In re Harrill

• Decision Date: 18 September 1979
• Docket Number: Bankruptcy No. BK-3-79-13.
• Citation: 1 BR 76
• Parties: In re William Larry HARRILL dba Larry Harrill Insurance Agency, Bankrupt. COTTON BELT INSURANCE CO., INC., Plaintiff, v. William Larry HARRILL and William Larry Harrill dba Larry Harrill Insurance Agency, Defendant. MEMPHIS FIRE INSURANCE COMPANY, Plaintiff, v. William Larry HARRILL dba Harrill Insurance Agency, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

1 B.R. 76 (1979)

In re William Larry HARRILL dba Larry Harrill Insurance Agency, Bankrupt.

COTTON BELT INSURANCE CO., INC., Plaintiff, v. William Larry HARRILL and William Larry Harrill dba Larry Harrill Insurance Agency, Defendant.

MEMPHIS FIRE INSURANCE COMPANY, Plaintiff, v. William Larry HARRILL dba Harrill Insurance Agency, Defendant.

Bankruptcy No. BK-3-79-13.

United States Bankruptcy Court, E.D. Tennessee.

September 18, 1979.

Sharon J. Bell, Knoxville, Tenn., for defendant.

Charles D. Deas, Marysville, Tenn., for plaintiff, Cotton Belt Insurance Co.

Wayne Christeson, Jr., Knoxville, Tenn., for plaintiff, Memphis Fire Insurance Co.

MEMORANDUM

CLIVE W. BARE, Bankruptcy Judge.

I

Cotton Belt Insurance Co., Inc. (Cotton Belt) and Memphis Fire Insurance Company (Memphis Fire) filed complaints seeking a determination that defendant's debts to them are nondischargeable. In separate actions plaintiffs allege nondischargeability under § 17a(2) and § 17a(4) of the Bankruptcy Act (11 U.S.C. § 35a(2) and (4)).¹

Cotton Belt

The bankrupt was an insurance agent of Cotton Belt and as such was authorized to bind and execute insurance contracts and collect and receipt for premiums for business placed with that company. The bankrupt also was authorized to retain the commissions due him out of the premiums collected and to transmit the balance to Cotton Belt.

The bankrupt and Cotton Belt operated under the terms of a written Agency-Company Agreement executed June 1, 1975. The pertinent part of the Agreement states that the agent (the bankrupt) is an independent contractor and not an employee of the company. Further, that he is authorized to solicit, receive and transmit to the company proposals for insurance contracts, to bind and execute insurance contracts, to provide the usual and customary services of an insurance agency; and to collect and receipt for premiums and, as full compensation, to retain commissions out of the premiums so collected.

Part II of the Agreement entitled "Premium Accounting," provides that the agent (the bankrupt) is to prepare monthly itemized statements and to remit the balance shown in the statement due the company not later than 45 days after the end of the account month.

Although the bankrupt commenced writing policies in June 1975, he remitted no premiums to Cotton Belt during the months of July, August, and September 1975. On October 10, 1975, a $629.27 payment was made to Cotton Belt on a balance owing of $2,576.03.

On January 15, 1976, a $75.00 payment was sent to Cotton Belt through the bankrupt's attorney. At that time the bankrupt owed Cotton Belt the sum of $4,339.13.

Additional payments made either directly by the bankrupt or through his attorney in January, March, April and June 1976, totaled $351.00. After the last payment on June 22, 1976, the bankrupt owed Cotton States $5,305.04, after all credits and commissions had been deducted.

On June 20, 1977, Cotton Belt obtained judgment against the bankrupt in the Circuit Court for Blount County, Tennessee, in the amount of $5,305.04. The judgment provides that the bankrupt would pay the sum in twelve monthly installments of $100.00 per month beginning July 1, 1977, and thereafter in 23 monthly installments of $200.00.

The balance owing on the judgment at this time is $4,705.04, and it is this sum that Cotton Belt says is nondischargeable in bankruptcy.

Memphis Fire

Between January 1977 and January 1978 the bankrupt acted as agent for the sale of insurance policies and the collection and remittance of insurance premiums for Memphis Fire.

Under the Agency Agreement entered into by the parties on December 6, 1976, Memphis Fire granted authority to the agent (bankrupt) to receive and accept proposals for contracts of insurance covering risks located in Tennessee and to write insurance business in accordance with the terms and conditions set out in the Agreement. The agent was authorized to collect, receive, and receipt for premiums on insurance and to retain out of the premiums so collected, as full compensation for all business placed with the company, commissions at rates mutually agreed upon. Accounts of money due the company were to be rendered monthly and the balance due was to be paid not later than 45 days after the end of the month for which the account was rendered.

The initial Agency Agreement dated December 6, 1976, is between Memphis Fire and Tennessee Valley Insuror, Inc., but an amendment to the Agreement effective February 1, 1977, changed the "agent" to Larry Harrill.

In a period of about nine months, between January 1977 and September 1977, the bankrupt became indebted to Memphis Fire in the amount of $5,705.60, after all commissions owing and all credits had been given. On May 19, 1978, the bankrupt executed a note in this amount with a payment schedule of $50.00 per month. No payments were subsequently made and it is this amount that Memphis Fire asserts is nondischargeable.

The bankrupt is 38 years of age. He worked for a short period of time as an insurance agent before opening his own agency in Maryville, Tennessee, in October 1974. He encountered financial difficulties almost immediately. He kept his own books for a period of time but later employed a clerk. He never had more than two other employees. His wife helped out when he could not afford to employ anyone else. At one time he sought help from an insurance agent in an adjoining city. In November 1975 he ran an ad in a newspaper in an effort to sell the agency but received no offers. In the latter part of 1976 he sought advice from an attorney concerning the debts owing Cotton Belt and Memphis Fire. He closed the insurance agency in January 1978 and is presently working as an assistant service manager for an automobile agency. He suffers from a brain tumor and requires medical treatment.

II

The debts are dischargeable in bankruptcy.

The purpose of a discharge is set forth in the often quoted decision of Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) where the Court stated:

"One of the primary purposes of the bankruptcy act is to `relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.\' Williams v. U.S. Fidelity & G. Co., 236 U.S. 549, 554, 555, 35 S.Ct. 289, 290, 59 L.Ed. 713. This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. Stellwagen v. Clum, 245 U.S. 605, 617, 38 S.Ct. 215, 62 L.Ed. 507; Hanover National Bank v. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L.Ed. 1113 supra; Swarts 8 v. Fourth National Bank (C.C.A.) 117 F. 1, 3; United States v. Hammond (C.C.A.) 104 F. 862, 863; Barton Bros. v. Texas Produce Co. (C.C.A.) 136 F. 355, 357; Gilbert F. Shouse (C.C.A.) 61 F.2d 398. The various provisions of the Bankruptcy Act were adopted in the light of that view and are to be construed when reasonably possible in harmony with it so as to effectuate the general purpose and policy of the act. Local rules subversive of that result cannot be accepted as controlling the action of a federal court."

§ 17a of the Act provides that "a discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as . . . (2) are liabilities for . . . willful and malicious conversion of the property of another; . . . (4) were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity . . ." (11 U.S.C. § 35a(2)(4)).

The term "fiduciary capacity" was first used in the Bankruptcy Act of 1841, in a phrase describing those "defalcations" which would not be discharged, 5 Stat. 441 (1841). The subsection also gave several examples of trustees whose debt would not be discharged if the debt was created by a "defalcation" while acting in such trustee capacity. In the case of Chapman v. Forsyth, 2 How. 202, 11 L.Ed. 236 (1844), the court early had the opportunity to determine the meaning of "fiduciary capacity," and held that the term applied only to express or technical trusts, not implied trusts. The court supposedly based its reasoning on the fact that several technical trusts were specifically mentioned in the statute, thus "any other fiduciary capacity" was intended to indicate those situations of a similar character to those specifically enumerated. See 41 Wisc.L.R. 239, 243.

The rationale for the court's holding is clearly expressed:

"If the Act embrace such a debt, it will be difficult to limit its application. It must include all debts arising from agencies; and indeed all cases where the law implies an obligation from the trust reposed in the debtor. Such a construction would have left but few debts on which the law could operate. In almost all the commercial transactions of the country, confidence is reposed in the punctuality and integrity of the debtor, and a violation of these is, in a commercial sense, a disregard of a trust. But this is not the relation spoken of in the first Section of the Act" at page 207.

See also Hennequin v. Clews, 111 U.S. 676, 4 S.Ct. 576, 28 L.Ed. 565 (1884); Palmer v. Hussey, 119 U.S. 96, 7 S.Ct. 158, 30 L.Ed. 362 (1886); Nobel v. Hammond, 129 U.S. 65, 9 S.Ct. 235, 32 L.Ed. 621 (1889).

The Act of 1867 changed the wording of the subsection to read:

"No debt created by the fraud or embezzlement of the bankrupt, or by his defalcation as a public officer, or while acting in any fiduciary character, shall be discharged." 14 Stat. 533 (1867).

As a result of this alteration, a minority of cases concluded that...