Hardie v. Swafford Bros. Dry Goods Co.

SHEEBY, Circuit Judge

(dissenting). After the bankruptcy act of 1898 (Act July 1, 1898, c. 541, 30 Stat. 550 [U. S. Comp. St. 1901, p. 3418]) had been in force nearly five years, Congress discovered that section IT was too liberal in permitting discharges. It was found that the bankrupt could obtain a discharge when it seemed inequitable and unjust for him to have it. There were in the act only two grounds named on which the granting of the discharge could be opposed: When he has (1) committed an offense punishable by imprisonment as herein provided; or (2) when he has, with intent to conceal his true financial condition, destroyed, concealed, or failed to keep books of account or. records from which such condition might be ascertained. Section 14b. Clause 1 relates only to criminal offenses, and clause 2 involves intentional wrong. On February 5, 1903, the act was amended by adding four additional grounds upon which the right to a discharge might *593 be contested. This case involves the construction of the third ground added by the amendment, which provides that the court must discharge the applicant, unless he has (3) “obtained property on credit from any person upon a materially false statement in writing made to such person for the purpose of obtaining such property on credit.” Section 14b, as amended (chapter 487, § 4, 32 Stat. 797 [U. S. Comp. St. Supp. 1907, p. 1026]). This clause involves no specific intent, nor offense punishable under the ad. The court below held that it was applicable to a partnership and to the members thereof, and refused a discharge to a member because the firm, without the knowledge of the applicant, acting by another member, had obtained property on a false written statement, contrary to the terms of the clause. The question, when the principle involved is considered, is whether a person is barred of his discharge by clause 3 when he obtains the property l>3r a materially false statement made by an agent acting within the scope of his authority.

Section 14 is applicable to “any person” who may be adjudged a bankrupt, including corporations and partnerships. Section 1 (19), and sections 4 and 5. Clause 3 of the amendment is therefore, by the words of the act, made applicable to partnerships and corporations. A partnership, by the terms of the act, “during the continuation of the partnership business, or after its dissolution and before final settlement thereof, may be adjudged a bankrapt.” Section 5. The partnership is made a separate entity, and, as such, subject to the terms of the act. Under the act before its amendment, a discharge did not release the bankrupt from a debt for property “obtained by false pretenses or false representations.” Section 17. The amendment, therefore, was not to prevent a discharge from the liability for property obtained by the materially false statement, and the discharge, neither before nor since the amendment, releases the bankrupt from such liability. But it releases him from his general debts, and it was to prevent this release in the cases covered by the amendment that the several grounds of opposition to the discharge were enacted. The evil and wrong to be corrected by clause 3 was the obtaining property on credit by false written statements. Before its enactment, the bankrupt might add largely to his estate by making false written statements, and yet obtain a discharge as to all of his debts (with the few statutory exceptions), except the debt to tlie person to whom he made the false representations. The purpose of the amendment was to prevent this, and to deprive the bankrupt who made such statement of his discharge. The evil is the same whether the bankrupt acts himself or by an agent. The creditor loses his property because of his reliance upon a materially false written statement. And it appears to me wrong to permit the bankrupt to take shelter behind his agent’s act while he profits by tlie fraud committed in his name.

The construction placed on the statute by the opinion just read tends, I think, to defeat the purpose of the amendment. Mercantile business is to a large extent conducted by firms and corporations, and, if the doctrine of agency is to have no application in the enforcement of clause 3, the false written statement made to obtain credit can be made without risk as to obtaining the discharge. A firm may *594 be composed of ten' members, and only one, as managing partner, may make the false statement and obtain property for the firm, and nine members may be discharged, although the firm has reaped the benefit of the fraud. And every member can secure his discharge if the firm has an agent, who is not a member thereof, to make a false statement. The assets of the firm being distributed, and it dissolved and out of business, its failure to obtain a discharge as a partnership would not matter to the discharged members. Firm debts are provable debts also against each member as an individual bankrupt, and the partnership debts are discharged, so far as they are individual liabilities, by the discharge of the partner in individual proceedings. 2 Remington on Bankruptcy, § 2796. While a partnership is a separate entity, the substantial thing that makes it is the individual members, and to.discharge them is to emasculate clause 3 so far as it is applicable to partnerships. A single person engaged in business may make a materially false' statement in writing through his managing clerk or agent, and thereby obtain credit and property. Yet, on the principle announced, he would be entitled to his discharge on his denial of guilty knowledge of the false statement, although he had received the fruits of the fraud, unless his knowledge of his clerk’s action could be affirmatively proved — which, in practice, would usually be impossible.

And is clause 3 not to be applied to bankrupt corporations? If so, it can only be done by holding the principal, when he or it applies for a discharge, bound by the materially false written statement made by the agent within the scope of his authority. If the idea is to prevail that the discharge is not to be barred by the false written statement made by an agent acting within {he scope of his authority, clause 3 of the amendment cannot be applied to partnerships at all, nor to corporations, for both must act by agents. And that view is in conflict with several provisions of the act. It seems to me that the only way to give effect to the intention of Congress, as shown by clause 3, is to hold that it is applicable to partnerships and corporations (In re Marshall Paper Co., 102 Fed. 872 , 43 C. C. A. 38 ) which become bankrupts, and that when the former, or the individual partners, seek a discharge from the partnership debts, neither can be discharged if the partnership, acting by a duly authorized agent, has obtained property on credit from any person upon a materially false statement in writing made to such person for the purpose of obtaining such property on credit.

The cases cited in the opinion of the court, with one exception, relate to instances where the discharge of the bankrupt was opposed on a ground involving an “offense punishable by imprisonment” (clause 1), or where a forbidden act was done with a wrongful or fraudulent “intent.” Such cases are distinguishable from a case arising under clause 3, where no question of punishable offense is involved, and where Congress has not used the word “intent,” nor its equivalent, but has made a described act, done for the purpose of obtaining property, a bar to a discharge.

The only case cited that relates to the ámendment in question is In re Dresser & Co. (D. C.) 13 Am. Bankr. Rep. 637, 144 Fed. 318 . *595 The excerpt from that case quoted in the opinion of (lie majority appears in the report of the referee. No exception was taken to this conclusion of the referee, and the court, iti deciding the case, makes no allusion to that part of the referee’s report ( 144 Fed. 318 ), nor was that part of the report mentioned when tlic same case reached the appellate court ( 115 Fed. 1021 , 74 C. C. A. 680 ). The fact that this report of the referee was acquiesced in by the parlies, and not sustained by the opinion of either court, is mentioned in Re Gilpin (D. C.) 160 Fed. 171, 182 , a well-considered and learned opinion which clearly shows that the referee’s report is not sound in principle.

I have found no case directly in point construing clause 3, but the general principle that each partner is the agent of the firm as to all business within the scope of the partnership, and that, if one partner makes false or fraudulent representations of fact, the other partners are bound by such statements, although made without their knowledge, is recognized in the construction of the bankruptcy acts both in this country and in England. Strang v. Bradner, 111 U. S. 561 , 5 Sup. Ct. 1038, 29 L. Ed. 248 ; Cooper v. Prichard, 11 L. R. Q B. Div. 351.

With all my deference for the opinion of my Brethren, I cannot concur in their view that there is ho reason in “law, business, or morals” for the construction the learned District Court placed on the statute. In re A. F. Hardie (D. C.) 143 Fed. 607 . The construction, I think, is good in law, because it is based on the apparent intention of Congress; in business, because it will tend to prevent false written statements to secure credit; and in morals, because it makes for fair dealing and righteousness.