Davis v. Aetna Acceptance Co.
293 U.S. 328 (1934)
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Rule of Law:
A debt arising from the conversion of property is dischargeable in bankruptcy unless the act of conversion was a "willful and malicious injury." Furthermore, a debt is not created in a "fiduciary capacity" under the Bankruptcy Act unless it arises from a technical or express trust that existed prior to the wrongdoing, not from a trust implied by law from the act itself.
Facts:
- Davis was a retail automobile dealer who financed his inventory through loans from Aetna Acceptance Company.
- To finance an Auburn sedan, Davis borrowed $1,181.87 from Aetna, representing 90% of the car's cost.
- As security for the loan, Davis provided Aetna with a promissory note, a chattel mortgage, a bill of sale, and a trust receipt.
- The trust receipt stated that Davis held the car as Aetna's property and agreed not to sell it without written consent.
- Davis's salesman sold the car from the showroom floor in the ordinary course of business without obtaining Aetna's prior written consent.
- Davis testified that he notified Aetna of the sale on the same day and that he had a history of selling cars under similar terms and remitting the proceeds later.
- Davis failed to remit the proceeds from the sale to Aetna.
- Subsequently, Davis filed a petition for bankruptcy and received a discharge, having listed Aetna as a creditor.
Procedural Posture:
- Aetna Acceptance Company sued Davis in an Illinois trial court for the tort of conversion.
- Davis pleaded his discharge in bankruptcy as an affirmative defense.
- The trial court overruled the defense and entered a judgment for Aetna, though it specifically found Davis lacked 'wilful, malicious or criminal intent.'
- Davis, as appellant, appealed to the Illinois Appellate Court.
- The Illinois Appellate Court affirmed the trial court's judgment in favor of Aetna.
- The Supreme Court of Illinois denied Davis's petition for leave to appeal.
- The United States Supreme Court granted Davis's petition for a writ of certiorari.
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Issue:
Does a debtor's sale of mortgaged property, conducted in the ordinary course of business and without malicious intent, create a non-dischargeable debt for either 'willful and malicious injury' or 'misappropriation while acting in a fiduciary capacity' under the Bankruptcy Act?
Opinions:
Majority - Mr. Justice Cardozo
No, the debt is dischargeable in bankruptcy. An act of conversion does not automatically constitute a 'willful and malicious injury' under the Bankruptcy Act's exceptions to discharge. The trial court made a specific finding that Davis was 'not actuated by wilful, malicious or criminal intent,' and this specific finding controls over a general finding of legal conversion. A conversion can be innocent or technical, arising from an honest but mistaken belief engendered by a course of dealing. Furthermore, the debt was not created while Davis was acting in a 'fiduciary capacity.' This exception applies only to technical or express trusts that existed before the act of wrongdoing, not to trusts implied by law (trusts ex maleficio) or to standard commercial relationships like that of a mortgagor and mortgagee. Despite the 'trust receipt,' the substance of the transaction was a secured loan, not a formal trust.
Analysis:
This decision significantly clarifies and narrows two key exceptions to discharge in bankruptcy. It establishes that a mere technical conversion of property, without actual malicious intent, is not sufficient to make a debt non-dischargeable under the 'willful and malicious injury' exception. More importantly, it reinforces a long-standing, strict interpretation of 'fiduciary capacity,' preventing creditors from using boilerplate language like 'trust receipts' in standard loan agreements to circumvent a debtor's bankruptcy discharge. This protects the 'fresh start' policy of bankruptcy law by limiting non-dischargeability to cases of genuine malice or breaches of pre-existing, formal fiduciary duties.
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