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may be chargeable to such a purchaser, in IS ERROR to the Supreme Court of the
as against the government, by virtue of his action for fraud" so as to be exempted by so-called attempt to make entry for the 80
the bankruptcy act of July 1, 1898 (30 Stat.
at L. 550, chap. 541, U. S. Comp. Stat. 1901, acres in section 35, they do not override the
p. 3428), § 17, subd. 2, from the operation of plain provisions of the statute of 1887, and
a discharge in bankruptcy, where such judg. also that of 1896 (29 Stat. at L. 42, chap. ment, whatever may be the form of the ac39, U. S. Comp. Stat. 1901, p. 1603), which tion, was based upon actual, as distinguished save the rights of one who purchased from
from constructive, fraud of the bankrupt. the railroad in good faith.
[No. 60.] As was observed by Mr. Justice Brewer, in the case already referred to (United States v. Winona & St. P. R. Co. 165 U. S. Argued November 10, 11, 1904. Decided De
cember 12, 1904. 480, 41 L. ed. 796, 17 Sup. Ct. Rep. 372); “It matters not what constructive notice
if, State of New York to review a judgmenu in actual ignorance of any defect in the of that court, entered pursuant to a judg. railroad company's title, and in reliance ment of the Court of Appeals of that State, upon the action of the government in the affirming the judgment of the Appellate Diapparent transfer of title by certification or vision of the Supreme Court, Fourth Depatent, he has made an honest purchase of partment, which had, in turn, affirmed a the lands.”
judgment of the Supreme Court, entered at Donovan is not brought within the case a special term held in and for the County of Winona & St. P. R. Co. v. United States, of Erie, denying an application to cancel immediately following the above-cited case, certain judgments as having been released at page 483 (L. ed. p..798, Sup. Ct. Rep. p. by a discharge in bankruptcy. Affirmed. 381), because, among other facts, it appears See same case below in Court of Appeals, herein that there was no record of any entry 171 N. Y. 689, 64 N. E. 1119; and in Appelin Donovan's case for this land, on the late Division, 68 App. Div. 508, 73 N. Y. books of the local land office, and it is con- Supp. 1047. ceded that he had been out of any possession of the land since 1885. The above-cited case Statement by Mr. Justice Day: is not," therefore, in point. The same may The plaintiff in error, Spencer S. Bullis, be said of Duluth & 1. Range R. Co. v. Roy, having been discharged in bankruptcy on 173 U. S. 587, 43 L. ed. 820, 19 Sup. Ct. September 19, 1899, which discharge covered Rep. 549, and Oregon & C. R. Co. v. United provable debts existing on November 14, States, 189 U. S. 103–116, 47 L. ed. 726–732, 1898, made application under the New York 23 Sup. Ct. Rep. 615.
Code, 1268, for the cancelation and disDonovan cannot be regarded as having by charge of certain judgments rendered his action secured a vested interest in this against him in the supreme court of New land, so as to make the certification to the York. The defendants in error, judgment state a wholly void act, as an act beyond creditors of said Bullis, opposed the grantthe jurisdiction of the Secretary. Assuming ing of the order upon the ground that the that it may have been erroneous and void- judgments against Bullis were in an action able, it was not void. We do not decide it for fraud, and therefore not discharged inwas erroneous. In 1871 the legal title, still der the terms of the bankrupt law. The remaining in the government, was trans- supreme court of New York denied the apferred to the state by the certification of plication. Upon appeal to the appellate dithe Secretary, and, as we have said, Wood- vision, fourth department, this judgment wick occupied the position of a purchaser was affirmed. 68 App. Div. 508, 73 N. Y. in good faith under the acts of Congress. Supp. 1047. Bullis then appealed to the The judgment is affirmed.
court of appeals of New York, which affirmed the judgment of the court below
without opinion. 171 N. Y. 689, 64 N. E. (195 U. S. 606)
1119. SPENCER S. BULLIS, Piff. in Err., The facts necessary to be noticed in this
case are in substance: James R. O’Beirne, JAMES R. OʻBEIRNE, on Behalf of Him- in behalf of himself and other bondholders,
self and All Other Bondholders of the Al- filed a complaint, setting forth, among othlegheny & Kinzua Railroad Company, and er things that, on September 8, 1899, Bullis the Central Trust Company of New York. and one Barse owned the capital stock of
three railroads,-two organized under the Bankruptcy - discharge - judgments in ac- laws of Pennsylvania and one under the
laws of the state of New York,—which
railroads were construcied 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 bonds to the amount of $300,000 were issued stock of $500,000, and for a mortgage to and were sold by Newcombe & Company, ten the Central Trust Company, as trustee, to of which were purchased by the plaintiff secure $500,000 of first-mortgage bonds. in the action; that all the proceeds of the The railroad lines were to be extended to said bonds have been used in the construc70 miles, and 16,000 acres of timber lands tion of said lines and in the payment of to be included, making 46,000 acres to be prior liens upon the property and the conowned by the new company.
$300,000 of stituent lines, and that the defendant railthe bonds were to be put upon the market, road company, which is the consolidated to represent 46 miles of the railroad. New company, is wholly without funds, and that combe & Company were to dispose at par the extension thereof is essential to enable of $260,000 of these bonds, in accordance it to obtain money to meet its liabilities; with the terms of the agreement. Bullis that said Bullis and Barse refused to conand Barse were to enter into an agreement vey to said trustees the remaining 16,000 for consolidating the said railroads into acres of such land and to provide for the one system, by agreement with the Interna- building of the balance of said railroad, tional Interior Construction & Improvement whereby the construction company is unCompany. On September 10, 1899, the con- able to proceed with its work of completing struction company made a contract with the same. the Allegheny & Kinzua Railroad Company, The complaint further alleges that said owned by Bullis and Barse, and one with 30,954.10 acres of land, conveyed by Bullis Bullis and Barse, providing for the construc- and his wife, were not free from encumtion and consolidation of the railroads and brances; that the same at the time were for the distribution of the proceeds of the subject to prior liens aggregating $159,000, bonds, a considerable portion of which were besides interest; that $144,776.07 of said into be given to Bullis and Barse.
debtedness still remain unsatisfied; that The complaint specifically charges: That said land was not covered with merchantable Bullis and Barse falsely and fraudulently timber, but was waste land, from which the pretended and represented to the said firm salable timber had been removed, and that of I. B. Newcombe & Company that said a large portion of said land was not adtract of 30,000 acres to be conveyed was free jacent to the line of said railroad, and the and clear from all encumbrances; that all timber thereon not accessible to be transof said land was contiguous or adjacent to ported thereon; that a large portion of the the line of said railroad as the same was land so assumed to be conveyed was not then constructed or surveyed or projected, owned by either of the said defendants, and and the said land was covered by a large was not conveyed at all by said deed. All quantity of merchantable timber, capable of which facts the said Bullis and Barse of yielding and producing 70 tons of freight well knew at the time they made said prein 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. reason of the fraud and failure of said Bul. ment of said agreements, the defendant rail- lis and Barse to convey said land free of road corporation, on the 1st day of Feb- ' 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 The prayer of the complaint is
of Bullis and Barse; that engineers were “Wherefore, plaintiff demands judgment sent from New York to inspect the timber that immediate specific performance by the on the land to be conveyed; they were essaid defendants Bullis and Barse and said corted through certain timber lands by said defendant railroad company of their said Bullis, and these lands were heavily timagreements to convey unto the trustee of bered, and said Bullis stated that said
, said defendant railroad company's mort- lands were to be placed under the mortgage gage, and place under the lien of said to the trustee, and a report in accordance instrument 30,000 acres of timberland with this statement was made by the encontiguous or tributary to the line of gineers, and upon this report said Newcombe railroad of said railroad company, as in & Company embarked in the enterprise, and said agreements stated, free of all encum- entered into said scheme of consolidation brance of whatsoever nature prior to the and extension. That the lands so defined said mortgage above mentioned; or that and pointed out were worth from $18 to said defendants pay to said trustee, for the $20 an acre. That Bullis and Barse had security of said bondholders, such a sum stated to Newcombe & Company that the of money as the court shall ascertain to be mortgage was to be a first lien, the lands equivalent to the value of said lands and to be well timbered, and contiguous and real estate, conveyed as aforesaid, which tributary to said line of railroad; that said are not in conformity with the terms of trust mortgage was approved and accepted said several agreements, and said bonds, and in the belief that said representations were the mortgage, or deed of trust, securing the true in fact, and that Bullis and Barse were, same; and in addition thereto 16,000 acres in good faith, performing their said covof like timber land, in all respects similarly enants. situated, and free from encumbrance, as se- The court further found that the plaincurity to authorize the issue of $200,000 tiff was, in fact, deceived by said state. of bonds in said agreements specified, and ments and representations; that said stateset apart for the construction of the 24 ments and representations were false; that miles of railroad of said company additional said agreement was, in fact, fraudulently to the 46 miles above mentioned.”
made with respect to the lands agreed to And for injunction and general relief. be conveyed by Bullis and Barse; that a
The case was tried at special term of the great part of the lands included in the New York supreme court. That court dis- deed was not the property of Bullis, anci missed the complaint, holding that, as Bul- the value of that owned by him, and not timlis and Barse did not own the lands, specific bered, was $13,350, while that apparently performance could not be decreed, and the covered by the deed, but not owned by case could not be held for the assessment him, was worth $175,502.77, and a considof damages. This judgment was reversed erable part of that included in the conby the general term. 80 Hun, 570, 30 N. Y. veyance was encumbered; that the stateSupp. 588. Upon appeal taken by the Al ments of Bullis and Barse with respect to legheny & Kinzua Railroad Company, one said timber lands were false and frauduof the defendants, this judgment in general lent, and made with intent to deceive. 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 mer- It appearing that Bullis and Barse were chantable timber, which would actually pro- unable to specifically perform the original vide said railroad company with at least'agreement, but that they were liable for
false representations, judgment was
judgment was ren- | the railroads; that the timber was not acdered against them in favor of the Central cessible, and that a large portion of the Trust Company, representing the bondhold- land to be conveyed was not owned by either ers, in the sum of $341,745.65, and for the of the defendants; that all of these facts plaintiff in the sum of $3,586.40.
were well known to Bullis and Barse when
they made the false and fraudulent repMessrs. Adelbert Moot and Charles s.resentations aforesaid, and were relied upon Cary for plaintiff in error.
to the prejudice of the bondholders. The Messrs. Frank Sullivan Smith and New York courts found that the agents Adrian H. Joline for defendant in error. of the New York brokers attempting to
negotiate the bonds, when they went to see Mr. Justice Day delivered the opinion of the lands, were shown those not included the court:
in the mortgage, and which were falsely This action involves the construction of and fraudulently pointed out as being the § 17 of the bankrupt act of 1898 (30 Stat. intended lands. Under these allegations ard at L. 550, chap. 541, U. S. Comp. Stat. 1901, proofs the New York courts have seen fit to p. 3428), as it stood prior to the amend render a money judgment, not for specific ment of February 5, 1903 [32 Stat. at L. performance, as upon contract, but for the 797, chap. 487]. So far as it pertains to frauds charged against the defendants. this case, this section is as follows:
As was said of the action and the relief "A discharge in bankruptcy shall release granted, in the opinion of the appellate dia bankrupt from all of his provable debts vision (68 App. Div. 508, 73 N. Y. Supp. except such as
(2) are judgments 1047, affirmed in 171 N. Y. 689, 64 N. E. in actions for frauds, or obtaining property 1119): “The action for specific performby false pretenses or false representations, ance, in the strictest sense thereof, was or for wilful and malicious injuries to the founded upon the actual, positive fraud of person or property of another,
the defendants Bullis and Barse. They had (4) were created by his fraud, embezzle- in fact, in pretended compliance with their ment, misappropriation, defalcation agreements, conveyed to the designated truswhile acting as an officer or in a fiduciary tee 30,000 acres of land. The plaintiff alcapacity.”
leged that the defendants fraudulently inIn Crawford v. Burke, decided at this cluded in this conveyance lands not owned term, 195 U. S. 176, ante, p. 9, 25 Sup. Ct. by the grantors, and the bulk of the tract Rep. 9, this court held that subd. 4 of this was not timber land, was encumbered, and act was limited to frauds, embezzlements, was not adjacent to the railroad lines demisappropriations, or defalcations while scribed.
The gist, the intrinsic inacting in an official character, or in a fidu- gredient of the action, was consequently ciary capacity, and did not apply to other the fraudulent scheme—the false represendebts or obligations fraudulently created. tations-of these defendants.” The question, therefore, presented in this Considerable argument was made by the case, is, Was the judgment against Bullis learned counsel for the plaintiff in error and Barse, as finally reached in the New as to the essential allegations of a pleading York courts, one in “an action for fraud" where relief for fraud is sought. It is said within the meaning of the act?
that there is no averment in the complaint It is distinctly charged in the complaint, in this case of knowledge or intent to deand found in the judgment, that the agree ceive upon the part of the plaintiff in erment was fraudulently made; that Bullis ror; but it is averred that the represenand Barse falsely and fraudulently pre- tations were falsely and fraudulently made, tended that the large tract of timber land with the intent to further the pecuniary inwhich they were to put under the mort- terest of the plaintiff in
error, and gage for the security of the bondholders was were known to be false when made. Such free from all encumbrances; that it was allegations have frequently been held the near' the line of the projected railroads, equivalent of averments of specific intent. and covered by a large quantity of mer. Indeed, it is difficult to perceive how a statechantable timber; when, in fact, as Bullis ment falsely and fraudulently made can be and Barse well knew, the 30.000 acres of otherwise than intended to deceive. A statetimberland actually mortgaged was not ment fraudulently made, with knowledge of free from encumbrances, but was subject its falsity, must necessarily be intended to to $159,000 and interest of prior encum- deceive. Bank of Montreal v. Thayer, 2 brances, and that it was waste land from McCrary, 1, 7 Fed. 625, and cases cited in which the timber had been removed; that the opinion. It is argued that Bullis, one the lands were not adjacent to the lines of of the defendants, regarding the case as
1 U. S. Comp. St. Supp. 1903, p. 411.
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 its conclusions of law the supreme court the opinion of the New York court of ap- at special term decided that it "had jurispeals (158 N. Y. 466–468, 53 N. E. 211), diction to proceed in the cause by reason when the demand for a jury trial was made of the fraud practised by the defendants the defendants had not set up their inability Bullis and Barse in the premises.” This to perform the contract, but had taken is. manner of exercising jurisdiction by the sue upon the allegations of fraud and mis- lower court was expressly affirmed by the representation. In this attitude of the case supreme court at general term (2 App. Div. it was held that a jury trial was properly 545, 38 N. Y. Supp. 4), and finally by the denied.
court of appeals of New York (158 N. Y. But it is unnecessary to further consider 466, 53 N. E. 211). In the latter case the questions of practice peculiar to the juris- court said: diction where the judgment was rendered. "The theory upon which the decision proWhether the complaint sufficiently charged ceeded was that they [Bullis and Barse] fraud to warrant the judgment given is not devised a fraudulent scheme for the cona Federal question. Forsyth v. Vehmeyer, solidation of certain railroads owned and 177 U. S. 177, 180, 44 L. ed. 723, 725, 20 controlled by them, issued bonds upon false Sup. Ct. Rep. 623. The question for this representations as to the timber lands to court is whether the judgment rendered by be furnished as added security under the the New York court is in an action for fraud. If so, it is excepted from the ef- mortgage to make the bonds secure and fect of a discharge in bankruptcy.
salable; that upon those facts the court We think an inspection of the record as
would have been justified in granting rewell as the interpretation put upon the lief to the plaintiff against them, and that pleadings and judgment by the courts of the corporation, having been the instruNew York in the various trials and pro- mentality employed by them, was also liable. ceedings had show that the relief was Thus it was that the liability of the apgranted upon the ground of fraud. When pellants was involved in the decision. We the case was first before the New York court adhere to the principle of our decision upon of appeals, Judge Gray, delivering the opin- that appeal.”
. ion of that court, said:
It is thus apparent that the courts of “The theory of the complaint and the New York, in conformity to their own practendency of the proof upon the trial were tice, have rendered a judgment against Bul. that a fraudulent scheme was devised by lis and Barse by reason of the fraudulent Bullis and Barse, having for its object the scheme found, and because of the frauduconsolidation of certain railroad properties, lent representations made to and relied upon owned and controlled by them, and the is- by the parties to whom the relief was suance of a large number of bonds by the granted. The Federal question is, Is such consolidated company, which should be a judgment entitled to be discharged in placed with the public at par through the bankruptcy ? Under the bankrupt law of coöperation of Newcombe & Company, whose 1867 it was provided: “No debt created assistance to the scheme, in the negotiation by the fraud or embezzlement of the bankof the bonds, should be gained by repre- rupt, or by his defalcation as a public ofsentations and agreements of such a nature, ficer, or while acting in any fiduciary charas to the timber tracts to be furnished as acter, shall be discharged by proceedings in additional security under the mortgage, that bankruptcy; but the debt may be proved, the bonds would appear to be attractive and and the dividend thereon shall be a payment salable securities. We are not called upon,
We are not called upon, on account of such debt.” Rev. Stat. § 5117. 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 whick