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and definite method of computation, and stated on demand by any policy holder or person in interest;" that the society, pursuant to law and in accordance with its practice, had stated to him and declared the cash surrender value of each of the policies and its readiness and willingness to pay such value upon the surrender of the policies. The values were stated.
The matter was referred to a special master to take the proofs and report the same, with findings of fact and conclusions of law. Proofs were taken and a report made in accordance with the order of the court. The master, in his report, describing the policies, said:
"None of these express any agreement or provision whereby, upon default, the company shall pay a 'cash surrender value' to any person. By their terms the assured is excluded from any participation in dividends until the completion of the tontine period, at which time all surplus and profits derived from such policies are to be divided among the persistent policies of that class then in force. At the expiration of the tontine period the persistent policy holder is given certain options, among them to withdraw in in cash the policy's the policy's entire share of the assets, that is, the accumulated reserve, the amount of which is stated in each policy, and, in addition, the accumulated surplus apportioned to the policy. Each of these policies also provides that, upon default in payment of a premium and the surrender of the policy within six months thereafter, the assured shall be entitled to a new paid-up policy, based upon the reserve accumulated under the old policy, but 'without participation in profits.' Both funds secured by the agreement, namely, the insurance proper and the endowment fund representing the accumulated profits, are payable to the assured or to his executors, administrators, or assigns. No other person is mentioned in either of the policies as having any beneficial interest therein."
It appeared from the testimony that, as a matter of fact, policies of the character of those in controversy had, under the practice of the company, cash surrender values, if offered for surrender within six months from the date of the nonpayment of any premium. Explaining this, a witness said: "To make clear the replies of previous questions I will state that the Equitable Life Assurance Society would decline to purchase for cash a policy during the period for which premiums had been paid, entitling the policy holder to protection for the face value, for the reason that, in the event of the death of the holder of that policy before the expiration of the period for which premiums
had been paid, the question would be raised as to the liability of the company, so that the payment of an amount of cash for the surrender of a policy is only made by the company after that policy has lapsed by reason of the nonpayment upon its due date." And it was testified that the cash surrender values of policies was determined by a fixed and definite method of computation, uniform in all cases, and had, without exception, been paid to persons insured by the company. It further appeared that the surrender values of the policies in controversy were as follows: Policy No. 274,445, $5,905.65; policy No. 417,678, $2,272.56; policy No. 417,171, $6,574.00.
It was further testified that the surrender value of each policy was equivalent to the amount of a paid-up policy, which the company was willing to give. Or, as expressed by a witness, "it is equivalent to the percentage reserved under that policy (referring to policy No. 274,445), which the company is willing to pay in consideration of the surrender."
The district court held that the policies had no cash surrender value within the meaning of § 70 of the bankrupt act. The court said:
"In the policies in question not only is there a failure to provide for a cash surrender value, but the provisions are inconsistent with the existence of such a value. This, however, is not at war with the fact that the assurance association may be willing to pay money for the surrender of such policies. There is no pretense that this custom of the insurer formed a part of the contract between the parties, or that the insured could enforce the payment of a surrender value, or the payment of anything, on surrendering the policy. In short, the insurer might be willing to pay a surrender value and might not. Such payment would be optional with it."
"The association might be willing to pay one day, entirely unwilling the next. . Is this the 'cash surrender value' spoken of in the bankruptcy law? This court thinks not. It would seem that had Congress intended that every bankrupt holding a policy of insurance of the nature of these should retain the same as his own on paying to the trustee in bankruptcy the value thereof that the insurer might fix by its custom or otherwise, it would have used language appropri ate to that end, and not an expression implying a value the insured has a legal right to demand, and the insurer may be compelled to pay,-a value generally understood to be provided for in the policy itself." [131 Fed. 974, 975.]
The court cited, to sustain its views, Re
Welling, 51 C. C. A. 151, 113 Fed. 189, and | made and their proper effect and relation Re Slingluff, 106 Fed. 154.
An order was entered requiring Mertens to assign the policies to the trustees. It was reversed by the circuit court of appeals. The latter court, however, said that it "should be inclined to concur with these views [expressed in Re Welling] and to sustain the conclusion of the district judge in the cause at bar, that 'no policy is understood to have a cash surrender value unless provided for in the policy so as to be enforceable by the insured,' were it not for a subsequent expression of opinion by the Supreme Court. This is found in Holden v. Stratton, 198 U. S. 214, 49 L. ed. 1022, 25 Sup. Ct. Rep. 660, as follows:
""There has been some contrariety of opinion expressed by the lower Federal courts as to the exact meaning of the words "cash surrender value" as employed in the proviso, some courts holding that it means a surrender value expressly stipulated by the contract of insurance to be paid, and other courts holding that the words embrace policies, even though a stipulation in respect to surrender value is not contained therein, where the policy possesses a cash value which would be recognized and paid by the insurer on the surrender of the policy. It is to be observed that this latter construction harmonizes with the practice under the bankrupt act of 1867 (Re Newland, 6 Ben. 342, Fed. Cas. No. 10,170; Re McKinney, 15 Fed. 535) and tends to elucidate and carry out the purpose contemplated by the proviso as we have construed it. However, whatever influence that construction may have, as the question is not necessarily here involved we do not expressly decide it." [142 Fed. 447.]
The court observed that the extract from Holden v. Stratton was obiter to the questions decided in the case, but considered it such an explicit declaration of views that the court expressed hesitation to disregard it.
We are hence confronted with the problem whether the obiter of Holden v. Stratton shall be pronounced to be the proper construction of § 70 of the bankrupt act. We may remark at the commencement that that obiter was not inconsiderately uttered, nor can it be said that it was inconsequent to the considerations there involved. It was there necessary to determine between conflicting decisions of two circuit courts of appeals upon the effect of state statutes of exemption from liability for debts, and a careful consideration of § 6 of the bankrupt act, which provided for exemptions, and § 70, which defined the property which passed to the trustee, was necessary to be
determined. As elements in that consideration the meaning and scope of § 70 were involved and the purpose of Congress in its enactment. Section 6 provides for exemptions "prescribed by the state laws." Section 70 vests the title of all the property of the bankrupt in the trustee, "except in so far as it is to property which is exempt." Then, after a designation of the property the title to which is transferred, follows the proviso in regard to insurance policies. It was argued that the proviso would be meaningless unless considered as wholly disconnected from the clause as to exempt property, and this court replied:
"As § 70a deals only with property which, not being exempt, passes to the trustee, the mission of the proviso was in the interest of the perpetuation of policies of life insurance, to provide a rule by which, where such policies passed to the trustee because they were not exempt, if they had a surrender value their future operations could be preserved by vesting the bankrupt with the privilege of paying such surrender value, whereby the policy would be withdrawn out of the category of an asset of the estate. That is to say, the purpose of the proviso was to confer a benefit upon the insured bankrupt by limiting the character of the interest in a nonexempt life insurance policy which should pass to the trustee, and not to cause such a policy when exempt to become an asset of the estate. When the purpose of the proviso is thus ascertained it becomes apparent that to maintain the construction which the argument seeks to affix to the proviso would cause it to produce a result diametrically opposed to its spirit and to the purpose it was intended to subserve." 198 U. S. 213, 49 L. ed. 1022, 25 Sup. Ct. Rep. 659.
And, contemplating the proviso as having such purpose, the court used the language quoted by the circuit court of appeals, and expressed the view that, as between the two constructions that had been made of the terms, "cash surrender value," whether they meant a stipulation in the contract or the recognition by the company, the latter harmonized with the practice under the bankrupt act of 1867 [14 Stat. at L. 517, chap. 176], and tended to elucidate and carry out the purpose contemplated by the proviso as the decision construed it. And the precedent practice is necessarily a strong factor and would be so even if it had a less solid foundation in reason. It is nowhere better expressed than in Re McKinney, supra. It is there pointed out that the foundation of the surrender value of a policy is the excess of the fixed annual premiums in the earlier years of the policy
over the annual risk during the later years, it make whether the surrender value was of the policy. "This excess," it was said, | stipulated in a policy or universally recog"in the premium paid over the annual cost of insurance, with accumulations of interest constitutes the surrender value."
nized by the companies? In either case the purpose of the state would be subserved, which was to secure to the trustee the sum of such value and to enable the bankrupt to "continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of the estate under the bankruptcy proceedings."
"Though this excess of premiums paid is legally the sole property of the company, still in practical effect, though not in law, it is moneys of the assured, deposited with the company in advance, to make up the Counsel for petitioner argues that the deficiency in later premiums to cover the policies are mere investments, and intimates annual cost of insurance instead of being the injustice of keeping them from the retained by the assured, and paid by him | trustee, and illustrates the comment by conto the company in the shape of greatly in- trasting what the company would have paid creased premiums when the risk is greatest. as the surrender value of policy No. 274,445, It is the 'net reserve' required by law to be if default had been made in payment of prekept by the company for the benefit of the miums, and what the company would pay assured and to be maintained to the credit six months thereafter. The contrast is beof the policy. So long as the policy re- tween $5,905.65 and $11,318.40. But this mains in force the company has not prac-is the result of the age of the policy, and tically any beneficial interest in it, except cannot be a test of other policies or of the as its custodian, with the obligation to construction of the law. And a precisely maintain it unimpaired and suitably invest-like effect would result if the policy exed for the benefit of the assured. This is the practical, though not the legal, relation of the company to this fund.
pressed a surrender value, in which case it is conceded, it would come under the law. The same comment is applicable to other "Upon the surrender of the policy before arguments of petitioner which tend to conthe death of the assured, the company, to found the distinction between surrender be relieved from all responsibility for the value and other value. Section 70 deals increased risk, which is represented by this with the former, and makes it the accumulating reserve, could well afford to ditions of the relative rights of the banksurrender a considerable part of it to the rupt and the trustee of his estate. Pursuassured, or his representative. A returning the argument farther, it is said that of a part in some form or other is now usually made."
In Re Newland, supra, it was said that the present value of a policy is its cash surrender value, and but for that "it could not be said to have any appreciable value. Parker v. Anglesey, 20 Week. Rep. 162, 25
"the right to participate in the profits was a part and parcel of the policy and of the privileges enjoyed thereunder;" and it is further observed that the difference between the value of the policy which was used for illustration, "if lapsed on September 8, 1903, given as $5,905.65, and its value on March 8, 1904, $11,318.40, is chiefly made up There is no expression in either of the of the value of this right to participate in cases that the cash surrender value depend-profits." And counsel for petitioner is dised upon contract as distinct from the usage
L. T. N. S. 482."
of companies. And § 70 expresses no dis-posed to think the contention absurd that tinction. At the time of its enactment there the bankruptcy law contemplated that such were policies which stated a surrender value a valuable right "could be absolutely wiped and a practice which conceded such value if not stated. If a distinction had been intended to be made it would have been ex
pressed. Able courts, it is true, have decided otherwise, but we are unable to adopt their view. It was an actual benefit for which the statute provided, and not the manner in which it should be evidenced. And we do not think it rested upon chance concession. It rested upon the interest of the companies and a practice to which no exception has been shown. And that a provision enacted for the benefit of debtors should recognize an interest so substantial and which had such assurance was perfectly natural. What possible difference could
out and taken from the trustee in such a case as this by allowing the bankrupt to take up the policy by paying what the bankrupt here claims to be the surrender value." Such result would not appear to be absurd if the policy were only two years old instead of nineteen years. Manifestly a policy cannot be declared in or out of the law according to its age, nor can anything be deduced from the investment features of tontine policies. Such policies were decided to be covered by the law in Holden v. Stratton. Whether the law should have included them is not our concern. Whatever may be said against it, it has seemed best to the legislature to encourage the extra endeavor
and sacrifice which such policies may repre- IN ERROR to the Supreme Court of the
It is further contended that respondent has not made out that the policies have a cash surrender value, because it appears from the evidence that the company would not accept their surrender until they had lapsed, and that they had not lapsed either when the petition was filed or the bankruptcy adjudged. But this is tantamount to saying that no policy can ever have a surrender value. According to the testimony, policies which have a stipulation for such value are subject to the same condition. And there is nothing in the record to show that the practice and policies of other companies are not the same as those of the Equitable Life Assurance Society. Section 70 is broad enough to accommodate such condition. It permits the redemption of a policy by the bankrupt from the claims of creditors by paying or securing to the trustee the cash surrender value of the policy "within thirty days" after such value "has been ascertained and stated to the trustee by the company issuing the same." Judgment affirmed.
State of New York to review a judg ment entered pursuant to the mandate of the Court of Appeals of that state, which reversed a judgment of the Appellate Division of the Supreme Court, Fourth Department, affirming a judgment of a trial term of that court held in and for the county of Erie, in favor of plaintiffs in an action to recover damages arising out of false and fraudulent representations inducing the sale of merchandise, in which the defendant pleaded a discharge in bankruptcy as a defense. Affirmed.
See same case below in Court of Appeals, 183 N. Y. 207, 76 N. E. 25.
The facts are stated in the opinion.
Mr. Chief Justice Fuller delivered the opinion of the court:
This was an action brought in 1899 to recover damages claimed to have been sustained in consequence of specified false and fraudulent representations made by the firm of which the defendant was survivor, by reason whereof plaintiffs alleged they were deceived into selling goods to defend
THOMAS TINDLE and Willis K. Jackson, ant's firm, which they otherwise would not
Plffs. in Err.,
CLARENCE T. BIRKETT.
1. Claims for damages arising out of false and fraudulent representations inducing sales of merchandise might have been proved under the bankrupt act of July 1, 1898 (30 Stat. at L. 550, 562, chap. 541, U. S. Comp. Stat. 1901, pp. 3428, 3447), § 63a, as debts "founded upon an open account or upon a contract, expressed or implied," if the sellers had chosen to waive the tort and take their places with the other creditors of the bankrupt estate, and are therefore barred by a discharge in bankruptcy. Bankruptcy-provable debts-discharge.
have done. The complaint contained three counts, setting up separate items of damages, namely, $349.30, $230.83, and $321.73 for goods sold, and judgment was demanded for the aggregate, with interest on each item.
One of the defenses was that plaintiffs' claims were barred by a discharge in bankruptcy of defendant's firm, to which plaintiffs replied that they were not such as could be discharged in bankruptcy proceedings.
The New York court of appeals held that, according to the rulings of this court in Crawford v. Burke, 195 U. S. 176, 49 L. ed. 147, 25 Sup. Ct. Rep. 9, the alleged indebtedness to plaintiffs was covered by the discharge, and directed plaintiffs' complaint to be dismissed. 183 N. Y. 267, 76 N. E. 25.
2. The words "while acting as an officer or in any fiduciary capacity," as used in the bankrupt act of July 1, 1898, § 17, subd. | 4, making an exception from the operation This writ of error was then prosecuted, of a discharge in bankruptcy in favor of and plaintiffs' counsel contends that their debts created by the bankrupt's "fraud, em- debts were not provable debts, and therebezzlement, misappropriation, or defalcation while acting as an officer or in any fil-fore not discharged, and that Crawford v. duciary capacity," extend to "fraud, embez- Burke might well be modified in view of zlement, misappropriation," as well as to certain suggestions deemed to be novel. "defalcation."
Sections 17 and 63a of the bankruptcy act of 1898 read as follows:
"Sec. 17. A discharge in bankruptcy shall release a bankrupt from all of his provable . (2) are judgments in actions for frauds, or obtain
Argued February 28, 1907. Decided March debts, except such
ing property by false pretenses or false | Crawford and Valentine, plaintiffs in error, representations, or for wilful and malicious to recover damages for the wilful and injuries to the person or property of an- fraudulent conversion of the interests of the other; or (4) were created by his plaintiff in certain shares of stock. There fraud, embezzlement, misappropriation, or were ten counts in the declaration, five defalcation while acting as an officer or in charging fraudulent conversion of that any fiduciary capacity. stock, and five, the obtaining of money from plaintiff in the way of margins by means of false and fraudulent representations. Defendants pleaded their discharge in bankruptcy, but were found guilty on all the counts, and judgment was entered against them, which was affirmed by the appellate court and by the supreme court of Illinois. This court held that plaintiff's claim was "provable under the bankruptcy act," that is, was "susceptible of being proved," and that it might have been proved under § 63a as "founded upon an open account or upon a contract express or implied," if plaintiff had chosen to waive the tort and take his place with the other creditors of the estate. And that the words, in the fourth subdivision of § 17, "while acting as an officer, or in any fiduciary capacity," extended to "fraud, embezzlement, misappropriation" as well as "defalcation."
"Sec. 63. Debts which may be proved:"(a) Debts of the bankrupt may may be proved and allowed against his estate which are (1) a fixed liability, as evidenced by a judgment or an instrument in writing, absolutely owing at the time of the filing of the petition against him, whether then payable ; (4) founded upon an open account, or upon a contract expressed or implied; and (5) founded upon provable debts reduced to judgments after the filing of the petition and before the consideration of the bankrupt's application for a discharge." [30 Stat. at L. 550, 562, chap. 541, U. S. Comp. Stat. 1901, pp. 3428, 3447.]
Counsel admit that the claims in question were all liquidated. By their nature and amount as well as by the form of the complaint they stand upon the contracts originally made. Whiteside v. Brawley, 152 Mass. 133, 134, 24 N. E. 1088.
Crawford v. Burke was an action in trover instituted in the circuit court of Cook county, Illinois, by Burke against
That case completely determines this, as the New York Court of Appeals correctly held.