Bankr. L. Rep. P 68,588john R. Stuhley, Trustee, Plaintiff-appellee, v. Richard Hyatt, Defendant-appellant, 667 F.2d 807 (9th Cir. 1982)

James J. Biggins, Jr., San Diego, Cal., for defendant-appellant.

Jon R. Stuhley, Santa Ana, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of California.

Before HUG and ALARCON, Circuit Judges, and MARSHALL,^*  District Judge.

MARSHALL, District Judge:

The bankrupt, Richard Hyatt, appeals from an order of the district court affirming the denial of a discharge of his debts in a bankruptcy proceeding. In that proceeding the bankruptcy judge concluded that certain acts Hyatt had committed while serving as a "standing trustee" for the bankruptcy court of the Southern District of California in several prior cases had violated paragraphs one and five of 18 U.S.C. § 152 ("Section 152"), the criminal provisions of the Bankruptcy Act.¹  Consequently Hyatt was denied a discharge of his debts pursuant to Section 14(c) (1) of the Act, formerly 11 U.S.C. § 32(c) (1).² 

We conclude that even if Hyatt was properly found guilty of violating Section 152,³  the mere presence of his former bonding company as a non-dischargeable creditor⁴  in Hyatt's bankruptcy proceeding does not create a relationship between the creditors in the prior and subsequent cases sufficient to justify the denial of a discharge of Hyatt's debts.

Appellant argued before the bankruptcy court that under Pugh v. ADCO, 329 F.2d 362 (5th Cir. 1964), and its precursor, Raphiel v. Morris Plan, 146 F.2d 340, 341 (2d Cir. 1944), he is entitled to a discharge of his personal indebtedness because the bankruptcy crimes occurred in other cases, not in the principal bankruptcy case, so that his creditors were not harmed.

The bankruptcy court found no requirement that Section 152 violations be committed in the same proceeding in order to justify denial of discharge.⁵  In reaching this result it relied on the treatise, Collier on Bankruptcy and also on Pugh, supra. The Court specifically declined to follow Raphiel.

Collier on Bankruptcy is a most helpful work on the status of the law. We do not, however, accept its conclusion as to this particular issue, nor do we find any inconsistency between Pugh & Raphiel.

The opinion expressed in Collier's treatise is based primarily on a literal reading of the statute. The statute states very simply that when a bankrupt has violated Section 152 he shall be denied discharge. It does not state that the acts must be committed in the same proceeding, nor does it state that they need not be. The treatise suggests that "(t)he absence of a specific showing of legislative intent to the contrary can hardly be made the basis for contradicting the plain statutory language or reading into it a limitation not stated, because of what seems to be an inequitable or harsh result." 1A Collier on Bankruptcy, par. 14.17(2) at 1315. We disagree. It is precisely when Congress has not stated the specific limits of a statute that the interpretive role of the court becomes most important. The bankruptcy court is a court of equity and must be guided by equitable principles in the effectuation of the policy of the Bankruptcy Act. Turner v. Boston, 393 F.2d 683, 684 (9th Cir. 1968); Hull v. Powell, 309 F.2d 3, 5 (9th Cir. 1962).

In Raphiel, the bankrupt was involved in a bankruptcy proceeding in which he did not apply for a discharge. Subsequently, he was convicted of an offense under the Act in connection with that proceeding. Several years later another proceeding was begun when Raphiel, the bankrupt, filed a voluntary petition in bankruptcy. The Referee denied a discharge to Raphiel, because of his criminal conviction in connection with the prior bankruptcy proceedings. The district court affirmed. On appeal the Second Circuit revised the decision, holding:

Where a discharge is barred under § 14, sub. c(2-7) because of a wrongful act of the debtor, a future discharge will be denied only in regard to those who were creditors at the time that the wrongful act occurred, or became creditors within the time specified by the Act. But the doctrine adopted by the district court would prevent the discharge in bankruptcy as to all creditors for all time when the wrong committed is a bar under § 14, sub. c(1). Neither § 14, sub. c, nor any other provision of the Act makes such a differentiation, and there is nothing in the legislative history to justify it...

Appellant should be granted a discharge from all debts except those involved in the earlier bankruptcy proceeding.

146 F.2d at 340-41.

Raphiel has since been followed in another case. In re Herold, 131 F. Supp. 407 (E.D.N.Y. 1954), affirmed sub. nom. Schieffelin & Co. Inc. v. Herold, 222 F.2d 262 (2d Cir. 1955). We concur with the reasoning and the result reached by the Second Circuit in Raphiel.

In departing from the ruling of Raphiel the bankruptcy court purported to follow the case of Pugh v. ADCO, 329 F.2d 362 (5th Cir. 1964). Quoting a passage from that case, the bankruptcy court found that as a matter of public policy it would be "shocking" to send an embezzling trustee forth with a general discharge. It is important to note, however, that the court in Pugh took great care to distinguish its holding specifically from the holding in Raphiel. In Pugh the bankrupt had been guilty of offenses against the Act in a prior proceeding by a corporation of which he was the president and principal stockholder. Many of the creditors he listed in his personal proceeding had been listed by the corporation in the earlier proceeding. To a large extent, then, the interests of Pugh as a debtor were identical with the interests of the corporation as a debtor in the earlier proceeding. This link was an essential factor in the court's determination. The rule established in Pugh was that "(i)f the acts which are grounds for barring discharge bear some reasonable relationship to the rights of creditors in the personal bankruptcy proceeding, then the discharge should be barred." 329 F.2d at 364.

In the instant case, appellee Stuhley argues that Pugh sets forth a new rule for determining the relationship between the acts of a debtor and the rights of his creditors in one bankruptcy proceeding and in subsequent proceedings. Applying that rule, appellee contends that in the instant case the requisite "reasonable relationship" exists because Hyatt's bonding company has paid Hyatt's debts to the creditors of the prior action and thus become subrogated to their rights to repayment. The bonding company is now a creditor in the present action. From these facts appellee contends that the bonding company is in the shoes of the prior creditors and establishes the connection necessary under Pugh. This connection, however, is too remote.

Pugh, as well as other cases decided along the same lines, involved situations in which the bankrupt in the second proceeding was the wrongdoer and a controller or major stockholder of a corporation in the first proceeding. See In re Marcus, 149 F. Supp. 496 (S.D.N.Y. 1957) (the bankrupt had been the principal stockholder of the corporation in the first proceeding); In re Cole, 88 F. Supp. 842 (E.D.N.Y. 1950) (the bankrupts had been the only two officers and directors of the corporate bankrupt in the first proceeding). In these cases, as in Pugh, a discharge would have allowed the bankrupts to circumvent the denial of discharge in the first proceeding. Therefore, the holdings in these cases did not contradict the holding of Raphiel, but involved facts which were clearly distinguishable.

We conclude that in order to deny discharge as to all creditors under section 14(c) (1), the bankruptcy offenses must involve the bankrupt's current proceedings or involve a prior proceeding in which the bankrupt debtor had substantial identity with the current bankrupt, as in Pugh.

Hyatt committed violations of 18 U.S.C. § 153 as the trustee in other bankruptcy cases, which are offenses that could also be punishable under 18 U.S.C. § 152. The bonding company, which is subrogated to the interests of defrauded creditors in those prior bankruptcy proceedings would, as noted above, have a non-dischargeable debt.⁶  However, Hyatt's bankruptcy offenses did not involve the current proceedings, nor any prior proceedings in which he had substantial identity with the bankrupt, so as to preclude discharge as to all creditors. The debts of Hyatt to the creditors in the former bankruptcy proceedings arose because of a breach of his fiduciary duty as trustee. They were, in effect, new debts that arose out of the administration of those proceedings, not debts of the bankrupt in the prior proceeding. Hence, the holdings of Pugh and similar cases cannot be authority for denying the discharge here.

For the reasons stated above, the decision of the district court is reversed and the case remanded for further discharge proceedings in accordance with this opinion.