the provision in the bankruptcy act of the United States, found no difficulty in the same person, considered in different capacities, acting as giver and receiver of a fraudulent preference. The court of appeals met the contention of appellant that there must be a contractual relation, and decided that it existed, both on account of the bond and independently of the bond. The court said: 'It is true that, in the ordinary course, enforcing the bond would be at the end of the proceedings, and not at the beginning. Nevertheless, as the equitable rules which govern in bankruptcy always look to the end, and disregard the intervening datails as only steps to reach the end, there was in this case a contract from the beginning,that is, the bond,which was capable of liquidation on the rules explained in Tindle v. Birkett, 205 U. S. 183, 51 L. ed. 762, 27 Sup. Ct. Rep. 493. . . . Aside from this and independently of the bond, we believe there is an obligation resting on a defaulting testamentary trustee to restore the value of the assets embezzled, which is of a contractual character.'
But this, appellant contends, is to evolve 'two moral persons out of one embezzler.' The criticism only can be made by putting out of view what the 'one embezzler' represents. He is one being, but acts in more than one capacity, and in all of his capacities he has duties and obligations. The relation of a trustee to the trust property is not the same as his relation to his individual property. He certainly may incur obligations to the trust. He can only satisfy the obligations out of his individual property, and by doing so may deplete it, make it deficient, to satisfy its obligations. These are realities, not fictions. We must overlook essential things to disregard them, and hence the decision in Bush v. Moore, supra. Moore was the guardian of his son, and wrongfully appropriated to his own use the moneys of his ward. Within six months preceding his insolvency, and being insolvent, intending to restore the funds he had appropriated, he deposited in the defendant bank the necessary sum derived from his private property. His assignees in insolvency sued in equity to recover the sum as a preference, alleging that he at the time was insolvent, and acted in contemplation of insolvency. The Massachusetts statute made void any payment or conveyance of property by an insolvent 'to any creditor or person having a claim against him' and gave power to the assignee to recover the property.
To the contention that two persons were necessary to consummate a preference, one to transfer and the other to receive the property, the court answered: 'But where the same person acts as the giver and receiver of the security, the concurrence and participation of two parties to the fraudulent preference exists. . . . One individual acting in two capacities, as debtor and on behalf of the creditor, may constitute the two persons contemplated by the statute.' And, supplying the element of knowledge of the insolvency and the preference required by the statute, the court said that the ward was bound by the knowledge of his guardian.
The case is certainly determinative of appellant's contention that accounting in the probate court was necessary as a condition to a provable claim, or that a suit on a bond was the only remedy available for the misappropriation of the funds by a guardian. This applies as well to a trustee; and that there may be a contractual obligation of one trust to another under the laws of Massachusetts is decided in Bremer v. Williams, 210 Mass. 256, 96 N. E. 687. In that case a person who was the sole trustee of two separate estates paid the taxes due from one of them with money embezzled from the other. It was held that the new trustee of the latter could maintain suit in equity to recover from another unjustly enriched by the embezzlement. The liability of the latter to the former, the court said, grew out of an implied or constructive obligation, and did not rest upon an express trust; and, being such, the statute of limitations would be a bar in equity as well as in law. In other words, the court recognized that from the misuse of the funds the law would imply an obligation to repay. This ruling brings the case at bar within Crawford v. Burke and Tindle v. Birkett, even if their application be as limited as appellant contends. It may be questioned if they are so limited. They recognize the relation of § 63a to § 17. Section 17 excludes certain debts from discharge; among others, those created by the bankrupt's 'fraud, embezzlement, misappropriation, or defalcation while acting as an officer in any fiduciary capacity.' It was said in Crawford v. Burke: 'If no fraud could be made the basis of a provable debt, why were certain frauds excepted from the operation of the discharge?' The question was pertinent in view of the language of the section. It provides that 'a discharge in bankruptcy shall release a bankrupt from all of his provable debts, except such as,' etc. The relation of the section was also recognized in Friend v. Talcott, 228 U. S. 27, 57 L. ed. , 33 Sup. Ct. Rep. 505. It is there declared that § 17 enumerates the debts provable under § 63a which are not discharged. Among them, we have seen, are those created by fraud, embezzlement, misappropriation, or defalcation in any fiduciary capacity. It would seem, therefore, to follow that the conversion of trust funds creates a liability provable in bankruptcy.
The court of appeals expressed the hardship of a contrary conclusion. 'Moreover,' the court said, 'it will be a great hardship if the various estates of which Shaw was trustee cannot recover any part of their loss of about $350,000 by sharing in his bankrupt estate. This might, of course, in this instance, be but a very small dividend: but in another instance it might be very near the face of the default. Any construction which would leave such a result as that cannot, of course, be accepted unless fairly forced upon us.' 106 C. C. A. 69, 183 Fed. 523.
In this, we think, the court was right. Equality between creditors is necessarily the ultimate aim of the bankrupt law, and to obtain it we must regard the essential nature of transactions, not their forms or accidents. As we have said, there may be an unity of the person in the individual and the trustee, of the individual and the guardian; we must look beyond it to the difference in his capacities and the duties and obligations resulting from it. These duties and obligations are as distinct and insistent as though exercised by different individuals, and have the same legal consequences. The unity of the person has, of course, an effect. It constitutes such relationship between the different capacities exercised as to impute knowledge of their exercise and for what purpose exercised. Bush v. Moore, 133 Mass. 198; Atlantic Cotton Mills v. Indian Orchard Mills, 147 Mass. 282, 9 Am. St. Rep. 698, 17 N. E. 496; Rogers v. Palmer, 102 U. S. 263, 26 L. ed. 164; Atlantic Bank v. Merchants' Bank, 10 Gray, 532, cited in United States v. State Nat. Bank, 96 U. S. 30, 36, 24 L. ed. 647, 648.