Bullis v. O’beirne, 195 U.S. 606 (1904)
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Bullis v. O’Beirne
No. 60
Argued November 10-11, 1904
Decided December 12, 1904
195 U.S. 606
ERROR TO THE SUPREME COURT
OF THE STATE OF NEW YORK
Syllabus
On writ of error to a state court reviewing its refusal to cancel a judgment after discharge of the debtor in bankruptcy on the ground that the judgment was in an action for fraud, the federal question is not whether the complaint sufficiently charged fraud to warrant the judgment, but whether the action was for fraud, and if there are facts charged and found to the effect that false and fraudulent representations were made and relied on which in the state court were sufficient to warrant relief on the ground of fraud, the judgment comes within the exception of § 17 of the Bankrupt Act and will not be cancelled although the suit may originally have
been brought in equity for specific performance instead of for money judgment. A statement made fraudulently with knowledge of its falsity must necessarily be intended to deceive.
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 cancellation 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. 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.
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 of reaching timber on large tracts of land. At that time, the length of the railroads was about sixteen miles, but an extension of the lines was contemplated so as to cover about thirty miles. Certain agreements are alleged between said Bullis and Barse and a firm of bankers -- Newcombe & Company, of New York -- by the terms of which Bullis and Barse were to execute a mortgage to the Central Trust Company of New York, to secure $250,000 of first mortgage bonds, running thirty years, which mortgage was to cover the railroad properties and 30,000 acres of timber lands in Duquesne County, Pennsylvania. The property was to be under the management of a new corporation to be organized with a capital stock of $250,000. Various agreements were made as to the organization and management of said corporation. Another agreement was entered into between the parties, providing for the merger and consolidation of the railroads 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 seventy 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 forty-six 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.
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 seventy tons of freight in timber, lumber, and bark for each acre of land, for transportation over said railroad. It is further alleged that, in fulfillment of said agreements, the defendant railroad corporation, on the first day of February, 1890, executed its first mortgage deed of trust to said trust company, conveying to it said railroad properties and franchises, and providing for an issue of bonds limited to $500,000, to be secured by said properties and the 46,000 acres of timber to be conveyed by said Bullis and Barse to said trustee. That the defendants Bullis and Barse caused the said Bullis and Sarah E., his wife, to join with said railroad company in said mortgage, and that, by said mortgage they assumed to convey to said trustee land contiguous to the line of said railroad, and free from encumbrances, and covered by a quantity of merchantable timber, aggregating 30,954.10 acres, and which, by the terms of said agreements, was to be a condition precedent to the issue of $300,000 of said bonds, to be used in building and completion of said forty-six miles of said railroad; that, in reliance upon the conveyance of said lands, 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 wasteland, 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 pretended conveyance, and said conveyance is in reality false and fraudulent; that, by 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 to the bondholders, including the plaintiff, unless the performance of the said agreements and the conveyance of 30,000 acres of unencumbered timber land to said trustee are specifically decreed.
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 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 twenty-four miles of railroad of said company additional to the forty-six miles above mentioned.
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. 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 of New York. 151 N.Y. 372. Bullis and Barse, after the reversal at general term, went to trial at special term, and, upon the allegations of fraud, findings were made, among others: that Bullis and Barse pretended and represented to the said firm of Newcombe & Company that the 30,000 acres of land were timbered, free and clear of all encumbrances, and contiguous and adjacent to the line of the defendant railroad company, as the same was then constructed and projected, and that said land was covered by a large quantity of merchantable timber, which would actually provide said railroad company with at least seventy tons to the acre, for conveyance over said railroad at rates from twenty-five to fifty cents per ton, in addition to the percentage accruing to said defendant railroad company from divisions of other lines. That said 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 eighteen to twenty dollars 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 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.
As a conclusion of law, the court decided that it had jurisdiction to proceed in the cause by reason of the fraud practiced by the defendants Bullis and Barse in the premises, and because of the fact that the plaintiff had been deceived by the fraudulent statements and misrepresentations of the defendants. This decision was affirmed. O’Beirne v. Bullis, 2 App.Div. 545. Upon appeal to the Court of Appeals of New York, this judgment was affirmed. 158 N.Y. 466.
It appearing that Bullis and Barse were unable to specifically perform the original agreement, but that they were liable for false representations, judgment was rendered 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.