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as against the government, by virtue of his so-called attempt to make entry for the 80 acres in section 35, they do not override the plain provisions of the statute of 1887, and also that of 1896 (29 Stat. at L. 42, chap. 39, U. S. Comp. Stat. 1901, p. 1603), which save the rights of one who purchased from the railroad in good faith.
action for fraud" so as to be exempted by the bankruptcy act of July 1, 1898 (30 Stat. at L. 550, chap. 541, U. S. Comp. Stat. 1901, p. 3428), § 17, subd. 2, from the operation of a discharge in bankruptcy, where such judgment, whatever may be the form of the action, was based upon actual, as distinguished from constructive, fraud of the bankrupt.
As was observed by Mr. Justice Brewer, in the case already referred to (United Argued November 10, 11, 1904. Decided De
States v. Winona & St. P. R. Co. 165 U. S. 480, 41 L. ed. 796, 17 Sup. Ct. Rep. 372); "It matters not what constructive notice may be chargeable to such a purchaser, if, in actual ignorance of any defect in the railroad company's title, and in reliance upon the action of the government in the apparent transfer of title by certification or patent, he has made an honest purchase of the lands."
Donovan is not brought within the case of Winona & St. P. R. Co. v. United States, immediately following the above-cited case, at page 483 (L. ed. p. 798, Sup. Ct. Rep. p. 381), because, among other facts, it appears herein that there was no record of any entry in Donovan's case for this land, on the books of the local land office, and it is conceded that he had been out of any possession of the land since 1885. The above-cited case is not, therefore, in point. The same may be said of Duluth & I. Range R. Co. v. Roy, 173 U. S. 587, 43 L. ed. 820, 19 Sup. Ct. Rep. 549, and Oregon & C. R. Co. v. United States, 189 U. S. 103-116, 47 L. ed. 726-732, 23 Sup. Ct. Rep. 615.
Donovan cannot be regarded as having by his action secured a vested interest in this land, so as to make the certification to the state a wholly void act, as an act beyond the jurisdiction of the Secretary. Assuming that it may have been erroneous and voidable, it was not void. We do not decide it was erroneous. In 1871 the legal title, still remaining in the government, was transferred to the state by the certification of the Secretary, and, as we have said, Woodwick occupied the position of a purchaser in good faith under the acts of Congress. The judgment is affirmed.
(195 U. S. 606)
SPENCER S. BULLIS, Piff. in Err.,
JAMES R. O'BEIRNE, on Behalf of Himself and All Other Bondholders of the Allegheny & Kinzua Railroad Company, and the Central Trust Company of New York.
Bankruptcy-discharge — judgments in actions for fraud.
cember 12, 1904.
'N ERROR to the Supreme Court of the State of New York to review a judgment of that court, entered pursuant to a judgment of the Court of Appeals of that State, affirming the judgment of the Appellate Division of the Supreme Court, Fourth Department, which had, in turn, affirmed a judgment of the Supreme Court, entered at a special term held in and for the County of Erie, denying an application to cancel certain judgments as having been released by a discharge in bankruptcy. Affirmed.
See same case below in Court of Appeals, 171 N. Y. 689, 64 N. E. 1119; and in Appellate Division, 68 App. Div. 508, 73 N. Y. Supp. 1047.
Statement by Mr. Justice Day:
The plaintiff in error, Spencer S. Bullis, having been discharged in bankruptcy on September 19, 1899, which discharge covered provable debts existing on November 14, 1898, made application under the New York Code, § 1268, for the cancelation and discharge of certain judgments rendered against him in the supreme court of New York. The defendants in error, judgment creditors of said Bullis, opposed the granting of the order upon the ground that the judgments against Bullis were in an action for fraud, and therefore not discharged under the terms of the bankrupt law. The supreme court of New York denied the application. Upon appeal to the appellate division, fourth department, this judgment was affirmed. 68 App. Div. 508, 73 N. Y. Supp. 1047. Bullis then appealed to the court of appeals of New York, which affirmed the judgment of the court below without opinion. 171 N. Y. 689, 64 N. E. 1119.
The facts necessary to be noticed in this case are in substance: James R. O'Beirne, in behalf of himself and other bondholders, filed a complaint, setting forth, among other things that, on September 8, 1899, Bullis and one Barse owned the capital stock of three railroads,-two organized under the laws of Pennsylvania and one under the laws of the state of New York,-which railroads were constructed for the purpose
A judgment of a state court is rendered in "an of reaching timber on large tracts of land.
At that time the length of the railroads was | ruary, 1890, executed its first mortgage deed about 16 miles, but an extension of the of trust to said trust company, conveying lines was contemplated so as to cover about to it said railroad properties and franchises, 30 miles. Certain agreements are alleged and providing for an issue of bonds limited between said Bullis and Barse and a firm to $500,000, to be secured by said properties of bankers,-Newcombe & Company, of New and the 46,000 acres of timber to be conYork, by the terms of which Bullis and veyed by said Bullis and Barse to said trusBarse were to execute a mortgage to the tee. That the defendants Bullis and Barse Central Trust Company of New York, to caused the said Bullis and Sarah E., his secure $250,000 of first-mortgage bonds, wife, to join with said railroad company running thirty years, which mortgage was in said mortgage, and that by said mortgage to cover the railroad properties and 30,000 they assumed to convey to said trustee land acres of timber lands in McKean county, contiguous to the line of said railroad, and Pennsylvania. The property was to be un- free from encumbrances, and covered by a der the management of a new corporation, quantity of merchantable timber, aggregatto be organized with a capital stock of ing 30,954.10 acres, and which, by the terms $250,000. Various agreements were made of said agreements, was to be a condition as to the organization and management of precedent to the issue of $300,000 of said said corporation. Another agreement was bonds, to be used in building and completion entered into between the parties, providing of said 46 miles of said railroad; that, in for the merger and consolidation of the rail-reliance upon the conveyance of said lands, roads into a new company, with a capital stock of $500,000, and for a mortgage to the Central Trust Company, as trustee, to secure $500,000 of first-mortgage bonds. The railroad lines were to be extended to 70 miles, and 16,000 acres of timber lands to be included, making 46,000 acres to be owned by the new company. $300,000 of the bonds were to be put upon the market, to represent 46 miles of the railroad. Newcombe & Company were to dispose at par of $260,000 of these bonds, in accordance with the terms of the agreement. Bullis and Barse were to enter into an agreement for consolidating the said railroads into one system, by agreement with the International Interior Construction & Improvement Company. On September 10, 1899, the construction company made a contract with the Allegheny & Kinzua Railroad Company, owned by Bullis and Barse, and one with Bullis and Barse, providing for the construction and consolidation of the railroads and for the distribution of the proceeds of the bonds, a considerable portion of which were to be given to Bullis and Barse.
bonds to the amount of $300,000 were issued and were sold by Newcombe & Company, ten of which were purchased by the plaintiff in the action; that all the proceeds of the said bonds have been used in the construction of said lines and in the payment of prior liens upon the property and the constituent lines, and that the defendant railroad company, which is the consolidated company, is wholly without funds, and that the extension thereof is essential to enable it to obtain money to meet its liabilities; that said Bullis and Barse refused to convey to said trustees the remaining 16,000 acres of such land and to provide for the building of the balance of said railroad, whereby the construction company is unable to proceed with its work of completing the same.
The complaint further alleges that said 30,954.10 acres of land, conveyed by Bullis and his wife, were not free from encumbrances; that the same at the time were subject to prior liens aggregating $159,000, besides interest; that $144,776.07 of said indebtedness still remain unsatisfied; that said land was not covered with merchantable timber, but was waste land, from which the salable timber had been removed, and that a large portion of said land was not adjacent to the line of said railroad, and the timber thereon not accessible to be transported thereon; that a large portion of the land so assumed to be conveyed was not owned by either of the said defendants, and was not conveyed at all by said deed. All of which facts the said Bullis and Barse well knew at the time they made said pre
The complaint specifically charges: That Bullis and Barse falsely and fraudulently pretended and represented to the said firm of I. B. Newcombe & Company that said tract of 30,000 acres to be conveyed was free and clear from all encumbrances; that all of said land was contiguous or adjacent to the line of said railroad as the same was then constructed or surveyed or projected, and the said land was covered by a large quantity of merchantable timber, capable of yielding and producing 70 tons of freight in timber, lumber, and bark for each acre tended conveyance, and said conveyance is of land, for transportation over said rail-in reality false and fraudulent; that by road. It is further alleged that, in fulfil ment of said agreements, the defendant railroad corporation, on the 1st day of Feb
reason of the fraud and failure of said Bullis and Barse to convey said land free of liens a great fraud has been committed by
them which will cause irreparable injury | 70 tons to the acre, for conveyance over to the bondholders, including the plaintiff, said railroad at rates from 25 to 50 cents unless the performance of the said agree- per ton, in addition to the percentage acments and the conveyance of 30,000 acres cruing to said defendant railroad company of unencumbered timber land to said trus- from divisions of other lines. That said tee are specifically decreed. agreements were entered into at the request of Bullis and Barse; that engineers were sent from New York to inspect the timber on the land to be conveyed; they were escorted through certain timber lands by said. Bullis, and these lands were heavily timbered, and said Bullis stated that said lands were to be placed under the mortgage to the trustee, and a report in accordance with this statement was made by the engineers, and upon this report said Newcombe & Company embarked in the enterprise, and entered into said scheme of consolidation and extension. That the lands so defined and pointed out were worth from $18 to $20 an acre. That Bullis and Barse had stated to Newcombe & Company that the mortgage was to be a first lien, the lands to be well timbered, and contiguous and tributary to said line of railroad; that said trust mortgage was approved and accepted in the belief that said representations were true in fact, and that Bullis and Barse were, in good faith, performing their said covenants.
The prayer of the complaint is"Wherefore, plaintiff demands judgment that immediate specific performance by the said defendants Bullis and Barse and said defendant railroad company of their said agreements to convey unto the trustee of said defendant railroad company's mortgage, and place under the lien of said instrument 30,000 acres of timber land contiguous or tributary to the line the line of railroad of said railroad company, as in said agreements stated, free of all encumbrance of whatsoever nature prior to the said mortgage above mentioned; or that said defendants pay to said trustee, for the security of said bondholders, such a sum of money as the court shall ascertain to be equivalent to the value of said lands and real estate, conveyed as aforesaid, which are not in conformity with the terms of said several agreements, and said bonds, and the mortgage, or deed of trust, securing the same; and in addition thereto 16,000 acres of like timber land, in all respects similarly situated, and free from encumbrance, as security to authorize the issue of $200,000 of bonds in said agreements specified, and set apart for the construction of the 24 miles of railroad of said company additional to the 46 miles above mentioned."
The court further found that the plaintiff was, in fact, deceived by said statements and representations; that said statements and representations were false; that said agreement was, in fact, fraudulently made with respect to the lands agreed to be conveyed by Bullis and Barse; that a great part of the lands included in the deed was not the property of Bullis, and the value of that owned by him, and not timbered, was $13,350, while that apparently covered by the deed, but not owned by him, was worth $175,502.77, and a considerable part of that included in the conveyance was encumbered; that the statements of Bullis and Barse with respect to said timber lands were false and fraudulent, and made with intent to deceive.
And for injunction and general relief. The case was tried at special term of the New York supreme court. That court dismissed the complaint, holding that, as Bullis and Barse did not own the lands, specific performance could not be decreed, and the case could not be held for the assessment of damages. This judgment was reversed by the general term. 80 Hun, 570, 30 N. Y. Supp. 588. Upon appeal taken by the Allegheny & Kinzua Railroad Company, one of the defendants, this judgment in general term was affirmed by the court of appeals As a conclusion of law, the court deof New York. 151 N. Y. 372, 45 N. E. 873. cided that it had jurisdiction to proceed Bullis and Barse, after the reversal at gen- in the cause by reason of the fraud praceral term, went to trial at special term, tised by the defendants Bullis and Barse and, upon the allegations of fraud, find- in the premises, and because of the fact ings were made, among others: That Bul. that the plaintiff had been deceived by the lis and Barse pretended and represented to fraudulent statements and misrepresenta the said firm of Newcombe & Company that tions of the defendants. This decision was the 30,000 acres of land were timbered, free affirmed. O'Beirne v. Bullis, 2 App. Div. and clear of all encumbrances, and contigu- 545, 38 N. Y. Supp. 4. Upon appeal to the ous and adjacent to the line of the defend-court of appeals of New York this judgant railroad company, as the same was then ment was affirmed. 158 N. Y. 466, 53 N. E. constructed and projected, and that said 211. land was covered by a large quantity of merchantable timber, which would actually provide said railroad company with at least
It appearing that Bullis and Barse were unable to specifically perform the original agreement, but that they were liable for
false representations, judgment was ren- the railroads; that the timber was not acdered against them in favor of the Central Trust Company, representing the bondholders, in the sum of $341,745.65, and for the plaintiff in the sum of $3,586.40.
Messrs. Adelbert Moot and Charles S. Cary for plaintiff in error.
Messrs. Frank Sullivan Smith and Adrian H. Joline for defendant in error.
Mr. Justice Day delivered the opinion of
This action involves the construction of § 17 of the bankrupt act of 1898 (30 Stat. at L. 550, chap. 541, U. S. Comp. Stat. 1901, p. 3428), as it stood prior to the amend ment of February 5, 1903 [32 Stat. at L. 797, chap. 4871.1 So far as it pertains to this case, this section is as follows:
"A discharge in bankruptcy shall release a 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,
(4) were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in a fiduciary capacity."
In Crawford v. Burke, decided at this term, 195 U. S. 176, ante, p. 9, 25 Sup. Ct. Rep. 9, this court held that subd. 4 of this act was limited to frauds, embezzlements, misappropriations, or defalcations while acting in an official character, or in a fiduciary capacity, and did not apply to other debts or obligations fraudulently created. The question, therefore, presented in this case, is, Was the judgment against Bullis and Barse, as finally reached in the New York courts, one in "an action for fraud" within the meaning of the act?
cessible, and that a large portion of the
As was said of the action and the relief
Considerable argument was made by the learned counsel for the plaintiff in error as to the essential allegations of a pleading where relief for fraud is sought. It is said that there is no averment in the complaint in this case of knowledge or intent to de
It is distinctly charged in the complaint, and found in the judgment, that the agree-ceive upon the part of the plaintiff in erment was fraudulently made; that Bullis and Barse falsely and fraudulently pretended that the large tract of timber land which they were to put under the mort gage for the security of the bondholders was free from all encumbrances; that it was near the line of the projected railroads, and covered by a large quantity of merchantable timber; when, in fact, as Bullis and Barse well knew, the 30.000 acres of timber land actually mortgaged was not free from encumbrances, but was subject to $159,000 and interest of prior encumbrances, and that it was waste land from which the timber had been removed; that the lands were not adjacent to the lines of 1 U. S. Comp. St. Supp. 1903, p. 411.
ror; but it is averred that the represen-
one for fraud, demanded a jury trial, which | after it had been held that it might be rewas denied him, and that this shows the tained for the assessment of damages, in character of the case. But, as appears in the opinion of the New York court of appeals (158 N. Y. 466-468, 53 N. E. 211), when the demand for a jury trial was made the defendants had not set up their inability to perform the contract, but had taken issue upon the allegations of fraud and misrepresentation. In this attitude of the case it was held that a jury trial was properly denied.
But it is unnecessary to further consider questions of practice peculiar to the jurisdiction where the judgment was rendered. Whether the complaint sufficiently charged fraud to warrant the judgment given is not a Federal question. Forsyth v. Vehmeyer, 177 U. S. 177, 180, 44 L. ed. 723, 725, 20 Sup. Ct. Rep. 623. The question for this court is whether the judgment rendered by the New York court is in an action for
fraud. If so, it is excepted from the effect of a discharge in bankruptcy.
We think an inspection of the record as well as the interpretation put upon the pleadings and judgment by the courts of New York in the various trials and proceedings had show that the relief was granted upon the ground of fraud. When the case was first before the New York court of appeals, Judge Gray, delivering the opinion of that court, said:
its conclusions of law the supreme court at special term decided that it "had jurisdiction to proceed in the cause by reason of the fraud practised by the defendants Bullis and Barse in the premises." This manner of exercising jurisdiction by the lower court was expressly affirmed by the supreme court at general term (2 App. Div. 545, 38 N. Y. Supp. 4), and finally by the court of appeals of New York (158 N. Y. 466, 53 N. E. 211). In the latter case the court said:
"The theory upon which the decision proceeded was that they [Bullis and Barse] devised a fraudulent scheme for the consolidation of certain railroads owned and controlled by them, issued bonds upon false representations as to the timber lands to be furnished as added security under the mortgage to make the bonds secure and salable; that upon those facts the court would have been justified in granting relief to the plaintiff against them, and that the corporation, having been the instrumentality employed by them, was also liable. Thus it was that the liability of the appellants was involved in the decision. We adhere to the principle of our decision upon that appeal.”
It is thus apparent that the courts of New York, in conformity to their own practice, have rendered a judgment against Bullis and Barse by reason of the fraudulent scheme found, and because of the fraudu lent representations made to and relied upon by the parties to whom the relief was granted. The Federal question is, Is such a judgment entitled to be discharged in bankruptcy? Under the bankrupt law of 1867 it was provided: "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 by proceedings in bankruptcy; but the debt may be proved, and the dividend thereon shall be a payment on account of such debt." Rev. Stat. § 5117.
"The theory of the complaint and the tendency of the proof upon the trial were that a fraudulent scheme was devised by Bullis and Barse, having for its object the consolidation of certain railroad properties, owned and controlled by them, and the issuance of a large number of bonds by the consolidated company, which should be placed with the public at par through the coöperation of Newcombe & Company, whose assistance to the scheme, in the negotiation of the bonds, should be gained by representations and agreements of such a nature, as to the timber tracts to be furnished as additional security under the mortgage, that the bonds would appear to be attractive and salable securities. We are not called upon, We are not called upon, at the present time, to pass upon the liabil- In the law of 1898, for reasons which have ity of Bullis and Barse for the parts they been the subject of much diversity of view have played in the development and con- in the courts, but which were sufficient in summation of this scheme, inasmuch as they the judgment of Congress in passing the have gone back to a new trial; but, on the act to necessitate a change, it is provided, face of this record, that the evidence amply instead of exempting debts created by fraud warranted the findings by the trial court from the operation of the discharge, that is not to be denied; and it would have justi- only judgments in actions for fraud shall fied the granting of relief to the plaintiff be exempted. Under this act (as it was had the case been in a shape to make that before the passage of the act of February 5, possible." 151 N. Y. 372-384, 45 N. E. 1903) claims grounded in fraud will not be 873-876. exempted unless reduced to judgment; but When the case was sent back for trial, the essential character of the fraud which