In re Hammond

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: MANTON, SWAN, and CHASE, Circuit
• Citation: In re Hammond, 98 F.2d 703 (2nd Cir. 1938)
• Decision Date: 25 July 1938
• Docket Number: No. 347.,347.
• Parties: In re HAMMOND.

98 F.2d 703 (1938)

In re HAMMOND.^*

No. 347.

Circuit Court of Appeals, Second Circuit.

July 25, 1938.

Ernst, Gale, Bernays & Falk, of New York City (Murray C. Bernays and Abraham Friedman, both of New York City, of counsel), for appellant.

Sapinsley & Lukas, of New York City (Simon H. Rifkind, Alvin T. Sapinsley, and Edwin J. Lukas, all of New York City, of counsel), for appellee.

Before MANTON, SWAN, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

Upon his voluntary petition Harris Hammond was adjudicated a bankrupt on September 30, 1937. Thereafter, pursuant to section 11a of the Bankruptcy Act, 11 U. S.C.A. § 29(a), he moved for an order to restrain a judgment creditor, Irving Trust Company as trustee in bankruptcy of Sonora Products Corporation of America (formerly known as Acoustic Products Company), from taking any further steps, except in the pending bankruptcy proceedings, to collect a judgment of $1,938,755 entered against him prior to bankruptcy. The district court granted the requested stay, pending the bankrupt's application for a discharge, and by leave of this court the creditor has appealed.

The sole question for decision is whether the appellant's judgment, concededly a provable debt, represents a liability that is excepted from discharge under section 17 of the Bankruptcy Act, 11 U.S.C.A. § 35, the relevant provisions of which read as follows: "A discharge in bankruptcy shall release a bankrupt from all of his provable debts, except such as * * * (second) 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 (fourth) were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity * * *."

To determine the character of the liability upon which the appellant's judgment was founded, we must look to the suit in which it was rendered. In re Harber, 2 Cir., 9 F.2d 551. It was a suit in equity to compel the defendants to account for profits alleged to have been made in violation of their fiduciary duties to a corporation (for convenience referred to as Acoustic) of which several of the defendants, including Hammond, were directors. The District Court dismissed the bill on the merits, with an opinion reported as Irving Trust Co. v. Deutsch, 2 F.Supp. 971. This court reversed that decree with respect to Hammond and three other defendants. Irving Trust Co. v. Deutsch, 2 Cir., 73 F.2d 121. A very brief recapitulation of the facts will suffice to indicate the character of the liability decreed against them.

Acoustic obtained an offer from Reynolds & Co. of a one-third participation in the purchase of 600,000 shares of De Forest stock. At a meeting of the board of directors, the president of Acoustic reported his inability to procure the necessary funds, $100,000, to enable Acoustic to carry out its obligations, if it should accept the offer; and he announced that several individuals were desirous of taking over the proposal on their own behalf and were willing to extend to Acoustic the benefits contemplated by the acquisition of the stock. The contemplated benefits were access to patents controlled by the De Forest Company. Thereupon the directors voted to accept the offer on behalf of Acoustic and to notify Reynolds & Co. of its acceptance. When the time came for payment for the stock, Acoustic lacking the funds, several of its directors and others associated with them, made the payments and took the stock in their own names. An active market on the Curb Exchange was created for De Forest stock, and Hammond and his associates made large profits through the sale of their shares. This court imposed liability on the directors, Biddle, Deutsch and Hammond, upon the principle that a fiduciary may make no profit for himself out of a violation of duty to his cestui, even though he risk his own funds in the venture; that the rigid rule of "undivided loyalty" forbids directors of a solvent corporation "to take over for their own profit a corporate contract on the plea of the corporation's financial inability to perform." The defendant Bell, who was not a director, was held liable on the principle that "one who knowingly joins a fiduciary in an enterprise where the personal interest of the latter is or may be antagonistic to his trust becomes jointly and severally liable with him for the profits of the enterprise." No conscious purpose to defraud Acoustic was found by the district court or by this court; nor was the liability decreed by this court upon Hammond and his associates predicated upon conscious wrongdoing. Pursuant to the decision and mandate of this court, the district court entered an interlocutory decree against the four defendants above named, adjudging that their conduct in receiving and dealing with the De Forest stock was "an unlawful taking and disposition by said defendants of property and property rights" of Acoustic, and ordering them to account jointly and severally to the present appellant for said stock and all profits derived therefrom. Thereafter an accounting was had, and a final judgment was entered, which was affirmed by this court without opinion. Irving Trust Co. v. Deutsch, 2 Cir....