Supreme Court Bankruptcy Jurisprudence

Hennequin v. Clews, 111 U.S. 676 (1884)

Issue:  When the debtor fails to return collateral to the owner of the collateral, is the resulting debt dischargeable under the Bankruptcy Act of 1867?

Holding:   Yes.
Justice Joseph P. Bradley

The debtor made loans to Hennequin secured by “certain collateral securities.”  The debtor used the securities owned by Hennequin “by depositing them with third parties as collateral security to raise money for their own purposes,” at a time when Hennequin owed no debt to the debtor.  “Hennequin demanded a return of the collaterals; but [the debtor] having failed in business, did not return them.”  Hennequin sued for damages but the debtor filed bankruptcy and received a discharge.  Hennequin sought an order that this debt was excepted from the discharge but the court in New York found the debt to be discharged. 

The Supreme Court affirmed.  Under the Bankruptcy Act of 1867, "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 under this act."  Citing Chapman v. Forsyth and Neal v. Clark,

[I]t is very difficult to distinguish [this case] in principle from the cases of commission merchants and factors failing to account for the proceeds of property committed to them for sale.  There is no more -- there is not so much -- of the character of trustee in one who holds collateral securities for a debt, as in one who receives money from the sale of his principal's property -- money which belongs to his principal alone, and not to him -- and which it is his duty to turn over to his principal without delay.  The creditor who holds a collateral, holds it for his own benefit under contract.  He is in no sense a trustee.  His contract binds him to return it when its purpose as security is fulfilled; but if he fails to do so, it is only a breach of contract, and not a breach of trust.  A mortgagee in possession is bound by contract, implied if not expressed, to deliver up possession of the mortgaged premises when his debt is satisfied; but he is not regarded as guilty of breach of trust if he neglects or refuses to do so, but only of a breach of contract.

Notes:
1. Justice Joseph P. Bradley was appointed to the Supreme Court in 1870 by President Ulysses Grant.  He served for 22 years until 1892 when he died.