Whether an offset should be allowed by the receiver will often be a matter of doubt, in respect of which different advice might be given by competent lawyers. When, therefore, the receiver finds himself in substantial doubt, he should seek the instructions of the court. The court superintending the administration has the power to order the receiver to allow a set-off in a proper case, upon a summary application. This was done where the policy-holder, who had sustained a loss, was indebted to the company, by bond and mortgage, for a loan.2

§ 7252. Right of Set-off under Statutes of New York. — It has been held in New York that a receiver of an insolvent corporation, whether appointed under the statute relating to insurance companies, or under the provisions of the Revised Statutes relating to proceedings against corporations in equity, is bound, in the administration of the estate, to allow a liquidated debt, due to the corporation, to be set off against an unliquidated debt due from the corporation to the same person, in the same manner as trustees of insolvent debtors are bound to offset cross-demands arising from mutual credits, as well as from mutual debts. In such cases, the right of set-off is not confined to liquidated debts, or to such as might have been offset in a suit at law between the original parties, but it extends to all mutual credits, arising ex contractu, between the original parties. In this case, Chancellor Walworth proceeded upon the ground that a party may have a greater equitable right of set-off than that which is accorded to him at law by the statute relating to this subject. But he said that "to entitle a party to such equitable relief, in a case not provided for by the statute, he must either have an equity arising out of the contracts or dealings between the parties, from their connection with each other, or his natural equity to have one unconnected claim compensate or discharge another must be superior to any equitable claim which can be urged in favor of those for whose benefit his claim to an equitable offset is resisted. The natural equity to have mutual but unconnected demands [set off], between two parties who have been dealing with each other, is, as a general rule, superior to the claim of any other creditor who has not dealt with the insolvent upon the faith of the specific fund

'Re Van Allen, 37 Barb. (N. Y.) 225. Holbrook v. Receivers, 6 Paige

(N. Y.), 220.

New York Stat. Jan. 18, 1836. Holbrook v. Receivers, 6 Paige (N. Y.), 220.

against which the right of set-off is claimed." Still later, in the same State, a departure was taken from this decision, so far as to lay down the doctrine that a set-off will be allowed against the receiver of an insolvent insurance company, as its representative, where it would be allowed against the principal, but holding, nevertheless, that the principal is the body of creditors, and not the company; that the question of set-off is to be tested by the consideration whether there could be a set-off if the action stood in the name of the creditors as plaintiffs, against the particular defendant; so that where he has no claim against the creditors in respect of which he could demand a set-off, he cannot demand it against the receivers. At the same time, it is conceded that the party demanding the right of set-off is entitled to its allowance in respect of any demand which he had against the corporation at the time of its dissolution."

1 Holbrook v. Receivers, 6 Paige (N. Y.), 231.

The value of this decision as an authority is extremely doubtful. A policy-holder who had sustained a loss, had, prior to the loss, borrowed from the company $4,000, for which he had given his bond secured by a mortgage; he had also borrowed another $4,000, for which he had given the joint bond of himself and another person, also secured by a mortgage. After the loss, the receiver refused to allow him to have what the company owed him for the loss, applied in liquidation of these two debts owing by him to the company. Vice-Chancellor McCoun sustained the receiver, and refused to order the set-off, on the ground that the loss was an unliquidated demand, and not within the statute relating to set-offs, and that he could go no further in allowing a set-off than a court of law could go. But, in so far as he so held, his decision was reversed by Chancellor Walworth on appeal, who directed that the set-off be allowed in respect of the $4,000 due by the single bond and mortgage

of the policy-holder, but that it should not be allowed in respect of the $4,000 due by the joint bond of the policyholder and another, on the ground that, in respect of the latter indebtedness, there was a want of mutuality. The infirmity of the decision consists in the fact that it does not appear that the debts secured by the bond and mortgage were past due, at the time when the loss occurred and prior to the appointment of the receiver. But, even if they had been so due, it would not have made a case within the governing principle already stated (ante, § 7251), unless the claim for the loss had also been adjusted prior to the appointment of the receiver; for that principle is, that the receiver cannot allow a setoff unless the circumstances were such that it was demandable, as between the parties to the contract, prior to the time when he took possession.

70.

"Osgood v. Ogden, 4 Keyes (N. Y.),

Ibid.; following McLaren v. Pennington, 1 Paige (N. Y.), 102.

§ 7253. Defenses to Such Actions. -It has been held that if, at the time of the making of the contract of insurance, the agent of the company, with the authority of the directors, represented that the company was entirely solvent and able to pay all losses, and that it was then worth a considerable amount, and the insured relied upon those representations, and was thereby induced to enter into a contract of insurance. and to execute a premium note, and such representations were false, these facts will constitute a good defense to an action by the receiver on the premium note.' He may defend by setting up the fraudulent representations of the agent appointed by the company to procure insurances and premium notes; but he must aver, in his answer, that he has done all in his power to restore to the insurance company what he has received from it under the contract: the principle being, that a party cannot rescind a contract which has been imposed upon him through the fraud of another, without restoring the benefits which he has received under it. It is not a good defense to such an action that the claims for losses for which the assessment was made stood upon such a footing that the receiver might have resisted a recovery thereon upon strictly legal or technical grounds. If those claims are meritorious, in an equitable,- that is to say, in a moral, sense, the receiver is not bound to insist upon technical defenses against them; although we have had occasion to note a view that he cannot waive preliminary proofs of loss, but that such proofs are made a part of the essence of the contract by the terms of the contract itself. But the receiver may waive defenses against claims, which defenses are not meritorious but technical merely, just as the company might have done if in possession of its franchises; and his waiver will be binding upon the makers of the premium notes.1

3

§ 7254. Priorities in Distribution.-The officers of insolvent insurance companies are not entitled to have their salaries

1 Boland v. Whitman, 33 Ind. 64; Devendorf v. Beardsley, 23 Barb. (N. Y.) 656.

• Devendorf v. Beardsley, supra. Ante, § 7225.

Sands v. Hill, 42 Barb. (N. Y.) 651.

paid in full, in preference to other creditors. In respect of unpaid arrearages of their salaries which existed when the company went into the hands of the receiver, they stand merely on the footing of general creditors, and must take their pro rata dividends with the others. This follows from the doctrine that the officers of an insolvent corporation, as, for instance, the cashier of an insolvent bank,- have no lien upon the funds of the corporation for the payment of any arrears of their salaries. Where the receiver of an insurance company prosecutes an action to recover money which he claims to belong to the fund of which he is receiver, and fails to recover, the defendant is, of course, entitled to his costs. The defendant is not bound to await the administration of the fund and to share as a general creditor, pro rata with the other creditors, in respect of his demand for costs, but is entitled to an immediate order for their payment out of any funds in the hands of the receiver. This necessarily follows from the principle that the costs of the administration are a preferred demand. If the receiver makes and pays unreasonable or improper costs, that will be a matter of exception on the part of creditors when his accounts are passed upon.*

§ 7255. Receiver may Exercise an Option Possessed by the Company.-If the company, under a contract, possessed an option, which it may exercise within a time stated, upon giving notice in writing, and, before the time has expired, it passes into the hands of a receiver, it is competent for the receiver to exercise the option and give the notice. It was so held where certain securities were deposited as collateral by a corporation, taking the following receipt: "Received of Alexander Frear, secretary and treasurer, the following claims,

1 Re Croton Ins. Co., 3 Barb. Ch. (N. Y.) 642.

Bruyn v. Receiver, 1 Paige (N. Y.), 584. For a case adjusting the conflicting rights of policy-holders in a life insurance company where the company was insolvent at the time of the notice of the death of one of the

policy-holders, and where a receiver was appointed a few days thereafter and before the loss was paid, - see Re Security Life Ins. Co., 11 Hun (N. Y.), 96.

Columbian Ins. Co. v. Stevens, 37 N. Y. 536. Ibid.

notes, and bonds, as collaterals on the indebtedness of the New York Iron Company to us, viz.: [Specifying them.] The above securities are given upon the following conditions: We agreeing to release the New York Company from all liabilities to us, either as indorsers or principals, provided the secretary of the said company wishes us to do so, and giving us notice to that effect in writing." It was held that this did not constitute the secretary, in any way, an arbitrator, but the option was the option of the company, which could be legally made either by itself or by anyone acting as its representative, and consequently that it could be made by the receiver of its assets after its insolvency.1

§ 7256. Distribution not Made to Creditors of Creditors. For reasons already stated,' after a receiver of an insolvent insurance company has been appointed under a statute, and the company has been enjoined from the further prosecution of its business, its funds in the hands of the receiver are not subject to garnishment by creditors of its creditors, called trustee process" in Massachusetts. Such process will not run against the corporation, because it has been enjoined from paying its debts; nor against the receiver, because the property which he holds has been intrusted to and deposited with him, not by the acts of the public, but by authority of law; and the law allows no person, so holding funds, to be charged by such process, except executors, administrators, and assignees under the insolvent acts. It was suggested that, if the creditor of the creditor could, by any form of remedy, have the property of the corporation applied to the payment of the debt due him from one of its creditors, it could only be by petition in equity in the case in which the receivers were appointed. On this suggestion, such a petition was subse

1 Phoenix Iron Co. v. New York Wrought Iron Railroad Chair Co., 27 N. J. L. 484.

'Ante, § 6933.

Columbian Book Co. v. De Golyer, 115 Mass. 67.

Gray, C. J., in Columbian Book Co. v. De Golyer, supra; citing Colby v. Coates, 6 Cush. (Mass.) 558; Thayer v. Tyler, 5 Allen (Mass.), 94.

Columbian Book Co. v. De Golyer, supra.