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States Court of Appeals, the Supreme Court hold that where a national bank becomes insolvent and its assets pass into the hands of a receiver appointed by the Comptroller of the Currency, a debtor of the bank can set off against his indebtedness the amount of a claim which he holds against the bank, although the debt due to him from the bank was payable at the time of its suspension, while the debt due by him to the bank was payable at a subsequent time. But the court also hold that this right of set-off is an equitable, and not a legal, right, and therefore that the Circuit Court of the United States cannot, in an action by the receiver of the insolvent national bank against its debtor, accord to the defendant such right of set-off; but that it must be sought by the defendant by an affirmative proceeding in equity. Some previous decisions of the court, when dealing with the question of the right of setoff in other relations, had prepared the way for the conclusion that insolvency, on the one hand, justifies the set-off of a debt owing to the insolvent, on the other, although such debt is not due at the time of the suspension."
$ 7299. The Question how Viewed on Principle. - Professional opinion will not concur in the propriety of the conclusion of the court that“natural justice would seem to require that where the transaction is such as to raise the presumption of an agreement for a set-off, it should be held that the equity that this should be done is superior to any subsequent equity, not arising out of a purchase for value without notice." Nor will the profession concur, without dissent, in the following observations of the court: “In the case at bar, the credits between the banks were reciprocal, and were parts of the same transaction, in which each gave credit to the other on the faith of the simultaneous credit, and the principle applicable
1 Scott v. Armstrong, 146 U. 8. 362; Blount v. Windley, supra, sim499, 502, 513.
ply administered a statute of North · Ibid.
Carolina, • Blount v. Windley, 95 U. S. 173, • Scott v. Armstrong, 146 U. 8. 177; Carr v. Hamilton, 129 U. S. 252, 499, 508. 262; Scammon v. Kimball, 92 U, S.
to mutual credits applied.” Stripped of unnecessary detail, the case was nakedly the case where the customer of a national bank tenders to the bank his note for discount, and the note is discounted, and the proceeds are passed to his credit, the same as an ordinary deposit, and subject to his check for whatever purposes he may desire. By the transaction, under well-settled rules relating to the subject of bank deposits, the national bank becomes indebted to the customer to the amount of the proceeds of the discounted note placed to his credit, which debt is payable upon his demand. On the other hand, he becomes indebted to the national bank to the full amount of his note which the bank has discounted, but his debt to the bank is payable at a future day. Before his debt to the bank matures and becomes payable, the bank fails, and the Comptroller of the Currency puts it in the hands of a receiver for the purpose of winding it up and distributing its assets, first among its creditors, and next among its stockholders. While the fact of putting its assets in the hands of & receiver does not work a technical dissolution of the bank, such as suspends the prosecution of actions against it,' it does work what has often been called a de facto dissolution. It puts an end to the bank for every future purpose of conducting its business as a going concern, unless it shall, by proceeding under another section of the National Bank Act, enjoin the Comptroller and receiver from so holding its assets, or unless it shall restore the deficiency of its assets, or otherwise satisfy the Comptroller of its ability to resume its business. It is thus, in substance and essence, dissolved, and ought to pass out of view as a factor in determining the question. But if the mental processes of the judges who have taken this view were analyzed, it would be found that the infirmity of their view has been brought about by their inability to look upon the question except as a question standing between the two contracting parties, and their failure to note that one of the contracting parties has substantially ceased to exist, and that those who claim in his right are other creditors who ought to
· Ante, 88 6894, 7268.
Post, $ 7316.
stand on an equal footing with the customer claiming the setoff. If his right of set-off is conceded, it operates to that extent as a payment by the bank of his debt in full, and this, too, out of money which the bank has loaned to him, which money was, in part at least, the money of other depositors; and thus he is paid out of the pockets of other creditors of the bank. Now, in what respect does he stand in a better position than the other creditors, out of whose deposits he is thus paid? He does not stand on as good a footing. They have put their money into the bank — the very money out of which he is paid in preference to them; whereas he has borrowed their money from the bank. That is the very substance of the transaction in every case where the capital of the bank is entirely exhausted at the time of the transaction, and it is measurably the substance of the case where the capital of the bank is in part exhausted at that time. To make the question more bald and palpable, let us suppose that to-day a customer of a national bank procures it to discount his note for $10,000, and to place the proceeds to his general credit, and that, to-morrow, and before he has checked at all against the proceeds, and before his note has matured, the bank fails by reason of its insolvency, and that the result of its liquidation shows that, at the time of the discount, its capital was exhausted and that its assets are sufficient to pay no more than ten cents on the dollar to its depositors. The particular effect of this rule is to rescind the transaction by which the borrower procures the bank to discount his note; whereas no rescission is accorded to the depositors who have handed over to the bank their own money, but they are put off with a dividend of ten cents on the dollar. It is idle to characterize a rule which permits this to be done “as natural justice.” The legal profession will never concur in such a conclusion. The whole tenor of the National Bank Act is opposed to such a conclu. sion. By one of its provisions, “the Comptroller shall make a ratable dividend,”! and by another, all preferences avoided, and attachments (which would lead to preferences) are pro
1 Rev. Stats. U.S., 85236.
bibited.' The reasoning of the Supreme Court of the United States, by which they endeavor to establish the right of setoff in the face of these statutory provisions, possesses some degree of plausibility, but overlooks the substantial reason and justice of the question.'
* Rev. Stats. U. S., 85234.
allowance can be considered a prefer• That reasoning, in its opinion, ence; and it is clear that it is only the written by Mr. Chief Justice Fuller, balance, if any, after the set-off is deis as follows: “ The argument is that ducted which can justly be held to these sections, by implication, forbid form part of the assets of the insolthis set-off, because they require that vent. The requirement, as to ratable after the redemption of the circulat- dividends, is to make them from ing notes has been fully provided for what belongs to the bank, and that the assets shall be ratably distributed which, at the time of the insolvency, among the creditors, and that no belongs of right to the debtor, does preferences given or suffered, in con- not belong to the bank.” Scott v. templation of, or after committing the Armstrong, 146 U. S. 499, 510. Analact of insolvency, shall stand. And ogous decisions in the English Court it is insisted that the assets of the of Chancery, under an early bankbank, existing at the time of the act ruptcy law of that country, to which of insolvency, include all its property the court appealed for support of its without regard to any existing liens conclusion, are antiquated. Anonythereon or set-offs thereto. We do not mous, 1 Mod. 215; Curson v. African regard this position as tenable. Un- Co., 1 Vern. 121; Chapman v. Derby, doubtedly, any disposition by a na- 2 Vern. 117. They are two hundred tional bank, being insolvent or in years old; they are relics of a period contemplation of insolvency, of its when the system of equity was in a choses in action, securities, or other very crude condition, and when the assets, made to prevent their appli- conceptions of justice upon which the cation to the payment of its circulat English Court of Chancery proceeded ing notes, or to prefer one creditor were far less enlightened than those to another, is forbidden; but liens, upon which courts proceed at the
or rights arising by express present day. Decisions of inferior agreement, or implied from the nature Federal courts, tending to the same of the dealings between the parties, conclusion, were also cited by the Suor by operation of law, prior to insol- preme Court: Snyders' Sons Co. 0. vency and not in contemplation Armstrong, 37 Fed. Rep. 18; Yardley thereof, are not invalidated. The v. Clothier, 49 Fed. Rep. 337; Armprovisions of the act are not directed strong v. Warner, 21 Week. Law Bull, against all liens, securities, pledges, (Ohio) 136; 8. c. 27 Weekly Law or equities, whereby one creditor may Bull. (Ohio) 100. The case of Louis obtain a greater payment than an- Snyders' Sons Co., supra, is not in other, but against those given or aris- point, because in that case the reing after or in contemplation of ceiver had allowed the set-off, and the insolvency. Where a set-off is other question for decision was whether the wise valid, it is not perceived how its court would subsequently set it aside
8 7300. The Question how Viewed by Other Courts. - It has been held by the Supreme Court of Ohio that the receiver of a national bank holds, in respect of the bank and its creditors, the substantial relation of a statutory assignee, and that “a right of setoff, perfect and available against the bank at the time of his appointment as receiver, is not affected by the bank's insolvency," — the reason being that he succeeds only to the rights of the bank existing at the time when it goes into liquidation.' A Federal district judge, sitting in the Circuit Court of the United States in the same State, has, however, held that, under the provision of the national banking law' (and other provisions of the same act) prescribing the duties of the receiver in winding up such insolvent banks, — all unsecured creditors are placed on the same footing of equality. The court accordingly held that funds received by a creditor of a national bank, upon the discounting of his note by the bank, which were deposited with the bank subject to his check, and which had been drawn upon by him, but which were intended to meet the note when due, could not be pleaded as a set-off in an action on the note brought by the receiver into whose hands the note had come before maturity; and that this conclusion was not affected by the provision of the Code of Civil Procedure of Ohio, to the effect that a crossdemand, which may be pleaded as a counter-claim or set-off, shall not be extinguished as such by the assignment or death of either party. The conclusion is perfectly plain, and is consistent with the doctrine of the Supreme Court of Ohio, above referred to; for the reason that no right of set-off existed at the time when the receiver was appointed, because the note of the customer in the hands of the bank had not then matured. It is respectfully submitted that there is nothing in the language of the Revised Statutes of the United States which indicates a purpose on the part of Congress to establish any rule different from that which obtains under the principles of equity, and from that prescribed by the Ohio statute, in regard to this right of set-off; and that the statute ought not to be so con
on the theory of money paid under the weight of modern judicial opinion “a mutual mistake.” But Yardley may be easily made to appear. 0. Clothier, supra, is directly in point, · Hade v. McVay, 31 Ohio St. 231; and contains a learned opinion by 8. C. 2 Nat. Bank Cas. 353, Butler, J. There are State decisions : Rev. Stats. U. S., $ 5242. belonging to the same category; but • Armstrong v. Scott, 36 Fed. Rep. that they are not in accordance with 63.