State ex rel. Stifel, Nicolaus & Co., Inc. v. Clymer

• Decision Date: 14 April 1975
• Docket Number: No. 58769,58769
• Parties: STATE of Missouri ex rel. STIFEL, NICOLAUS & COMPANY, INCORPORATED, Relator, v. Hon. Lewis W. CLYMER and Hon. William J. Marsh, Judges of the Circuit Court of Missouri, Sixteenth Judicial Circuit, Respondents.
• Court: Missouri Supreme Court

Page 793

522 S.W.2d 793

STATE of Missouri ex rel. STIFEL, NICOLAUS & COMPANY INCORPORATED, Relator, v. Hon. Lewis W. CLYMER and Hon. William J. Marsh, Judges of the Circuit Court of Missouri, Sixteenth Judicial Circuit, Respondents.

No. 58769.

Supreme Court of Missouri, En Banc.

April 14, 1975.

Rehearing Denied May 12, 1975.

James E. Lockwood, Fred J. Petzold, Kansas City, Veryl L. Riddle, Thomas C. Walsh, St. Louis, for relator; Brenner, Lockwood & O'Neal, Kansas City, Bryan, Cave, McPheeters & McRoberts, St. Louis, of counsel.

S. Preston Williams, David Lee Wells, North Kansas City, Keith Wilson, Jr., Independence for respondents and party to be adversely affected.

FINCH Judge.

This is an original proceeding in prohibition wherein Stifel, Nicolaus & Company, Inc., as relator, seeks to prevent respondent judges from exercising jurisdiction over a case in which one Richard Stock seeks recovery of actual and punitive damages for alleged fraud and misrepresentation in connection with his purchase of securities.

Stock, as plaintiff, filed suit against relator in the Circuit Court of Jackson County on March 18, 1971. The petition alleged that during the period from June 1967 to November 1967 plaintiff was induced by fraud and misrepresentation on behalf of relator to invest in securities as to which relator was acting as a market-maker. The securities thereafter declined in value resulting in a loss. Stock seeks actual damages of $31,316.46, the loss incurred on the securities purchased, plus punitive damages of $150,000.

Following discovery procedures in which it was established that on September 17, 1968, Stock filed a petition in bankruptcy on which he subsequently was adjudged bankrupt, relator filed a motion for summary judgment. That motion alleged that Stock had no standing or capacity to sue because the cause of action for fraud and misrepresentation asserted by him had vested in the trustee in bankruptcy by virtue of the provisions of 11 U.S.C. § 110. In response thereto Stock filed an affidavit wherein he alleged his petition in bankruptcy was filed September 7, 1968; that he was discharged March 20, 1969; that prior to and during that period of time he had no knowledge or reason to believe that relator or its representatives had dealt with him in 1967 in any fashion other than honestly, fairly and in full accord wth all fiduciary obligations due him; that he did not become suspicious of the activities of relator until he began to read in the public press in 1970 that the registered agent and representative of relator with whom he had dealt was being disbarred from acting as a broker or registered representative by the Securities and Exchange Commission; that he then discussed the situation with his counsel and began to check out records and information concerning his dealings with relator and its agent; and that it was thereafter that he discovered for the first time that he had been defrauded by relator and its agent and he then filed suit.

Relator's motion for summary judgment was overruled, after which it unsuccessfully sought prohibition in the Missouri Court of Appeals, Kansas City District. Relator then filed this proceeding and we issued our preliminary rule in prohibition. We now make it absolute.

It is well established that claims for fraud or misrepresentation are rights of action that are within the purview of 11 U.S.C. § 110(a)(5) and (6) (§ 70(a) (5) and (6) of the Bankruptcy Act.). ¹ This conclusion is supported by the analysis of the foregoing sections in 4A Collier on Bankruptcy § 70.28 (14th ed.1971), which states as follows:

'(a) The trustee of the estate of a bankrupt and his successor or successors, if any, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located . . . (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise sized, impounded, or sequestered . . . (6) rights of action arising upon contracts, or usury, or the unlawful taking or detention of or injury to his property; . . ..'

'These clauses were revised by the 1938 Act with respect to the subject matter under discussion. In clause (5) of § 70a, the draftsmen inserted the phrase 'including rights of action', and also added the first proviso to the clause. In clause (6) the words 'or usury' were included. These changes served to clear up a certain confusion in the cases with regard to actions ex delicto and for usury. They also served to indicate that when the title to the bankrupt's rights of action is under consideration, both clause (5) and clause (6) must be considered together.

'Prior to 1938, the courts were sometimes puzzled as to the relation between the broad terms of $70a(5), which made no specific reference to rights of action, and § 70a(6), which expressly dealt with certain of these rights. This perplexity was highlighted in cases involving actions ex delicto and for usury, hereafter discussed. But other situations arose where the right of action involved, while not expressly within clause (6), was obviously an assignable chose in action with all the aspects of a property right. In such cases the courts had little difficulty holding that the particular right of action passed under either § 70A(5) or a broad reading of § 70a(6), or a combination of both. This, if course, is now settled by the Act itself, and clauses (5) and (6) together blanket the filed so far as rights of action are concerned.'

Numerous decided cases support the foregoing analysis. In Dallas Cabana, Inc. v. Hyatt Corporation, 441 F.2d 865 (5th Cir. 1971), plaintiff, which had been through a bankruptcy proceeding, filed suit to recover for fraud in connection with transactions which had occurred prior to filing of the petition in bankruptcy. Plaintiff's action was dismissed on the basis that the cause of action for fraud belonged to the trustee in bankruptcy, the court saying at 866--67:

'We think the dismissal was properly granted. Section 70 of the Bankruptcy Act, 11 U.S.C.A. § 110(a), vests in the trustee, upon appointment and qualification, substantially all rights of action reposing in the bankrupt corporation as of the date the bankruptcy petition is filed. Clause (6) of the cited section specifically gives the trustee the rights of action for 'the unlawful taking or detention of or injury to' property of the bankrupt. Construing Clause (5) and Clause (6) together, it may be stated as a general rule that all rights of action for injury to the property of a bankrupt vest in his trustee and that only injuries to his person or reputation do not so vest. . . . (T)itle to all assets and/or property of the Bankrupt, Dallas Cabana, Inc., vested in the trustee in bankruptcy as of the date upon which the bankruptcy petition was filed. The reason for this title conversion was well stated in Gochenour v. Cleveland Terminals Bldg. Co., (118 F.2d 89 (6th Cir. 1941)) where the court said:

The object of the Bankruptcy Act is to benefit creditors by making all the pecuniary means and property available to their payment and in furtherance of this object, there passes to the trustee, not only what in strictness may be called the property of the bankrupt, but also those rights of action to which he was entitled for the purpose of recovering real or personal property, or damages respecting that which has been unlawfully diminished in value, withheld or taken from him.'

In Benson v. Probst, 12 Utah 2d 348, 366 P.2d 700, plaintiff purchased land from defendant. Plaintiff subsequently was adjudicated a bankrupt but he did not schedule any claims against defendant in connection with the real estate transaction. Thereafter, plaintiff filed suit seeking recovery based on alleged deceit in connection with the purchase of the land from defendant. The suit was dismissed on motion of defendant, the court saying, 366 P.2d at 700:

'It appears unimportant whether the claim was scheduled or not, since the authorities uniformly determine that a claim like the one here becomes an asset in the hands of the trustee in bankruptcy, under the Bankruptcy Act simultaneously with the claimants' adjudication in bankruptcy, with plenary power to deal with it as an asset and as the trustee and the federal courts deem proper and which it is their duty to perform.'

See also Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966); Hooper v. Mountain States Securities Corporation, 282 F.2d 195 (5th Cir. 1960); Tamm v. Ford Motor Co., 80 F.2d 723 (8th Cir. 1935); Remmers v. Remmers, 217 Mo. 541, 117 S.W. 1117 (1909).

Respondents do not take issue with the foregoing conclusion as to the scope of § 110(a)(5) and (6). Instead they rely solely on the proposition that the claimed lack of knowledge as to fraud on the part of Stock until sometime in 1970 or 1971 necessarily meant that the cause of action was not in being at the time of the bankruptcy and that title thereto was not vested by operation of law in the trustee pursuant to § 110(a)(5) and (6). In other words, the critical issue is whether the cause of action accrued at the time of the alleged fraudulent 1967 acts on which the cause of action is based or whether it was not an being until the facts on which it was based were discovered subsequent to termination of the bankruptcy proceedings.

Such a question was answered by the Court in Unexcelled Chemical Corporation v. United States, 348 U.S. 59, 65, 73 S.Ct. 580, 583, 97 L.Ed. 821 (1953), when it said:

'A cause of action is created where there is a breach of a duty owed to plaintiff. It is that breach of duty, not...