Central Hanover Bank & Trust Co. v. Herbst

• Decision Date: 06 December 1937
• Docket Number: No. 138.,138.
• Citation: 93 F.2d 510
• Parties: CENTRAL HANOVER BANK & TRUST CO. v. HERBST.
• Court: U.S. Court of Appeals — Second Circuit

93 F.2d 510 (1937)

CENTRAL HANOVER BANK & TRUST CO. v. HERBST.

No. 138.

Circuit Court of Appeals, Second Circuit.

December 6, 1937.

Henry H. Salzburg, of New York City (Benjamin Beskin, of New York City, on the brief), for appellant.

Jones, Clark & Higson, of New York City (Samuel R. Feller, of New York City, Leo. H. Hirsch, Jr., of New York City, of counsel), for appellee.

Before L. HAND and SWAN, Circuit Judges.

L. HAND, Circuit Judge.

This appeal is from an order of the bankruptcy court, vacating a stay which the bankrupt had procured enjoining the prosecution of proceedings against him in a state court. The facts are as follows. Herbst, the bankrupt, by profession a dentist, had been appointed receiver of a parcel of real property in a suit of foreclosure in the Supreme Court of New York. He received allowances of $42,000, and when the property was sold, presented his intermediate account for settlement, which the court passed and allowed him $5,674.54 in addition to what he had already had. Without waiting for the time to appeal from this order to expire, or consulting the plaintiff in foreclosure as to whether it intended to appeal, he withdrew this money and has spent it. The plaintiff appealed to the Appellate Division (Central Hanover B. & T. Co. v. Williams, 244 App.Div. 566, 280 N.Y. S. 314) from the order passing the intermediate account, which that court modified by denying the added allowance; judgment was entered against Herbst for that amount of which he has paid only a part. Upon final settlement of his account a new judgment was entered against him for the unpaid balance, which the Court of Appeals of New York on June 1, 1937, decided that his surety must pay. Central Hanover B. & T. Co. v. National Surety Corp., 274 N.Y. 579, 10 N.E.2d 560. The surety at once moved ineffectively to punish him for contempt, and on August 13, 1937, filed a creditors' bill against him ("proceedings supplementary to execution"). Thereupon on the 16th he was adjudicated a voluntary bankrupt and procured the stay which has been vacated by the order appealed from. The only questions raised are whether the claim is dischargeable under section 17 (a) (4) of the Bankruptcy Act (11 U.S.C.A. § 35 (4); that is, whether it was created by the bankrupt's "fraud, embezzlement misappropriation, or defalcation while acting as an officer or in any fiduciary capacity"; and whether, having been discharged, he was acting "in any fiduciary capacity," when he took the money.

Arguendo we shall assume that Herbst's withdrawal of the money was neither a "fraud," "embezzlement," nor "misappropriation," for we think that in any event it was a "defalcation." Under the Act of 1800, 2 Stat. 19, 30 (section 34), a discharge relieved bankrupts of all their debts without exception, provided they conducted themselves properly; but the statute applied only to those engaged in commerce and was confined to involuntary bankruptcies. Under section 4 of the Act of 1841 (5 Stat. 443) a discharge also relieved bankrupts of all their debts, but for the first time and after much dissension voluntary bankruptcy was provided for. The word, "defalcation," first appears in section 1 of that act (5 Stat. 440) and only as part of the definition of those who might become voluntary bankrupts; they were those who did not owe debts "created in consequence of a defalcation as a public officer; or as executor, administrator, guardian or trustee, or while acting in any other fiduciary capacity." Colloquially perhaps the word, "defalcation," ordinarily implies some moral dereliction, but in this context it may have included innocent defaults, so as to include all fiduciaries who for any reason were short in their accounts. It must be remembered that the "fiduciary capacity" was limited to "special" or "technical" fiduciaries. Chapman v. Forsyth, 2 How. 202, 208, 11 L.Ed. 236. Section 11 of the Act of 1867 (14 Stat. 521) removed the former limitations of the Act of 1841 upon voluntary bankruptcies, and involuntary petitions were not longer confined to those engaged in commerce (section 39, 14 Stat. 536). However, for the first time not all debts were discharged, the exceptions appearing in section 33, 14 Stat. 533, which incorporated the old clause of section 1, compressed into the words, "defalcation as a public officer, or while acting in any fiduciary character," before which it interpolated the phrase, "the fraud or embezzlement of the bankrupt." Whatever was the original meaning of "defalcation," it must here have covered other defaults than deliberate malversations, else it added nothing to the words, "fraud or embezzlement." We do not understand that the Supreme Court questioned this in Crawford v. Burke, 195 U.S. 176, 25 S.Ct. 9, 49 L.Ed. 147, where it held that the suffix "as a public officer" etc., which had limited only "defalcation" in the Act of 1867, applied to the whole of subdivision 4 of the Act of 1898. The successful argument there was that otherwise part of subdivision two would have...