Section 63
a of the Bankruptcy Act, defining provable
debts, does not include a claim for unliquidated damages arising
out of a pure tort which neither constitutes a breach of an express
contract nor results
Page 251 U. S. 240
in any unjust enrichment of the tortfeasor upon which a contract
may be implied. P.
251 U. S.
248.
Clause
b of that section, in providing that
unliquidated claims may be liquidated in such manner as the court
shall direct and may thereafter be proved, refers to claims defined
as provable by clause
a, and not already liquidated,
especially those founded upon open account or contract, and has not
the effect of admitting all unliquidated claims, including those of
tortious origin.
Id.
Section 17 of the Bankruptcy Act, which declares that a
discharge shall release the bankrupt from all of his "provable
debts" except certain classes specified, refers to § 63 for
the definition of what debts are provable, and does not, by the
excepting clause, add other classes, but merely limits the effect
of a discharge, and this is true also of the amendment of February
5, 1903 (c. 487, § 5, 32 Stat. 797, 798). P.
251 U. S.
251.
To permit a person defrauded by a partnership to prove his claim
for damages as a
quasi-contract or equitable debt of the
partnership which profited, and also of the individual partners who
did not profit, by the fraud, would ignore the distinction between
partnership and individual debts and the respective equities of the
two classes of creditors as established by § 5 of the
Bankruptcy Act. P.
251 U. S.
254.
Worthless commercial paper, drawn by a partnership, was sold in
the course of its business, by means of fraudulent representations,
for a full consideration which went to the partnership and did not
profit the partners as individuals, save through their interests in
the partnership. The firm and its members individually having been
thrown into bankruptcy,
held that the claim of the
defrauded persons, against the individual partners -- as distinct
from their claim against the firm and therein their right to
participate as partnership creditors in any surplus that might
remain of individual assets after payment of individual debts --
was a claim in tort not provable in bankruptcy.
250 F. 6 affirmed.
The case is stated in the opinion.
Page 251 U. S. 246
MR. JUSTICE PITNEY delivered the opinion of the Court.
The transactions out of which this controversy arose took place
in the years 1913 and 1914. At that time, Le More and Carriere
carried on business as partners in the Cities of New Orleans,
Louisiana, and Mobile, Alabama. Afterwards, and in the month of
May, 1914, upon an involuntary petition in bankruptcy, the firm and
the individual members thereof were adjudged bankrupts in the
United States District Court for the Eastern District of Louisiana,
New Orleans Division, and the present respondents were elected and
qualified as trustees of both the partnership and the individual
estates. The present
Page 251 U. S. 247
petitioners, constituting the firm of Muller, Schall & Co.,
filed three proofs of claim, one against the partnership and one
against each of the individual partners, all based upon the same
transactions, which consisted of the purchase by claimants in the
City of New York, through an agent of the bankrupt firm named
Trippe, of certain bills of exchange and checks drawn by the firm
upon Loudon, Paris, and Antwerp, aggregating about $70,000, all of
which were sold to petitioners for full value on the faith of
certain fraudulent representations not necessary to be specified,
and, at maturity, were presented for payment, dishonored and
protested, and notice thereof given to the firm. At the time of
these transactions, Le More was in Europe and Carriere in New
Orleans, and neither of them participated in the particular
transactions, although both were cognizant of them and responsible
for the false representations. The particular drafts and checks
were not signed or indorsed by either partner, and neither profited
from their sale except through his interest in the firm. The
transactions occurred in the ordinary course of the firm's
business, except that they were fraudulent, and the proceeds of the
drafts and checks went to the credit of the firm and were used in
the conduct of its business. Petitioners' claim against the
partnership is based upon the drafts and checks as partnership
obligations in contract, and also upon the damages sustained by
reason of the fraudulent representations. The claims against the
individual estates of the partners in terms demand only damages for
the false representations, but are relied upon as showing also, by
inference, an individual liability in
quasi-contact or
equitable debt.
The trustees petitioned the district court that the latter
claims should be expunged. After a hearing, the referee in
bankruptcy, for reasons expressed in an elaborate opinion, ordered
that the claims against the individual
Page 251 U. S. 248
estates should be "expunged and disallowed," and the rights of
claimants to participate in dividends in such estates denied. Upon
review, the district court affirmed this order, and, upon appeal,
its decree was affirmed by the circuit court of appeals, 250 F. 6.
A writ of certiorari brings the case here.
No question is made as to whether the referee's order, in wholly
expunging the claims against the individual estates and denying to
petitioners all participation therein, went too far in view of the
provision of § 5
f of the Bankruptcy Act July 1, 1898,
c. 541, 30 Stat. 544, 548, that,
"Should any surplus remain of the property of any partner after
paying his individual debts, such surplus shall be added to the
partnership assets and be applied to the payment of the partnership
debts."
If the decision be sustained, petitioners nevertheless will be
entitled, upon establishing their claim against the partnership, to
participate as partnership creditors in any surplus that may remain
of individual assets after payment of individual debts. What was
asserted and overruled was a right to double proof, establishing a
separate and independent liability on the part of the individual
partners that would give to the claimants, in addition to their
participation in the partnership assets, a participation in the
individual assets on equal terms with other individual creditors
and in preference to other partnership creditors.
The first and fundamental question is whether a claim for
unliquidated damages, arising out of a pure tort which neither
constitutes a breach of an express contract nor results in any
unjust enrichment of the tortfeasor that may form the basis of an
implied contract is provable in bankruptcy. This question was
passed upon by the referee and by the district court; it has been
most elaborately argued pro and con in this Court; its general
importance in the administration of the Bankruptcy Act warranted a
review of the case by certiorari, and hence it is
Page 251 U. S. 249
proper that we dispose of it without regard to whether a like
result might follow, upon the particular facts of the case, from a
decision of any subordinate question.
Considering therefore the question stated: among other
definitions included in § 1 of the Bankruptcy Act is this:
"(11)
Debt' shall include any debt, demand, or claim provable
in bankruptcy." Section 63 runs as follows:
"Debts Which may be Proved. --
a Debts of the bankrupt
may be proved and allowed against his estate which are (1) a fixed
liability, as evidenced by a judgment or an instrument in writing,
absolutely owing at the time of the filing of the petition against
him, whether then payable or not, with any interest thereon which
would have been recoverable at that date or with a rebate of
interest upon such as were not then payable and did not bear
interest; . . . (4) founded upon an open account, or upon a
contract express or implied. . . ."
"
b Unliquidated claims against the bankrupt may,
pursuant to application to the court, be liquidated in such manner
as it shall direct, and may thereafter be proved and allowed
against the estate."
In
Dunbar v. Dunbar, 190 U. S. 340,
190 U. S. 350,
it was said:
"This paragraph
b, however, adds nothing to the class
of debts which might be proved under paragraph
a of the
same section. Its purpose is to permit an unliquidated claim coming
within the provisions of § 63
a to be liquidated as
the court should direct."
But in
Crawford v. Burke, 195 U.
S. 176,
195 U. S. 187,
the question whether the effect of paragraph
b was to
cause an unliquidated claim, susceptible of liquidation but not
literally embraced by paragraph
a, to be provable in
bankruptcy, was regarded as still open.
That clause
b provides the procedure for liquidating
claims provable under clause
a if not already liquidated,
especially those founded upon an open account or a contract express
or implied, is entirely clear, and has been
Page 251 U. S. 250
recognized repeatedly in our decisions.
Grant Shoe Co. v.
Laird, 212 U. S. 445,
212 U. S.
447-448;
Central Trust Co. v. Chicago
Auditorium, 240 U. S. 581,
240 U. S. 592.
Has it the further effect of admitting all unliquidated claims,
including those of tortious origin?
Historically, bankruptcy laws, both in England and in this
country, have dealt primarily and particularly with the concerns of
traders. Our earlier bankruptcy acts invariably have been regarded
as excluding from consideration unliquidated claims arising purely
ex delicto. Act of April 4, 1800, c.19, 2 Stat. 19;
Dusar v. Murgatroyd, 1 Wash. C.C. 13, 8 Fed.Cas. 140, No.
4, 199; Act of August 19, 1841, c. 9, 5 Stat. 440;
Doggett v.
Emerson, 1 Woodb. & M.195, 7 Fed.Cas. 821, 826, No. 3,962;
Act of March 2, 1867, c. 176, §§ 11 and 19, 14 Stat. 517,
521, 525; Rev.Stats. §§ 5014, 5067;
Black v.
McClelland, 3 Fed.Cas. 504, 505, No. 1,462;
In Re
Schuchardt, 8 Ben. 585, 21 Fed.Cas. 739, 742, No. 12,483;
In Re Boston & Fairhaven Iron Works, 23 F. 880.
Can it be supposed that the present act was intended to depart
so widely from the precedents as to include mere tort claims among
the provable debts? Its 63d section does not so declare in terms,
and there is nothing in the history of the act to give ground for
such an inference. It was the result of a long period of agitation,
participated in by commercial conventions, boards of trade,
chambers of commerce, and other commercial bodies. To say nothing
of measures proposed in previous Congresses, a bill in
substantially the present form was favorably reported by the
Committee on the Judiciary of the House of Representatives in the
First Session of the Fifty-Fourth Congress. Having then failed of
passage, it was submitted again in the Second Session of the
Fifty-Fifth Congress as a substitute for a Senate bill; after
disagreeing votes of the two houses, it went to conference, and, as
the result of a Conference
Page 251 U. S. 251
Report, became law. It is significant that § 63, defining
"Debts Which may be Proved," remained unchanged from first to last,
except for a slight and insignificant variance in clause (5) in the
final print, the word "interests" having been substituted for
"interest." House Rept. No. 1228, 54th Cong., 1st Sess., p. 39;
House Rept. No. 65, 55th Cong., 2d Sess, p. 21; Senate Doc. No.
294, 55th Cong., 2d Sess., p. 22. Evidently the words of the
section were carefully chosen, and the express mention of
contractual obligations naturally excludes those arising from a
mere tort. Since claims founded upon an open account or upon a
contract, express or implied, often require to be liquidated, some
provision for procedure evidently was called for. Clause
b
fulfills this function, and would have to receive a strained
interpretation in order that it should include claims arising
purely
ex delicto. Such claims might easily have been
mentioned if intended to be included. Upon every consideration, we
are clear that claims based upon a mere tort are not provable.
Where the tortious act constitutes at the same time a breach of
contract, a different question may be raised, with which we have no
present concern, and where, by means of the tort, the tortfeasor
obtains something of value for which an equivalent price ought to
be paid, even if the tort as such be forgiven, there may be a
provable claim
quasi ex contractu. Crawford v.
Burke, 195 U. S. 176,
195 U. S. 187;
Tindle v. Birkett, 205 U. S. 183,
205 U. S. 186;
Clarke v. Rogers, 183 F. 518, 521, 522,
aff'd,
228 U. S. 228 U.S.
534,
228 U. S.
543.
Of course, §§ 63 and 17 are to be read together. The
reference in the latter section to "provable debts," defined in the
former, would be sufficient to show this.
See Crawford v.
Burke, 195 U. S. 176,
195 U. S. 193;
Tindle v. Birkett, 205 U. S. 183,
205 U. S. 186;
Friend v. Talcott, 228 U. S. 27,
228 U. S. 39;
Clarke v. Rogers, 228 U. S. 534,
228 U. S. 548.
It is petitioners' contention that § 17, as amended in 1903
(Act of February 5, 1903, c. 487, § 5, 32 Stat. 797, 798),
amounts to a legislative
Page 251 U. S. 252
construction admitting tort claims to proof. The section as it
stood before, and the nature of the amendment, are set forth in the
margin. [
Footnote 1] We are
referred to the committee's report (House Rept. No. 1693, 57th
Cong., 1st Sess., pp. 3, 6) as indicating that, by the law as it
stood, in the opinion of the committee, claims created by fraud,
but not reduced to judgment, were discharged; reference having been
made to
In re Rhutassel, 96 F. 597, and
In re
Lewensohn, 99 F. 73,
aff'd, 104 F. 1006, as
contradictory decisions upon the point. But neither the report of
the committee nor the language of the amendment gives the least
suggestion of an intent to enlarge the description of provable
claims as set forth in § 63. On the contrary, the purpose was
to limit more
Page 251 U. S. 253
narrowly the effect of a discharge by enlarging the class of
provable debts that were to be excepted from it. By the terms of
the section, both before and after amendment, the scope of the
exception was qualified by the fact that the discharge released the
bankrupt only from "provable debts." And if the excepting clause as
amended might seem to extend to some claims not otherwise provable,
its own force must be deemed to be limited by referring to §
63 for the definition of provability. It is not admissible to give
to this amendment, confessedly designed to restrict the scope of a
discharge in bankruptcy, the effect of enlarging the class of
provable claims.
Aside from § 17 or the amendment thereof, it has been held
by the federal courts generally that § 63 does not authorize
the liquidation and proof of claims arising
ex delicto and
unaffected by contract express or implied.
In re
Hirschman, 104 F. 69, 70, 71;
In re Yates, 114 F.
365, 367;
In re Crescent Lumber Co., 154 F. 724, 727;
In re Southern Steel Co., 183 F. 498.
And that the amendment of § 17 does not enlarge the class
of provable claims enumerated in § 63 has been recognized in
several well considered decisions of the federal courts which have
held, upon satisfactory grounds, that pure tort claims are not
provable.
In re United Button Co., 140 F. 495, 499
et
seq., on appeal,
Brown v. United Button Co., 149 F.
48, 52, 53;
In re New York Tunnel Co., 159 F. 688, 690. In
Jackson v. Wauchula Mfg. Co., 230 F. 409, 411, and again
in the present case (250 F. 7), the Circuit Court of Appeals for
the Fifth Circuit passed the question as unnecessary for the
decision.
There is an argument
ab inconvenienti based upon the
supposed danger that, if tort claims be held not provable, they may
be preferred by failing debtors without redress
Page 251 U. S. 254
under § 60
a and
b (30 Stat. 562), amended
February 5, 1903 (c. 487, § 13, 32 Stat. 797, 799), amended
June 25, 1910 (c. 412, § 11, 36 Stat. 838, 842), held to apply
only to provable claims.
Richardson v. Shaw, 209 U.
S. 365,
209 U. S. 381.
See also Clarke v. Rogers, 228 U.
S. 534,
228 U. S. 542.
We are not much impressed. If there be danger of mischief here,
other than such as may be reached under the provisions of §
67
e or § 70
e respecting fraudulent
conveyances and transfers (
see Dean v. Davis, 242 U.
S. 438,
242 U. S.
444), the Congress may be trusted to supply the remedy
by an appropriate amendment.
It is insisted by petitioners, further, that because the proofs
of the individual claims establish the responsibility of each
partner for the frauds, they are liable
in solido not only
as partners, but individually, and that, irrespective of whether
the claims are provable in tort for the fraud, they are provable,
and were properly proved both against the individual partners and
against the firm as claims in
quasi-contract or equitable
debt. But as the basis of a liability of this character is the
unjust enrichment of the debtor, and as the facts show that no
benefit accrued to the individuals as a result of the frauds beyond
that which accrued to the firm, the logical result of the argument
is that out of one enrichment there may arise three separate and
independent indebtednesses. Doubtless it would be conceded that a
single satisfaction would discharge all of the claims, but we are
dealing with a situation where, by reason of insolvency, it is not
to be presumed that claims will be satisfied in full, and, as
already pointed out, the effect of sustaining the right to double
proof would be to give petitioners not only a right to share in the
partnership assets on equal terms with other partnership creditors,
but a participation in the individual assets on equal terms with
other individual creditors and in preference to other partnership
creditors. Section 5 of the Bankruptcy Act (30 Stat. 547-548)
establishes on a firm basis the respective
Page 251 U. S. 255
equities of the individual and firm creditors. [
Footnote 2] Hence, the distinction between
individual and firm debts is a matter of substance, and must depend
upon the essential character of the transactions out of which they
arise. And since, in this case, the tort was done in the course of
the partnership business, for the benefit of the firm and without
benefit to the partners as individuals, no legal or equitable claim
as against the individuals that might be deemed to arise out of it,
by waiver of the tort or otherwise, can displace the equities of
other creditors, recognized in the Bankruptcy Act, and put
petitioners in a position of equality with others who actually were
creditors of the individual partners, and of preference over other
firm creditors.
Reynolds v. New York Trust Co., 188 F.
611, 619-620.
Decree affirmed.
[
Footnote 1]
Section as originally enacted (30 Stat. 550):
"Sec. 17. Debts Not Affected by a Discharge. -- a A discharge in
bankruptcy shall release a bankrupt from all of his provable debts,
except such as (1) are due as a tax levied by the United States,
the state, county, district, or municipality in which he resides;
(2) are judgments in actions for frauds, or obtaining property
by false pretenses or false representations, or for willful and
malicious injuries to the person or property of another; (3)
have not been duly scheduled in time for proof and allowance, with
the name of the creditor if known to the bankrupt, unless such
creditor had notice or actual knowledge of the proceedings in
bankruptcy; or (4) were created by his fraud, embezzlement,
misappropriation, or defalcation while acting as an officer or in
any fiduciary capacity."
Amendment of 1903 (32 Stat. 798) inserted in the place of clause
2 the following:
"
(2) are liabilities for obtaining property by false
pretenses or false representations, or for willful and malicious
injuries to the person or property of another, or for alimony due
or to become due, or for maintenance or support of wife or child,
or for seduction of an unmarried female, or for criminal
conversation."
NOTE: By a further amendment (Act of March 2, 1917, ch. 153, 39
Stat. 999), there was inserted after the word "female," instead of
"or for criminal conversation," the following: "
or for breach
of promise of marriage accompanied by seduction, or for criminal
conversation."
[
Footnote 2]
"Sec. 5. Partners. --"
"
* * * *"
"d The trustee shall keep separate accounts of the partnership
property and of the property belonging to the individual
partners."
"
* * * *"
"f The net proceeds of the partnership property shall be
appropriated to the payment of the partnership debts, and the net
proceeds of the individual estate of each partner to the payment of
his individual debts. Should any surplus remain of the property of
any partner after paying his individual debts, such surplus shall
be added to the partnership assets and be applied to the payment of
the partnership debts. . . ."
"g The court may permit the proof of the claim of the
partnership estate against the individual estates, and vice versa,
and may marshal the assets of the partnership estate and individual
estates so as to prevent preferences and secure the equitable
distribution of the property of the several estates. . . ."