This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
The Bankrupt Act of 1898 also excepts provable debts created by the fraud, embezzlement, misappropriation or defalcation of the debtor while acting as an officer or in any fiduciary capacity. Similar provisions are found in other bankrupt acts.1
6 Ames v. Moir, 138 U. S. 306; affirming 130 111. 582; 22 N. E. 535.
7 Broadnax v. Bradford, 50 Ala. 270; Turner v. Atwood, 124 Mass. 411. (The action in which this question arose being " tort or contract.")
8 Morse v. Hutchins, 102 Mass. 439.
9 Bank v. Crandall, 87 Mo. 208. (The court points out that a different result would have been reached had the fraudulent use of the bonds been made after the debt had been incurred.)
10 Strang v. Bradner. 114 U. S. 555; affirming 89 N. Y. 299.
11 Forbes v. Thomas, 22 Neb. 541; 35 N. W. 411.
12 Forsyth v. Vehmeyer, 177 U.S. 177; affirming Forsyth v. Vehmeyer, 176 111. 359; 52 N. E. 55.
1 Chapman v. Forsyth, 2 How.
These words in the act of 1898 are the same as those in the acts of 1867 and 1841; and have the same meaning.2 The question whether the words "while acting as an officer or in any fiduciary capacity " apply to all the classes of debts named in this clause or only to the latter classes is discussed elsewhere.3 A debt incurred by the defalcation of a public officer,4 or by the fraud of an officer of a corporation, as of a bank,5 is not barred by a discharge in bankruptcy. The term "fiduciary capacity " includes technical trusts, but not such trusts as the law implies from contract relations or from relations of general trust and confidence.6 Thus it includes technical trustees,7 receivers,8 executors and administrators9 and guardians10 as far as they are acting in a trust capacity. It does not include debts created by special contract between the parties in fiduciary capacities.11 It does not include the liability of a surety on the bond of a trustee. If such surety obtains a discharge in bankruptcy this clause of the bankrupt act will not prevent such discharge from barring liability on such bond ;12 nor does it include the liability of one who has made default in his trust capacity and who has given his note to his sureties to reimburse them for sums advanced to cover such defalcation.13 Actual intent to deprive the beneficiary of the property or fund permanently is not necessary. Thus A, a trustee for the creditors of X and afterwards appointed as receiver of X's property, loaned the trust funds to a firm of which he was a member, taking their note therefor. He concealed the fact of this loan as long as he could. It was held that this debt was contracted in a fiduciary capacity, and was not barred by A's discharge in bankruptcy.14 This clause of the statute includes both active and passive wrong-doing. If the liability was incurred through neglect, as distinguished from active wrong-doing, such debt is not barred by a discharge.16 If a debt is created by fraud in a fiduciary capacity, the interest thereon is a mere incident of the debt and is not affected by such discharge.16 This clause of the bankrupt act does not include implied trusts; or actual trust and confidence existing between persons not in technical fiduciary relations. Accordingly, a buyer and seller of persona] property are not thereby brought into fiduciary relations.17 Hence, a judgment against the vendee for the purchase price of the goods, even though the sale was induced by fraud,18 is not a debt created while acting in a fiduciary capacity. A shipped goods to B to be resold by him under a contract, on the back of which was a memorandum to the effect that B was to hold the goods and their proceeds " in trust and separate for the settlement of our account." This was held not to be sufficient to establish a technical trust; and therefore B's debt to A was barred by B's discharge in bankruptcy.19 So a debt due from an agent,20 a commission merchant,21 or an attorney at to the same eflaw,22 to his principal arising out of the transaction of the agency, is not within this clause. The liability of a creditor to return collateral pledged to secure a debt, after payment of the same,23 or to pay the surplus left out of the proceeds of such collateral after payment of the debt,24 is not created in a fiduciary capacity. So where X pledged certain securities with A to secure X's debt to A, and A pledged them to B to secure A's debt to B, A's liability to X was not as trustee or in a fiduciary capacity.25 If, however, an agent intrusted by his principal with money to be loaned on trust deed or mortgage, makes such loan, taking the title to himself as trustee, he thereby becomes a technical trustee, and his failure to pay over the proceeds arising on foreclosure of such trust deed creates a debt while he is acting in a fiduciary capacity.26 The misappropriation of money by one partner while acting in the partnership business, does not, unless it is in violation of an express trust, create a debt owing by one acting in a fiduciary capacity.27 A mere breach of contract is not fraud within the meaning of this section. Thus A sold wood to B, the title to remain in A until the wood was paid for. B sold the wood and appropriated the proceeds. His liability was held not to be created by fraud, embezzlement, or misappropriation while acting in a fiduciary capacity.28 A borrowed money from B under a contract whereby A was to pay interest to X for life as long as A thought that X was conducting herself properly; but if not, the interest was to accumulate, to be paid over with the principal to the ultimate fect owner. This was held not to be a trust. Hence A's debt was barred by his discharge in bankruptcy.29 Some authorities, however, construe the word " fraud " to include more than is included by the courts in the cases already discussed, and give a broader meaning to " fiduciary capacity." Thus misappropriating the proceeds of a note received for collection,30 or money received to use in purchase of land for the party advancing the money,31 or to buy exchange,32 or money collected for laundry work by an agent working on a commission,33 has been held to create debts which are not barred by a discharge in bankruptcy.
(U. S.) 202; Maybury v. Cook, 121 Cal. 588; 54 Pac. 95; Herrlich v. McDonald, 80 Cal. 472; 22 Pac. 299; Mock v. Howell, 101 N. C. 443; 8 S. E. 167; Pawlet v. Kelley, 69 Vt. 398; 38 Atl. 92.
2 Crosby v. Miller, 25 R. I. 172; 55 Atl. 328.
3 See Sec. 1556.
4 Madison v. Dunkle, 114 Tnd. 262; 16 N. E. 593; Johnson v. Auditor, 78 Ky. 282; Grantham v. Clark, 62 N. H. 426.
5 Gerner v. Yates, 61 Neb. 100; 84 N. W. 596. (An action for defrauding third persons by a false statement of the condition of the bank.)
6 Johnson's Administrator v. Par-menter. 74 Vt. 58; 52 Atl. 73.
7 Donovan v. Haynie, 67 Ala. 51;
Field v. Howry, - Mich. - ; 94 N. W. 213; Mock v. Howell, 101 N. C. 443; 8 S. E. 167.
8 Field v. Howry. - Mich. - ; 94 N. W. 213.
9 Laramore v. McKinzie, 60 Ga. 532; Waller v. Edwards, Litt. Sel. Cas. (Ky.) 348; Johnson's Administrator v. Parmenter, 74 Vt. 58; 52 Atl. 73.
10 Simpson v. Simpson, 80 N. C. 332.
11 Amoskeag Mfg. Co. v. Barnes, 49 N. H. 312.
12 Jones v. Knox. 46 Ala. 53; 7 Am. Rep. 583; Eberhardt v. Wood, 6 Lea (Tenn.) 467; Davis v. Mc-Curdy. 50 Wis. 56:): 7 N". W. 665.
13 Light v. Merriam. 132 Mass. 283.
14 Field v. Howry, - Mich. -; 94 N. W. 213.
15 Warren v. Robison, 21 Utah 429; 61 Pac. 28.
16 Johnson's Administrator v. Parmenter, 74 Vt. 58; 52 Atl. 73.
17 Goodman v. Herman, 172 Mo. 344; 60 L. R. A. 885; 72 S. W. 546.
18 Goodman v. Herman, 172 Mo. 344; 60 L. R. A. 885; 72 S. W. 546.
19 In re Butts, 120 Fed. 966.
20 Bracken v. Milner, 104 Fed.
522; Du Pont v. Beck, 81 Ind. 271; Woodward v. Towne, 127 Mass. 41; 34 Am. Rep. 337.
21 Chapman v. Forsyth, 2 How. (U. S.) 202; In re Basch, 97 Fed. 761; Crosby v. Miller, 25 R. I. 172; 55 Atl. 328. So under the act o) 1867. Hennequin v. Clews, 111 U. S. 676. So under the act of 1841. Austill v. Crawford, 7 Ala. 335; Commercial Bank v. Buckner, 2 La. Ann. 1023; Hayman v. Pond, 7 Met. (Mass.) 328. See Woolsey v. Cade, 54 Ala. 378; 25 Am. .Rep. 711; Hayman v. Pond, 7 Met. (Mass.) 328; Pankey v. Nolan, 6 Humph. (Tenn.) 154. Contra, Mayberry v. Cook, 121 Cal. 588; 54 Pac. 95; Lemcke v. Booth, 47 Mo. 385; 4 Am. Rep. 326.
22 Woleott v. Hodge, 15 Gray (Mass.) 547; 77 Am. Dec. 381. Contra, Heffren v. Jayne, 39 Ind. 463; 13 Am. Rep. 281.
23 So in case of a broker. Crosby v. Miller, 25 R. I. 172; 55 Atl. 328.
24 Cronan v. Cotting, 104 Mass. 245; 6 Am. Rep. 232.
25 Hennequin v. Clews, 111 U. S. 676. For similar facts, see Palmer v. Hussey, 119 U. S. 96.
26 Bracken v. Milner. 104 Fed. 522. So Herrlich v. McDonald. 80 Cal. 472; 22 Pac. 299.
27 Pierce v. Shippee. 90 Til. 371; Gee v. Gee, 84 Minn. 384; 87 N. W. 1116.
28 Bryant v. Kinyon, 127 Mich. 152; 53 L. R. A. 801; 86 N. W. 531.