HARDIE v. SWAFFORD BROS. DRY GOODS CO., 165 F. 588

PARDEE, Circuit Judge. This is an appeal from a judgment in bankruptcy refusing a discharge. The facts of the case are undisputed and as follows: . On May 15,1905, the firm of A. F. Hardie & Co. and the individual members thereof, to wit, Alva Finley Hardie, his son, James Mallory Hardie, and Max Kaliski, were, upon the petition of creditors, adjudged bankrupt. An application of discharge was filed by the members of the firm on the 27th of October following. Opposition to the discharge having been filed by the Swafford Bros. Dry Goods Com.pany, two of the partners, A. F.

I-Iardie and Kaliski, withdrew their prayer for discharge, leaving the application to stand in behalf of J. M. Hardie alone. The principal ground of opposition urged by the Swafford Bros. Dry Goods Company was the following: “That on, to wit, the 13th day of February, 1905, the said firm made and delivered to the said Swafford Bros. Dry Goods Company a statement in writing, materially false, respecting the condition of the business of the said firm. By the said statement it appears that the said firm had assets of the value of $115,116. Said statement further shows that the said A. F.

Hardie had, in real estate anil real estate notes, $(>0,000. The said Swafford Bros. Dry Goods Company shows Unit the said statement was absolutely false, in this: that the said A. If. Hardie did not have real estate or real estate notes of the value of 860,000, or Anything approximating that amount; that the value of the assets of the firm did not exceed $60,000, and that the liabilities of the said firm were approximately $100,000-; that while the said statement shows the firm to he worth, over and above all liabilities, the sum of $00,000, still, in truth and in fact, the said firm was then insolvent.

The said statement was made by the said firm to the Swafford Bros. Dry Goods Company for the purpose of inducing the said Swafford Bros, to sell to the said A. F. Ilardie & Co. goods, wares, and merchandise on credit, and that they relied upon the truth of the said statement and did sell to the said A. F.

Hardie & Co. goods, wares, and merchandise, aggregating the sum of $1,500 and upward, which said goods, wares and merchandise have never been paid for.” After taking proofs, the referee found the facts substantially as set forth in the specification of opposition referred to, and made this additional finding: “I find that said statement was made by Alva Finley Hardie, and without the knowledge of said James Mallory Hardie; but at that time James Mallory Hardie was a member of the aforesaid partnership, and bound by its statements issued as aforesaid.” It is clearly shown by the record that, after A. P.

Hardie made the statement, the Swafford Bros. Dry Goods Company shipped merchandise to the firm of A. F. Hardie & Co. at San Antonio, amounting in value to about $1,300, and that the merchandise was received by the firm and commingled with the stock on hand. The matter to be decided upon this appeal is correctly stated by the trial judge as follows: “The only question of law to be determined is whether the fraud thus committed by A. F. Hardie may be interposed asa bar to the discharge of J. M.

Hardie, who, it is conceded, did not participate in the wrongful act and had no knowledge of its perpetration.” The trial judge in his opinion, found in the record, cites Parsons on Part. (3d Ed.) 163; Story on Part. 166; Collier on Part. §§ 445, 447; and Strang v. Bradner, 114 U. S. 561, 562, 5 Sup. Ct. 1038, 29 L. Ed. 248, and cases there cited, all to the effect, as summed up in Strang v. Bradner, that each partner is the agent and representative of the firm with reference to all business within the scope of the partnership.

And if, in the course of the partnership business and with reference thereto, one partner makes false or fraudulent misrepresentations of fact to the injury of innocent persons who deal with him as representing the firm, without notice of a.ny limitations upon his general authority, his partners cannot escape pecuniary responsibility upon the ground that such misrepresentations were without their knowledge.

The trial judge then proceeds to say as follows: “While the cages cited do not decide the very question involved in the present controversy, they nevertheless distinctly hold that a fraud committed by one partner in the course of the partnership business renders the firm pecuniarily liable to the aggrieved party for the wrongful act ol' the offending member. In the case before the court, it is shown by the record that A. F.

Ilardie was the financial agent of the firm and one of its buyers; that the false statement was made by him in the course of the partnership business, and for the benefit of the firm, and that the firm actually received and appropriated the fruits of the fraudulent transaction.

If so, under the facts stated, tlie law would impute tlie fraud of tlie delinquent partner to innocent meipbers of the partnership to the extent of imposing upon the firm a pecuniary liability, no sound reason is perceived why the principle shofild not be applied to the present proceeding by refusing a discharge to a member not assenting to the fraud. The court is of the opinion that the principle is applicable to both cases, and hence, that the prayer of .T. M.

Ilardie for a discharge should be denied.” The authorities cited above are indisputably correct as to the propositions declared, but we doubt if they should be permitted to control the case. So far as they go, the liability of the innocent partner for the torts of the wicked partner committed within the scope of the partnership is based on the application of the principles of agency, and is restricted to pecuniary liability alone.

In this country, since the abolition of imprisonment for debt, the punishment of the innocent principal or the innocent partner for the wrong committed by the agent or partner has not been pushed further than to affect business reputation and to impose pecuniary liability. It is said that the discharge of a bankrupt under the present bankruptcy law is

an act of grace, merely incidental to the general purpose, and in fact could be refused entirely; and it is argued from this that the provisions of the law relating to the discharge of bankrupts should be construed against the bankrupt, and all implications and doubts should be resolved against him. 1 Since the days of Queen Anne (4 & 5 Anne, c. 17, § 19) the discharge of thq prima facie honest bankrupt and his future estate and effects has been provided for in every bankruptcy law; at first with many restrictions, even requiring the consent of creditors; and it is provided in our last act that the bankrupt, whether voluntary or involuntary, applying for a discharge, shall receive it, unless— “iie has (1) committed an offense punishable by imprisonment as herein provided ; or (2) with intent to conceal his financial condition destroyed, concealed, or failed to keep books of account or records from which such condition might be ascertained; or (3) obtained property on credit from any person upon a materially false statement in writing made to such person for the purpose of obta ining such property on credit; or (4) at any time subsequent to the first day of the four months immediately preceding the filing of the petition transferred, removed, destroyed, or concealed, or permitted to be removed, destroyed or concealed any of his property with intent to hinder, delay or defraud his creditors; or (5) in voluntary proceedings been granted a discharge in bankruptcy within six years; or (6) in the course of the proceedings in bankruptcy refused to obey any lawful order of or to answer any material question approved by the court.” All of these exceptions, except the fifth, are based on criminal conduct, or actual dishonesty quasi criminal in nature, and this great advance from the early days when insolvency was treated as a crime goes to show that the discharge of the honest bankrupt is favored, and the opposition to a discharge under the present law is burdened with the necessity of bringing the inculpatory facts alleged strictly within the exceptions enumerated in the law.

Originally, in bankrupt laws, the discharge of the bankrupt may have been incidental, and the main purpose the equal distribution of his goods among creditors; but to say it now, and of the present law, we must shut our eyes to the actual practice in our courts. In nearly all and every voluntary bankruptcy brought under the present law die administration or distribution of the bankrupt’s property has been practically concluded before filing petition, and the sole object of the petitioner is to be relieved of his debts, and in number the voluntary cases are about four to one of the involuntary.

See Report, Dept, of Justice, 1807. And the seme may be said of the voluntary cases under the act of March 2, 1867, c. 170, 14 Stat. 517, which was passed mainly to relieve the unfortunate debtors ruined by and through the vicissitudes oí the great Civil War.

For these considerations, we are disposed to deny that in the present bankruptcy l;nv the discharge of the honest debtor is a mere incident which could have been omitted without impairing its symmetry and efficiency; and, on the contrary, to assert that the release of the honest, unfortunate, and insolvent debtor from the burden of his debts and restore him to business activity, in the interest oí his family and the general public, is cue of the main, if not the most important, objects of the law. The adjudged cases called to our attention and bearing on the question herein, favor a liberal construction of

section 14 of the bankruptcy law in the matter of the discharge of honest bankrupts. Act July 1, 1898, c. 541, 30 Stat. 550 (U. S. Comp. St. 1901, p. 3427). In Boyd v. Arnold Loucheim & Co., 149 Fed. 187, 79 C. C.

A. 135, this court ordered a discharge under circumstances as follows: “'Clio referee specifies the four grounds of objection tliat were made by the creditors to the application for discharge, and dhdiucfly finds that the mistake, if any. that was made in the /orified schedules, was not made willfully and fraudulently, nor with the intern ion of concealing any interests from Ms creditor's; that the 1,579 acres of land was not transferred to his wife, nor procured to ho transferred to her. for the purpose of defrauding, hindering, or delaying his creditors; that the indefinite interest which the bankrupt (in the opinion of the referee) liad in the 1,579 acres of land was not willfully and fraudulently concealed from his trustee; that the 885 referred to in the fourth objection, which the bankrupt drew from the Bo.yd Mercantile Company, another bankrupt, and had same charged to his personal account, was not done by him for the purpose of defeating the bankruptcy act; that the bankrupt has fully complied with the requirements of Congress and the orders of court touching his bankruptcy; and that all notices, wherever required, have been given in the maimer and length of time required by the bankruptcy act and file rules of court.

These findings of the referee, so far as they are disputed by the appellees, are, in our opinion, amply supported by the testimony.” And see In re Blalock (D. C.) 118 Fed. 679. In Hyman's Case (D. C.) 97 Fed. 195, the wife was held not to be liable for the fault of her agent, (her husband) in not keeping true hooks of account, and to the same effect see In re Meyers (D. C.) 105 Fed. 353. In Schultz’ Case (D. C.) 109 Fed. 264, the innocent partner was held not to be liable for the neglect of his copartner in not keeping true books of account. In re Dresser (D. C.) 13 Am. Bankr.

Rep. 637, 144 Fed. 318, is well reasoned and is directly in point. The referee reported: “The bankrupt Bicss seems to have had no share in making the later ‘short statement’ relied upon by the objecting creditors, and they do not claim that he was personally concerned in the alleged fraud other than as a partner of Dresser. It is true that, on principles of agency, Itiess is liable civiliter for the fraudulent acts of Dresser which were clearly within the scope of- the partnership business and for the firm’s benefit. Schroeder v. Frey, 60 Hun, 58, 14 N. Y. Supp. 71; Bradner v. Strang, 89 N.

Y. 299, affirmed in Strang v. Bradner, 114 U. S. 555, 5 Sup. Ct. 1038, 29 L. Ed. 248. “The discharge in bankruptcy would not therefore affect a debt so created. The present act specifies, among nondischargeable debts, ‘liabilities for obtaining property by false pretenses or false representations.’ Act July 1, 1898, c. 541, § 17a, cl. 2, 30 Stat. 550 (U. S. Comp. St. 1901, p. 3428). “But.these considerations do not affect the right of an innocent partner to a discharge under

section 14b, cl. 3, of the amended bankruptcy act of February 5, 1903, c. 487, § 4, 32 Stat. 797 (U. S. Comp. St. Supp. 1907, p. 1026. The right to a discharge is distinct from the effect of a discharge. In re McCarty (D. C.) 7 Am. Bankr. Rep. 40, 111 Fed. 151; In re Marshall Paper Co., 4 Am. Bankr. Rep. 468, 102 Fed. 872, 43 C. C. A. 38. “It was held under the act of 1867, which in

section 33 provided that ‘no debt created by fraud or embezzlement of the bankrupt shall be discharged,’ that ‘fraud’ as used in that

section meant ‘positive fraud in fact involving moral turpitude or intentional wrong as does embezzlement, and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality. Such a construction of the statute is consonant with equity, and consistent with the object and intention of Congress in enacting a general law by which the honest citizen may be relieved from the burden of hopeless insolvency. A different construction would be inconsistent with the liberal spirit which pervades the entire bankruptcy system.’ Neal v. Scruggs, 95 U. S. 704, 24 L. Ed. 586 (by Mr.

Justice Harlan). “Therefore, although, on principles of agency and partnership, a discharge may not relieve Riess from ‘liabilities for obtaining property by.false representations’ (a question not to be decided here), it is considered that, not having himself participated in the making of the short statement relied on by the hanks, the fraud of his partner cannot under these circumstances be imputed to him, and his discharge cannot therefore be refused. Matter of Hyman (D. C.) 3 Am. Bankr. Rep. 169, 97 Fed. 195; Matter of Meyers (D. C.) 5 Am. Bankr.

Rep. 4, 105 Fed. 353.” This, report and recommendation were confirmed by the court. As we find no reason in the law (and, certainly, none in business or morals) why an honest bankrupt should not be discharged, we answer the question, stated by the trial judge in this case, in. the negative. It is therefore ordered that the decree of the District Court be reversed, and the decree now rendered here that the petition of James Mallory ITardie for a discharge in bankruptcy be, and the same is hereby, granted.