
    William J. Shepard, as Trustee in Bankruptcy of The Hopper-Morgan Company, Appellant, v. Roger Morgan, Respondent.
    Fourth Department,
    January 8, 1908.
    Corporation —fraudulent issue of corporate notes by officer — erroneous charge as to intent of defendant — bankruptcy — claims not discharged.
    Where in an action by the trustee of a bankrupt corporation it appears that the defendant, who was intrusted with the full control of the corporate affairs and authorized to borrow money on its behalf, knowing it to be in desperate financial straits, issued promissory notes of flip corporation for the accommodation of third parties,' to be used by' them as collateral for their own obligations under an agreement that they would return the notes before maturity and pay the defendant a small percentage for the loan of credit, it is error to charge in substance that in order for the trustee, who had been obliged to pay the notes,
    ' to recover against the defendant upon the ground of fraud,, the jury must find that he had an “ intent ” to wreck the company. Under the circumstances, the jury should have beeu allowed to find that his acts were fraudulent, even in the absence of an intent to destroy the corporation.
    Under subdivision 2 of section 17 of the national Bankruptcy Act of 1898, as ,, amended, a claim based upon a liability for obtaining property by false pretense and false representation is not discharged, even-though the claim be not reduced to judgment.
    The claim against the defendant based on the fraudulent acts aforesaid was not discharged by his bankruptcy before the claim was reduced to judgment.
    Kruse, J., dissented, with memorandum.
    Appeal by the plaintiff, William J. Shepard, as trustee, etc., from a judgment of the Supreme Court in -favor of the defendant, entered in the office of the .clerk of the county of Jefferson on the 8th day of April, 1907, upon the verdict of a jury, and also from an order entered in said clerk’s office on the. 19th day of April, 1907, denying the plaintiff’s motion for a new trial made upon the minutes.
    
      
      George S. McCartin, Henry Purcell and Elon P. Brown, for the appellant.
    
      E. C. Emerson, for the respondent.
   Spring, J.:

The Hopper-Morgan Company was a domestic corporation located in Glen Park, in the county of Jefferson, engaged in the business of manufacturing pads and tablets for use in schools. It had a capital stock of $150,'000, and did an extensive business. It was. organized in November, 1898, and commenced business in April following. There was a branch plant at Benton -Harbor, Mich., which was sold at considerable loss in April, 1903. The stock had been owned by Elisha Morgan, his son the defendant, and Bertrand Hopper, who had charge of the plant in Michigan and $100 treasury stock. After the sale of this plant Hopper, who had owned stock to the amount of $19,900 par value, turned into the company all his stock except $5,000. Morgan, Sr., died about that time and the stock was then owned as follows: $71,000 by his estate; $59,000 by the defendant; $5,000 by Hopper; $100 by Bridge, who was secretary and in active personal charge, and the balance was held by the company.

Tlie manufactured goods were sold on credit and ■ no money was received for them until September when the school year commenced. A large amount of money was required in carrying on the business and the corporation was a heavy borrower. During the year 1905 the business was increasing but the company was short of funds. It had borrowed of banks in Watertown until the limit was reached, and the defendant, who attended to the borrowing of money, was making desperate efforts to secure what was needed and did borrow $20,000 of one Todd, putting up his own certificates of stock in the company as collateral security. He also arranged with a loaning brokerage firm in New York to accept accounts at the ruinous deduction of twenty-five per cent from the face value, and had obtained something like $25,000 in this way. The Hopper-Morgan Company, although in tight stress for cash, was reputed to be worth $100,000 and was of good credit.

The defendant had an office in New York, and in March, 1905, .he met a man named Trautwine, who induced him to deliver.prom-, issory notes of the company to the amount of $50,000, which Trautwine, or the company which he represented, was to use as collateral security for its own obligations; and Trautwine agreed that these notes would be returned to the defendant a few days before they severally matured. In consideration of this . agreement Trautwine promised to pay to the defendant $1,500, which he did in a short time. When the arrangement was made Trautwine purported to represent the Emerson Shoe Company of Boston, Mass., but later, as the extraordinary plan was embodied in. a written statement, it was signed “ Emerson Manufacturing Co., Geoi’ge A. Smith, General Manager.” This statement provided: “ Said notes are given us for accommodation, and we hereby agree to return said, notes to the' Hopper-Morgan Co. at least five days before maturity, in the samp condition as when delivered, without cost' of any kind whatsoever to the Hopper-Morgan Co.” The defendant did not desire these notes put in circulation in certain localities where the company was transacting business, so at his suggestion the following postscript was added to the statement: These notes are not to be used in the following cities or towns: Watertown, JST. Y., all .of western Massachusetts,'■ including Worcester, neither Hartford, Conn.”

, In addition to this plan Trautwine agreed to. discount in a. short time paper of the Hopper-Morgan Company to. the extent of $10,000 for its benefit, and a note for that sum was also intrusted to him, on which .nothing was ever received by the company. A week later another similar arrangement was made by the defendant with Trautwine, aüd another list of notes to the amount of $50,000, was delivered' over and eventually the defendant received the three per cent, or $1,500, and the notes were put in circulation by Trautwine or his confederates. Later the defendant fell in with ' a man-named Morton, who-claimed to be president of the. mythical Emerson Manufacturing Company, and gave to him a note for $10,000 for discount and some of the notes already issued, were returned and others of different amounts "were substituted for them.. Morton went to Philadelphia with the defendant and introduced him to a promoter named Helms, who was exploiting a Mexican mining company and to whom he delivered $50,000 of the notes of the Hopper-Morgan .Company, Helms agreeing to pay him $5,000 for the privilege of using these notes and to return them to the defendant before maturity. He also met Anderson or Whelpley, for his identity and name are uncertain, and Brazeir, who were apparently in league with Morton and Trautwine in abetting the scheme and also interested in the fictitious Emerson Companyand additional paper was delivered over to these men under a like plan.

These notes issued to the Emerson Company were rapidly put in circulation in the Hew England States. Many of the proposed purchasers, in the main banks, communicated with the defendant inquiring as to the genuineness of the note tendered in each instance; and the defendant, still under the spell of Morton, apprised these purchasers that the notes were genuine and would be paid at maturity. The Hopper-Morgan Company, already burdened with an overload of debts, was unable to weather the storm of this influx of notes, and in September was in the control of a receiver.' These notes, to the amount of $56,730, were allowed by the referee in bankruptcy as valid claims against the manufacturing corporation; and many others were rejected by him. and actions are pending to test the good fai'th of the holders of these obligations.

Morgan was in middle life, well educated, a man of affairs, and understood the effect of allowing these notes to get in the possession of bona fide holders. He was authorized to borrow money on behalf of the company. His brother, who was-in business in Springfield, Mass., was its president, but gave no attention to its affairs. Bridge, the secretary, was looking after the business in Watertown and Grlen Park. The defendant really was in absolute control of its financial affairs. He did not consult either his .brother or Bridge in regard to the foolhardy efforts he was making to secure a mere pittance of money to tide over an emergency. He did not report to the company any list of these notes. Its books contained no record of them. Hone of the directors knew they were issued until the crash came.

Trautwine, Morton, Helmes and their co-conspirators were total strangers to the defendant. He made no attempt to learn of their financial standing or their reputation for business integrity. The negotiations, in their various stages, continued for several months. Failure to perform was frequent. Hew schemes were devised and palmed off on this credulous defendant, each requiring the issue or substitution of notes, and all the time he was flooded with letters and telegrams from banks and others seeking to gather information concerning the notes. He was vouching for their genuineness. . He was obtaining ho money from these plotters, still he continued pliable to their schemes.

The complaint sets out, in a general way, the facts I have delineated, and which are undisputed; and charges that the acts alleged “ were secretly and furtively done ” by the defendant and without the knowledge of the company or its creditors, and he “ carefully concealed” from them “all such wrongful and unlawful acts, and committed the same knowingly,and fraudulently, and with the intent to defraud and injure the parties aforesaid- against the interests and rights of the said Hopper-Morgan Company, or other members of said company and the creditors of the said company.”

The court in its charge to the jury, after stating that the action ■ 'was one in fraud, said.: ■“ I am not .aware in this case that any -evidence has been offered which can lead you to the question of what could have been his motive to do this, if he was interested and liad the design to wreck this company ; but nevertheless there may be in this case some testimony, some acts upon his part, that you may. find was the motive for doing it. I cannot recall all of the "facts that have been given to yon, or all of the correspondence, or all of the acts, but I' cannot now point to any single piece of testimony from which yon could find alone that lie-had a motive and'an intent in this case and a design to wreck the company, of which, he was a part, or to injure and defraud the creditors of it; but the evidence is all before you, the testimony rather, and it is for you to say and for you to point it out and find it if it is in the case; and if it is not in this case,, and if you cannot find in this case, upon your oaths, as men, that this defendant had a wicked motive and an intent and design to wreck this corporation, and to defraud and injure the creditors thereof, it would be your duty to find a verdict for him.” And again:. “As I said before,.in the eye of the law fraud is odious ; it is a fearful charge, and it cannot be presumed; but if you believe that this intent, this motive upon the part of this defendant, was a wicked motive, an intent and design to wreck this company and to in jure its-creditors and damage its creditoi’S, then it would be your right and your duty to find a verdict for the plaintiff. Of course in cases of this kind it takes the defendant’s body, but that should not deter you from finding a verdict against the defendant if you believe the truth and the facts are with the plaintiff.” Proper exceptions ivere taken to these statements to the jury.

The gist of the instructions from beginning to end, reiterated with much vigor, was that an intent “to wreck the company” must be found by the jury in order to warrant a verdict for the plaintiff. The gravamen of the action is fraud. The charge is that the defendant signed the name of the corporation he represented to promissory notes and permitted them to be circulated as accommodation paper, knowing that they were to be acquired by innocent purchasers. . As might reasonably be. expected these notes became valid obligations against the company. It is no answer to unlawful transactions of this kind that the defendant expected Trautwine and his abettors to return these notes canceled before maturity. The fraud was in the inception of the notes. He knew if these notes, or any considerable part of them, became debts of the company its ruin was certain. When confronted with the wrecking and disaster, which are the reasonable sequence of his unlawful acts, he cannot evade the charge of fraud by claiming that he did not intend to ruin the corporation. He did intend to deliver over the notes as genuine' obligations of the company. When he notified the banks that they would be paid at maturity he knew that they were without adequate consideration. He kept these transactions from the other officers of the company. They were never listed among its debts. The jury might have found an intent to defraud, to deceive the company and its creditors by this furtive conduct on his part. Ho matter about an -intent to wreck the company. That may have been the resulting damage, an incident to the chief fraudulent act in sending out these accommodation notes as if they were valid obligations of the company. He falsely asserted a material fact, to wit, that the notes were the genuine obligations which they purported to be. The trial court in submitting the case to the jury should not have made the wicked motive to wreck the company a test of the defendant’s culpability. That was too narrow an issue. If the jury found he signed these notes and delivered them over to Trautwine or his confederates expecting they' would be. transferred as obligations of the company, they might find in the circumstances contained in the record an intent to defraud the company and its creditors. His statement that he acted honestly and without intent to defraud is not conclusive. The best guide in ascertaining a man’s purpose is the acts which he has committed. From them the .jury may determine the motives of the defendant. Acts.when illegal or flagrantly culpable carry their own condemnation:

Again, the court disregarded the fraudulent .inception of the execution and delivery of the notes, which is an important circumstance in the'case. The defendant destroyed the' credit of the corporation by issuing its notes far beyond its ability to pay. He may have been sufficiently duped to believe that the men who induced him to set afloat these notes with inadequate consideration would return them to him. He was dealing with men he did not known He was secretly participating in transactions which would not bear the light. The consequence of the scheme, if carried out, was the. ruin of the corporation, whose interests were largely intrusted to him. The • stockholders and creditors were reposing confidence in him. In view of all these circumstances, the jury should have been permitted to determine whether his .conduct was fraudulent, even though there was no intention to destroy the cbrporation.

The defendant was adjudged ^a bankrupt by a decree of the District Court of the United States for the Southern District of Hew York, March 19, 1906, and it is contended that this discharge bars the claim of the plaintiff. Section 17, subdivision 2, of the Hational Bankruptcy Act of 1898 provided: “A discharge in bankruptcy shall release a bankrupt from all of his provable debts except such as * * * (2) are j udgments in actions for frauds, or obtaining property by false pretenses, or false representations,” etc. (30 U. S. Stat. at Large, 550.) This provision of the act was amended February 5, 1903, by substituting in place of “ judgments in actions for frauds,” etc.j the following: “liabilities for obtaining property by false pretenses or false representations.” (32 id. 798, § 5.)

If the claim is within the exception, there is' no. longer any necessity for a judgment to prevent its release by the discharge in bankruptcy. The action against the defendant is for fraud, and the facts proven, if satisfactory.to the jury, constitute “obtaining property by false pretenses or false representations.” Thé provable debts, which are excepted from the discharge in subdivision 4 of section 17 of this act, are those “ created by his fraud, embezzlement,, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity.”

In the Bankruptcy Act of 1867 the offense must have been committed by a “public officer.” (14 U. S. Stat. at Large, 533, § 33; U. S. R. S. § 5117.) The omission of the word “public” in the present statute is significant/ The defendant was treasurer of the IIopper-Morgan Company and authorized to pledge its credit for loans, and was, therefore, an officer within the import of the statute, and was also acting in a fiduciary capacity. (Harper v. Rankin, 141 Fed. Rep. 626.)

The judgment should be reversed and a new trial ordered, with costs to the appellant to abide event.

All concurred, except Reuse, J., who dissented in a memorandum.

Kruse, J. (dissenting):

I do hot quite see how we can hold that this claim is not cut off by the discharge in bankruptcy in view of our decision in Lewis v. Shaw (122 App. Div. 96).

In that case the plaintiff left with the defendant specific money for safekeeping; the defendant used it wrongfully, and very likely committed the crime of grand larceny in so doing. We held that the defendant’s liability was not one created by his fraud, embezzlement or defalcation while acting in any fiduciary capacity within the meaning of the Bankruptcy Law.; nor do I think that the defendant was an officer within the meaning of that law.

The decision in the case of Harper v. Rankin (141 Fed. Rep. 626), referred to by Fir. Justice Spbieg, seems to rest upon the proposition that the debt was created in a fiduciary capacity.

Reither do I see how the plaintiff’s cause of action can be regarded as one for obtaining money or property by false pretenses or false representations. It is true that the defendant may have committed a fraud upon his company, the plaintiff, by using its paper as he did, but how can it be said that he obtained the money or property of the corporation by false or fraudulent representations ? What false and fraudulent representations did he make to the corporation ?

As regards the charge it seems to me the exceptions were too general to raise the question upon which it is proposed to reverse the judgment. The questions for the jury to pass upon were formulated by the trial judge to the satisfaction of- both parties, and stated at the outset; and I think the questions were well understood by the jury.

I vote for affirmance.

Judgment, and order reversed and new trial ordered, with costs to appellant to abide event, upon questions of law and of fact.  