169

the character of the parties. By the judi- | the citizenship of defendant was not discial act, the jurisdiction of the circuit court closed. The headnote asserts that the paris extended to cases where the constitutional ties were citizens of Kentucky. But the cerright to plead and be impleaded, in the tificate of the clerk, as appears from our courts of the Union, depends on the charac-files, sets forth "that it is stated in the bill ter of the parties; but where that right de- that the deft. Rawleigh Colson is a citizen pends on the nature of the case, the circuit of the state of Virginia." courts derive no jurisdiction from that act, except in the single case of a controversy between citizens of the same state claiming lands under grants from different states."

In both cases the parties were citizens of the same state, and the cases were originally commenced in the state courts, and the circuit courts acquired jurisdiction by removal. The judiciary act of 1789 vested the circuit courts with original jurisdiction on the ground of diversity of citizenship, but not where title was claimed under grants of dif ferent states. Congress manifestly accepted the letter of the Constitution, and, as the judicial power extended to controversies where citizens of the same state claimed title under grants of different states, assumed that cases presenting such controversies would be commenced in the state courts, and provided that those cases might be removed when that fact was made to appear. The particular constitutional provision was

And that jurisdiction was conferred by the 12th section of the act, which provided that "if in any action commenced in a state court the title of land is concerned, and the parties are citizens of the same state," either party might remove the cause to the circuit court on the fact being made to appear that the parties claimed under grants of different states. This section was carried forward as 647 of the Revised Statutes, U. S. Comp. Stat. 1901, p. 524, and reappears in substance in § 3 of the act of March 3, 1875. 18 Stat. at L. 470, chap. 1, 37, U. S. Comp. Stat. 1901, p. 510. By the 1st section of the latter act orig-treated as not open to a construction which inal jurisdiction was given to the circuit courts of cases, among others, "arising under the Constitution or laws of the United States, or treaties," or in which there was "a controversy between citizens of the same state claiming lands under grants of differ ent states."

The acts of March 3, 1887 (24 Stat. at L. 552, chap. 373), and of August 13, 1888 (25 Stat. at L. 433, chap. 866), are to the same purport.

Two cases arising under the judiciary act of 1789 are cited: * Pawlet v. Clark, 9 Cranch, 292, 3 L. ed. 735, decided March 10, 1815, and Colson v. Lewis, 2 Wheat. 377, 4 L. ed. 266, decided March 14, 1817.

In Pawlet v. Clark it appeared that the parties were citizens of Vermont, and that the cases were pending in the circuit | court for the district of Vermont, but the reporter's statement does not show that the case was commenced in the state court. The record on file in this court, however, discloses that such was the fact, and that the cause was removed into the circuit court under the 12th section.

Colson v. Lewis is not well reported. It was a bill in equity in which Lewis and others were complainants and Rawleigh Colson was the sole defendant. It came here on certificate, and the title was "Lewis and others against Colson," and not as given in the report. The case stated shows that the case was removed from the state court into the circuit court of Kentucky, and that the complainants were citizens of Virginia; but

would make it embrace citizens of different states. Naturally enough, as the reason for the extension of the Federal judicial power to controversies between citizens of different states, and to controversies between citizens of the same state claiming lands under grants of different states, was in substance the same. 2 Story, Const. § 1696.

And when the act of 1875 enlarged the original jurisdiction, no view to the contrary was indicated.

Ayres v. Polsdorfer, 187 U. S. 585, 47 I ed. 314, 23 Sup. Ct. Rep. 196, was an action of ejectment brought in the circuit court by citizens of one state against those of another, and the case, having gone to judg ment, was carried to the circuit court of appeals, and the judgment affirmed. A writ of error from this court was then sought to be sustained because, as was contended, the evidence disclosed, though the pleadings did not, that the parties claimed under grants of different states. But we held that if the emergence of such a question might have justified taking the case directly to this court, having gone to the court of appeals, it could not, after judgment, then be brought here.

As Congress has not conferred jurisdiction on the circuit courts over controversies between citizens of different states because, apart from diversity of citizenship, they may have claimed title by grants from different states, even if it had power to do so, which is not conceded, the result is that the appeal must be dismissed.

170

$177

(195 U. S. 176)

RICHARD C. CRAWFORD et al., Plffs. in | recover damages for the wilful and fraudu

Bankruptcy

Err., 0.

1. A claim arising out of the conversion by stockbrokers of shares purchased and held by them on a customer's account, charging him with commission and interest, and crediting him with amounts received as margins, is provable under the bankruptcy act of July 1, 1808 (30 Stat. at L. 562, chap. 541, U. 8. Comp. Stat. 1001, p. 8447), § 63a, as a debt "founded upon an open account, or upon a

contract, express or implied."

2. Only such debts created by the fraud of a bankrupt as were so created while he was acting as an officer or in a fiduciary capacity are excepted from the operation of a discharge in bankruptcy by the act of July 1, 1898 (30 Stat. at L. 550, chap. 541, U. S. Comp. Stat. 1901, p. 3428), § 17, subd. 4, stace to hold that the language of this subdivision, making an exception in favor of debts "created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer, or in any fiduciary capacity," includes all debts fraudulently contracted, would render meaningless the exception in subd. 2, in favor of such claims for frand as have been reduced to judgment.

lent conversion of certain reversionary interests of the plaintiff in 550 shares of Metropolitan Traction stock.

There were ten counts in the declaration. In each of the first five counts it was alleged that the defendant firm of Crawford & Valentine were stock brokers and dealers in investment securities; that plaintiff employed the defendants as his brokers and agents to buy, hold, and carry stocks for him, subject to his order; that defendants had in their possession, or under their control, certain shares of the capital stock of the Metropolitan Traction Company, which they were holding as a pledge and security for the amount due them from the plaintiff on said stock; that defendants wrongfully, wilfully, and fraudulently, and without his knowledge or consent, sold said shares of stock, and wilfully and fraudulently, and with intent to cheat and defraud the plaintiff, converted plaintiff's reversionary interest in said stock to their use, whereby it was wholly lost.

In each of the last five counts it was alleged that after defendants had wrongfully and fraudulently, and without * plaintiff's knowledge or consent, sold the plaintiff's stock, and converted the proceeds of such sales to their own use, they falsely and fraudulently represented to him that they still had the stock on hand and were carrying it for him; that their correspondents in Philadelphia, where the stock had been bought, were calling upon them for further demands or margins, and that it therefore became necessary to call upon the plaintiff to make further payments on the stock in order to comply with their correspondents' demands and to be secured against loss. It was averred in each of said counts that such representations were false and fraudulent, and by means thereof defendants obtained Argued April 25, 26, 1904. Decided Novem- from the plaintiff the aggregate sum of $10,

& A creditor, by electing to bring an action in trover, as for a fraudulent conversion, does not deprive his debt of its provable character under the bankruptcy act of July 1, 1898 (30 Stat. at L. 562, chap. 541, U. S. Comp. Stat. 1001, p. 3447) 63a, where it is "founded upon an open account or upon a contract, express or implied," in view of the recognition of the provable character of claims for fraud in general, inferable from the exception from the operation of a discharge in bankruptcy which 17 of that act makes in favor of claims for fraud which have been reduced to Judgment, or which originated in the bankrupt's acts while acting as an officer or in a fiduciary capacity.

IN

[No. 22.]

ber 7, 1904.

N ERROR to the Supreme Court of the State of Illinois to review a judgment which affirmed a judgment of the Appellate Court in and for the First District of that State, which had in turn affirmed a judgment

of the Circuit Court of Cook County in favor of plaintiff in an action in trever in which defendants had set up their discharge in bankruptcy as a defense. Reversed and remanded for further proceedings.

800.

To this declaration defendants pleaded not 4, 1900, and on May 12, 1900, a jury trial guilty, upon which issue was joined January without action until January 3, 1901, when was waived in writing. The case rested defendants filed their separate pleas of puis darrein continuance, setting up that on April 5, 1900, the defendants had received their discharge in bankruptcy, in the district court for the northern district of Illinois, and that plaintiff's claims were provable and

See same case below, 201 Ill. 581, 66 N. E. not excepted from the operation of such dis

833.

Statement by Mr. Justice Brown:

This was an action in trover instituted September 10, 1897, in the circuit court of Cook county, Illinois, by Burke against Crawford & Valentine, plaintiffs in error, to

charge. The plaintiff replied, denying that his claim was provable, and averred that the same was excepted from such operation.

Notwithstanding the plea of puis darrein continuance, the plaintiff introduced evidence and proved the allegations in his dee

*178

Under this section, whether the discharge A year after this case was put at issue, of the defendants in bankruptcy shall opand upon the opening of the trial, defend-erate as a discharge of plaintiff's debt, it ants filed their separate pleas puis darrein continuance, setting up their discharge in bankruptcy, and averring that plaintiff's claim was a provable debt, and the discharge a complete defense.

Fagraph a of this section includes "debts aris- | defalcation of the bankrupt while acting as ing upon contracts, express or implied, and an officer or in a fiduciary capacity. Unopen accounts, as well as for judgments and costs. As to paragraph b, two constructions are possible: It may relate to all unliquidated demands, or only to such as may arise upon such contracts, express or implied, as are covered by paragraph a.

881.

less these words relate back to all the pre-
ceding words of the subdivision, namely,
the frauds and embezzlements, as well as
misappropriations or defalcations, it results
that the exception in subd. 2 of all judg.
ments for fraud is meaningless, since such
judgments would be based upon a fraud ex-
cepted from discharge by subd. 4, whether
judgment had been obtained or not.
This conclusion is fortified by reference to
corresponding sections of the former bank-

act of 1841 (5 Stat. at L. 440, chap. 9), the benefits of that act were extended to all persons owing debts "which shall not have been 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." It is entirely clear that under this section a discharge was not denied to the bankrupt by reason of debts fraudulently contracted, but only to such as were created by his defalcation as an officer, or while acting in a fiduciary capac ity.

Certainly paragraph b does not embrace debts of an unliquidated character and which in their nature are not susceptible of being liquidated. Dunbar v. Dunbar, 190 U. S. 340, 350, 47 L. ed. 1084, 1092, 23 Sup. Ct. Rep. 757. Whether the effect of para-rupt acts. Thus, by the 1st section of the graph b is to cause an unliquidated claim which is susceptible of liquidation, but is not literally embraced by paragraph a, to be provable in bankruptcy, we are not called upon to decide, as we are clear that the debt of the plaintiff was embraced within the provision of paragraph a, as one "founded upon an open account, or upon a contract, express or implied," and might have been proved under § 63a had plaintiff chosen to waive the tort, and take his place with the other creditors of the estate. He did not elect to do this, however, but brought an action of trover, setting up a fraudulent conversion of We may remark here, in passing, that ever his property by defendants. In the first five since the case of Chapman v. Forsyth, 2 How. counts of his declaration he charges a fraud- 202, 11 L. ed. 236, this court has held that ulent conversion of his interest in the stock, a commission merchant and factor who sells and, in the last five counts, that the defend- for others is not indebted in a fiduciary caants had induced him to make further pay-pacity within the bankruptcy acts by with ments on such stock in the way of margins, holding the money received for property by false and fraudulent representations. sold by him. This rule was made under the • The question whether the claim thus set bankruptcy act of 1841, and has since been forth is barred by the discharge depends up-repeated many times under subsequent acts. on the proper construction of § 17, which declares that the discharge in bankruptcy relieves the bankrupt from all of his “provable | debts," except such as “. . . (2) are judgments in actions for frauds, or obtaining property by false pretenses, or false representations, or for wilful and malicious injuries to the person or property of another, or (4) were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer, or in any fiduciary capacity."

|

Neal v. Clark, 95 U. S. 708, 24 L. ed. 586;
Hennequin v. Clews, 111 U. S. 679, 28 L. ed.
567, 4 Sup. Ct. Rep. 576; Noble v. Ham-
mond, 129 U. S. 68, 32 L. ed. 623, 9 Sup. Ct.
Rep. 235; Upshur v. Briscoe, 138 U. S. 375,
34 L. ed. 934, 11 Sup. Ct. Rep. 313,-
-as well
as in cases in the state courts, too numerous
for citation.

Under the bankruptcy act of 1867 the list of debts excluded from the operation of the discharge was considerably larger. In § 33, Revised Statutes, 5117, it was declared that

Do these words apply to all debts created by the fraud, embezzlement, misappropria- "No debt created by the fraud or embezzletion of the bankrupt, or only to such as were ment of the bankrupt, or by his defalcation created while he was acting as an officer or as a public officer, or while acting in any in some fiduciary capacity? The fact that fiduciary character, shall be discharged unthe 2d subdivision of § 17 excepted from the der this act; but the debt may be proved, discharge "all judgments in actions for and the dividend thereon shall be a payment frauds, or of obtaining property by false pre-on account of said debt." [14 Stat. at L tenses, or false representations," indicates 533, chap. 176.] quite clearly that, as to frauds in general, it was the intention of Congress only to except from the discharge such as had been reduced to judgment, unless they fall within the 4th subdivision, of those created by the fraud, embezzlement, misappropriation, or

The language of this section is so clear as to require no construction. It is plain and explicit to the effect that the fraud and embezzlement of the bankrupt need not have been committed by him while acting as an officer or in a fiduciary character, and that

this character relates only to his defalcation. | not pretended that the claim was created But, under the act of 1898, there is no such by the bankrupt's 'fraud, embezzlement, misseverance in the fourth paragraph as would appropriation, or defalcation while acting as authorize us to say that the term "fiduciary an officer, or in any fiduciary capacity.' capacity" did not extend back to the words "fraud, embezzlement, and misappropriation." It was the opinion of the supreme court of Illinois that "a mere change in phraseology, apparently for the sake of brevity, rendering the meaning somewhat obscure, cannot be regarded as showing a legislative intent to depart so radically from precedents established by previous bankruptcy legislation and judicial decisions as to provide that debts created by the fraud or embezzlement of the bankrupt should be released by his discharge in bankruptcy, unless such fraud or embezzlement should be committed while the bankrupt was acting as a public officer, or in a fiduciary capacity."

"The contention that 'fraud' should be segregated from the qualifying language 'while acting as an officer or in any fiduciary capacity' is without merit. Such interpretation would not only destroy the grammati cal construction of the sentence and contravene its plain meaning, but would likewise be inconsistent with paragraph 2 of the same section, that a creditor should have obtained a judgment in an action for fraud in order to override a discharge in bankruptcy."

A like construction was given to subd. 4 by the supreme court of Missouri in Goodman v. Herman, 172 Mo. 344, 60 L. R. A. 885, 72 S. W. 546, by the supreme court of Minnesota in Gee v. Gee, 84 Minn. 384, 87 N. W. 1116, by that of Rhode Island in Crosby v. Miller, 25 R. I. 172, 55 Atl. 328, and by the supreme court of New York, fourth department, in Re Bullis, 68 App. Div. 508, 73 N. Y. Supp. 1047. In this case the question was discussed at consider

Our own view, however, is that a change in phraseology creates a presumption of a change in intent, and that Congress would not have used such different language in § 17 from that used in §33 of the act of 1867, without thereby intending a change of meaning. The view generally taken by the bank-able length, the court saying: ruptcy courts has been that the terms "officer" and "fiduciary capacity" extend to all the claims mentioned in paragraph 4, and are not confined to cases of defalcation. Re Rhutassel, 2 N. B. N. Rep. 381, 96 Fed. 599; Rc Lewensohn, 99 Fed. 73; Re Hirschman, 2 N. B. N. Rep. 1123, 104 Fed. 69; Re Cole, 3 N. B. N. Rep. 580, 106 Fed. 837; Re Freche, 109 Fed. 620; Hargadine-McKittrick Dry Goods Co. v. Hudson, 111 Fed. 361. This is the natural and grammatical reading of the clause.

The cases in the state courts are almost uniformly to the same effect. Thus in J. C. Smith & W. Co. v. Lambert, 69 N. J. L. 487, 55 Atl. 88, the defendant pleaded to an action on a book account his discharge in bankruptcy, to which the plaintiff replied that the cause of action was created by the fraud of the defendant. The supreme court of New Jersey held the replication to be insufficient. "We think," said the court, "that under § 17 of the bankrupt law, to which reference has been made, there is no provision that would except from the discharge the debt upon which the present suit is brought."

In Morse v. Kaufman, 100 Va. 218, 40 S. E. 916, it was pleaded against the discharge that the goods were procured by false pretenses. After holding that the case had not fallen within subd. 2 of §17, as there was no judgment for fraud, the supreme court of Virginia observed:

"It would seem to be equally clear that the demand of plaintiffs in error is not within the exception of subd. 4* of 8 17. It is

"If any debt created by fraud, embezzlement, or misappropriation is to be excepted from the application of the statute, then there is no necessity of subd. 2, making a judgment essential to prevent the granting of the discharge under the statute."

We have not overlooked the fact that the New York supreme court of the first department reached a different conclusion in Frey v. Torrey, 70 App. Div. 166, 75 N. Y. Supp. 40, affirmed by the court of appeals in a per curiam opinion, 175 N. Y. 501, 67 N. E. 1082, but, so far as we know, this is the only case that supports the construction given to § 17 by the supreme court of Пlinois.

Why an ordinary claim for fraud should be released by the discharge, while a judgment for fraud is not released, is not altogether clear, although this distinction may have been created to avoid the necessity of going into conflicting evidence upon the subject of fraud; while in cases of judgments for frauds the judgment itself would be evi-♦ dence of the fraudulent character of the claim. If a creditor has a claim against a debtor for goods sold which would ordinarily be covered by a discharge in bankruptcy, he is strongly tempted to allege, and if possible to prove, that the goods were purchased under a misrepresentation of the assets of the buyer, and thus to make out a claim for fraud which would not be discharged in bankruptcy. It was probably this contingency which induced Congress to enact that an alleged fraud of this kind