Emery & Kaufman, Ltd. v. Heyl

MOISE, Justice.

The gravamen of this appeal presents the issue .of the dischargeability or nondischargeability of a debt in bankruptcy. The judge of the district court held that the debt, under the circumstances of record, was non-dischargeable in bankruptcy, and because of that decision this appeal is prosecuted.

The facts are as follows:

The General Agency of Emery & Kaufman, Ltd., party of the first part, and Add A. Heyl, party of the second part, the Local Agent, made an agreement relative to an Agency Contract, the first lines of that agreement reading:

“In consideration of the General . Agent’s making its underwriting facilities available to the Local Agentj and in consideration of the other mutual covenants, stipulations and agreements hereinafter set forth, the parties hereto agree a« follows:” (Italics ours.)

An examination of the contract as a whole leads us to believe that the intent of the parties was to make a continuous agency agreement with no fixed terms, hut which could he terminated by either party upon notice. However, the agreement was fully enforceable until terminated. The rate of commission to be received, for making available the use of the General Agency’s underwriting facilities and other covenants, is fixed in the schedule annexed to the contract. The contract sets forth that the Local Agent is to write insurance protection through the underwriting facilities; that the policies are to be approved by the General Agency; and that the Local Agent is to pay his own expenses in the conduct of his business and is to receive compensation as fixed in the schedule, hut he is in duty bound to pay to the General Agency the sums which were held in trust by the Local Agent and which must be paid after the delivery of the contracts of insurance, making the protection sought by the assured, complete.

The Local Agent received his compensation, the General Agent performed his part of the agreement, but the Local Agent failed to remit to the General Agency the funds entrusted to his care because he made a conversion of these funds to his own use. Thereupon, the General Agency terminated, its contract, had an audit made and there was shown by that audit, as of December 31, 1950, to be due to the General Agency the sum of $9,012.68, after giving to the appellant all credits in conformity to the agreement.

The appellee brought suit for recovery. Mr. Heyl filed a petition in bankruptcy, and in his reason as to the dischargeability of the debt by bankruptcy, the referee stated:

“This is a question for another court of proper jurisdiction. Bankruptcy courts are not required or expected to pass on the question of dischargeability. The bankrupt’s discharge, if one is granted herein, will be a discharge of all of his dischargeable debts.”

Mr. Heyl received his discharge, and he excepted to the jurisdiction of the Civil District Court on the grounds that subsequent to the filing of the action by appellee he had filed his voluntary petition in bankruptcy and had been adjudicated a bankrupt. On June 2, 1952, after this suit was tried and judgment rendered (but before judgment was signed), Mr. Heybwas given his discharge. This is stated by appellee in its brief, and this fact has not been contradicted by appellant.

Appellee, in endeavoring to get payment, obtained the insurance policy held on the life of appellant. The policy value is not shown. This act did not constitute a condonement of the debt, nor a novation. In fact, such was not even argued, but the appellant is vigorously contending that—

“1. This agreement is unenforceable because it contains a potestative condition;

“2. The indebtedness is one which is dischargeable in bankruptcy;

“3. The appellee’s claim has prescribed.”

We must take into consideration the completed transactions shown in the record, which should be viewed in the light of consequences, and then apply the law.

In the suit of Board of Com’rs for Fifth Louisiana Levee Dist. v. Concordia Abstract & Realty Co., 181 La. 373, 159 So. 588, 592, 12 La.Law Review 103, we held:

“An obligation which has been made subject to a potestative condition becomes a valid and enforceable obligation when the condition on which it originally depended has been fulfilled.”

This suit was viewed in the light of consequences of the completed transaction, before applying the law.

The record discloses that the transactions were fully completed as to the benefits of appellant — he having received full compensation for his work. It was appellant’s conversion of entrusted funds that compelled the appellee to file suit for recovery. Appellee’s underwriting facilities were furnished; it did not arbitrarily refuse policies tendered by appellant for approval. There is no potestative condition apparent, because during the life of the agreement the execution of the agreement was not dependent on the act of either party, because the transactions were completed. A potestative condition is “that which makes the execution of the agreement depend on an event which it is in the power of the one or the other of the contracting parties to bring about or to hinder.” Art. 2024, LSA-C.C.

The defendant argues that the contract is invalid because of the provisions of Articles 2034 and 2024 of the LSA-Civil Code. We think that this contention is erroneous, because the contract states a serious consideration, in that the General Agency agreed to make and did make its underwriting facilities available to the defendant. And, this consideration was real, actual, and did not depend on whim or caprice.

In the case of Cali v. National Linen Service Corporation, 5 Cir., 38 F.2d 35, 36, it is stated:

“In the construction of articles 2024, 2034, and 2035 of the [LSA-] Civil Code, the Supreme Court has clearly announced the rule that, if the pctestative agreement is supported by a serious consideration, the contract is not void. For example, an agreement by a lessee to drill an oil well, which may be postponed indefinitely by the payment of $4 quarterly, with the option in the lessee to abandon the lease on the payment of $2, is held to be potestative as not based on a serious consideration, while practically the same agreement, but based on a consideration of $100, was held to be not potestative and valid. Murray v. Barnhart, 117 La. 1023, 42 So. 489, and authorities therein cited; Anse La Butte Oil & Mineral Co. v. Babb, 122 La. 415, 47 So. 754; Girault v. Feucht, 117 La. 276, 41 So. 572.”

.See also, Humble Oil & Refining Co. v. Guillory, 212 La. 646, 33 So.2d 182; and Martin-Parry Corp. v. New Orleans Fire Detection Service, 221 La. 677, 60 So.2d 83.

The second objection raised by the defendant is the one relating to the discharge of this debt in bankruptcy. The Bankruptcy Act, 11 U.S.C.A. § 35, states:

“(a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as * * * (4) were created by his fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity; * *

In the suit of Vertman v. Drayton, 223 Iowa 380, 272 N.W. 438, 439, it was held:

“A person is said to receive money in a fiduciary capacity when the money is not his own or for his benefit, but is for the benefit of another person to whom he stands in a relation implying great confidence and trust on the one part and a high degree of good faith on the other.”

The very nature of the relationship is self-imposed by the contract itself in Paragraph One, and it would seem that the facts of the case are comprehensive and complete in their meaning by the law.

The case of American Surety Co. of New York v. Greenwald, 223 Minn. 37, 25 N.W. 2d 681, was a case where the facts are almost identical. There it was held as shown by the syllabus from which we quote:

"Where by arrangement entered into between defendant and an insurance company it was expressly provided that defendant was to collect certain premiums for the company and, after deducting his commissions, that he was to remit the balance to the company, held that an express trust was created; that defendant was acting in a fiduciary capacity thereunder within the meaning of § 17, sub. a (4) of the Bankruptcy Act, 11 U.S.C.A., § 35, sub. a (4); and that the debt created by defendant’s wrongful failure to remit to the company the moneys thus collected was rendered nondischargeable in bankruptcy" (Italics ours.)

See also Morgan v. American Fidelity Fire Insurance Co., 8 Cir., 1954, 210 F.2d 53.

The language of the Bankruptcy Statute on dischargeability, 11 U.S.C.A. § 35, sub. a (4), reads in substance:

Whether the defendant’s failure to turn in his collections constitutes a fraud, embezzlement, mis-appropriation or defalcation.

We must consider this language.

In the case of Central Hanover Bank & Trust Co. v. Herbst, 2 Cir., 93 F.2d 510, 511, 114 A.L.R. 769, it is stated:

“Colloquially perhaps the word, ‘defalcation,’ ordinarily implies some moral dereliction, but in this context it may have included innocent defaults, so as to include all fiduciaries who for any reason were short in their accounts." (Italics ours.)

In the case of Citizens Mutual Automobile Insurance Co. v. Gardner, 315 Mich. 689, 24 N.W.2d 410, 414, the Court held that where an insurance agent had received premiums and failed to remit to the insurer, such action constituted a defalcation in fiduciary capacity and was not dischargeable in bankruptcy. The Court stated:

“Under the construction of the pertinent provision of the bankruptcy act indicated in the foregoing cases and others of like import, the conclusion follows that defendant’s discharge in bankruptcy was not a bar to enforcement of plaintiff’s judgment against him. Defendant, as plaintiff’s agent was acting in a fiduciary capacity, received the premiums in such capacity, and admittedly failed to make payment thereof to plaintiff as it was his duty to do. Based on the record before us such failure must be regarded as constituting a ‘defalcation’ within the meaning of the bankruptcy act." (Italics ours.)

In the case of Indemnity Insurance Co. of North America v. Leibrock, Sup., 55 N.Y.S.2d 3, 4, 163 A.L.R. 1010, the Court made the following statement:

“The definitions of the word ‘defalcation’ as included in the decided cases, are far from satisfactory, when applied to the facts established on this motion. The court is mindful of the fact that the word ‘defalcation’ must be given a meaning different from fraud, embezzlement or misappropriation, and that the word does not necessarily imply dishonesty or fraud. City of Syracuse v. Roscoe, 66 Misc. 317, 123 N.Y.S. 403; Indemnity Insurance Co. of North America v. Covington, 172 Misc. 310, 14 N.Y.S.2d 683. The court is also mindful of the fact that it was evidently not the intention of Congress, in enacting the Bankruptcy Act, to exclude all debts incurred by fidu-

ciaries from release by a discharge in bankruptcy. If the Congress had so intended, there would have been no necessity for the limitation of the debts so excluded, by the classification of such debts as those created by fraud, embezzlement, misappropriation or defalcation. Defalcation is commonly defined as ‘an abstraction, or misappropriation of money by one, especially an officer or agent, having it in trust’. Webster’s New International Dictionary, 2d Ed. ‘The failure of one who has received money in trust or in a fiduciary capacity to account and pay over as he ought’, 18 C.J. 454, 26 C.J. S., Defalcation, p. 663; ‘The failure of a public officer to account for monies received by him in his official capacity.’ National Surety Co. v. Lanza, Sup., 42 N.Y.S.2d 370, 371. The word, as ordinarily understood, implies some bad faith or misconduct, as distinguished from mere negligence or mistake. Central Hanover Bank & Trust Co. v. Herbst, 2 Cir., 93 F.2d 510, 114 A.L.R. 769; In re Bernard, 2 Cir., 87 F.2d 705. No judicial decision has been called to the Court’s attention, in which the word has been construed as including a negligent failure to collect money, but on the contrary, the reported decisions, in which the word has been construed, concern failures to pay over money collected, due to improper action on the part of the debtor, or on the part of some person or persons for whose actions the debtor was legally accountable. * * * ” See, First Citizens Bank & Trust Co. v. Parker, 225 N.C. 480, 35 S.E.2d 489, 163 A.L.R. 1003, 1008.

Counsel for the defendant relies on the case of Upshur v. Briscoe, 138 U.S. 365, 11 S.Ct. 313, 34 L.Ed. 931. This case is distinguishable because there the money held by the defendant constituted a loan, and under the circumstances he was only under the obligation to pay plaintiff and her heirs up to the extent of their interest. In other words, no fiduciary relationship existed.

The appellant files a plea of prescription. If appellee’s suit were for damages resulting from offenses or quasi offenses, appellant’s plea of prescription might be proper. Appellee’s claim, however, is not ex delicto in any sense, but is founded on contract, and a prescription of ten years applies.

Our conclusion is that the district court correctly found for appellee — that the debt is non-dischargeable in bankruptcy; otherwise, the bankrupt would profit by his own wrong. Crawford v. Burke, 195 U.S. 176, 25 S.Ct. 9, 49 L.Ed. 147.

For the reasons assigned, the judgment of the trial court is affirmed.

HAMITER, J., dissents with written reasons. LE BLANC, J., absent.