The closing of a national bank by order of the examiner, the
appointment of a receiver, and its dissolution by decree of a
Circuit Court necessarily transfer the assets of the bank to the
receiver.
The receiver in such case takes the assets in trust for
creditors, and, in the absence of a statute to the contrary,
subject to all claims and defenses that might have been interposed
against the insolvent corporation.
The ordinary equity rule of setoff in case of insolvency is
that, where the mutual obligations have grown out of the same
transaction, insolvency, on the one hand, justifies the setoff of
the debt due, on the other, and there is nothing in the statutes
relating to national banks which prevents the application of that
rule to the receiver of an insolvent national bank under
circumstances like those in this case.
A customer of a national bank who in good faith borrows money of
the bank, gives his note therefor due at a future day, and deposits
the amount borrowed to be drawn against, any balance to be applied
to the payment of the note when due, has an equitable (but not a
legal) right, in case of the insolvency and dissolution of the bank
and the appointment of a receiver before the maturity of the note,
to have the balance to his credit at the time of the insolvency
applied to the payment of his indebtedness on the note.
In this case, this Court reverses the judgment of the court
below, declining to sustain it upon a jurisdictional ground not
passed upon by that court.
Page 146 U. S. 500
No. 53 was an action brought by David Armstrong, receiver of the
Fidelity National Bank of Cincinnati, Ohio, against Levi Scott and
the Farmers' and Merchants' State Bank, in the Circuit Court of the
United States for the Southern District of Ohio, upon a promissory
note for $10,000, dated at Cincinnati on June 6, 1887, payable
ninety days after date at said Fidelity Bank, with interest after
maturity at the rate of eight percent per annum, signed by Scott
and endorsed by the Farmers' Bank to the order of the Fidelity
Bank.
The defendant Scott was the cashier of his codefendant, and
pleaded that he signed the note for the accommodation of the banks
under an agreement that he should not be looked to for its payment.
The Farmers' Bank made the same averments as to Scott, and pleaded
a setoff to the amount of $8,809.94 as arising on certain facts, in
substance as follows: that the Fidelity Bank lent the Farmers' Bank
the $10,000 at a discount at the rate of seven percent per annum,
for ninety days, under an agreement that the money so borrowed,
less the discount, should be placed to the credit of the Farmers'
Bank on the books of the Fidelity Bank; that the note in suit was
executed accordingly, dated and discounted on June 6, 1887, and the
proceeds, $9,819.17, were placed to the credit of the Farmers' Bank
upon the books of the Fidelity Bank, to meet any checks or drafts
of the Farmers' Bank and to pay the note when it became due; that
afterwards, and before June 20, the Farmers' Bank drew against the
deposit the sum of $1,009.23, and the balance, $8,809.94, remained
to the credit of the defendant to meet the note, and was so to its
credit at the time the receiver was appointed; that upon the
maturity of the note, and before suit was brought, defendant
tendered to the receiver the sum of $1,190.06, the balance due on
the note, and that the tender had since that time been kept good,
and the money was now brought into court.
Demurrers to the pleas were sustained, and judgment was entered
for the plaintiff for $10,833.33, with interest and costs. The
judgment, as provided by section 5419 of the Revised Statutes of
Ohio, contained a certificate that the Farmers' Bank was liable as
principal and Scott as surety.
Page 146 U. S. 501
The opinion of the circuit court, by the district judge, will be
found in 36 F. 63, and states that the circuit judge concurred in
its conclusions as being in accord with his opinion in
Bung
Company v. Armstrong, reported in 34 F. 94. The case being
brought here by writ of error, it was assigned for error that the
court erred in sustaining the demurrers and in rendering judgment
against the defendants below.
While the writ of error was pending, a bill in equity was filed
in the circuit court in behalf of the Farmers' Bank and Scott
against Armstrong, as receiver, praying for an injunction against
the judgment and for the enforcement of the setoff. Armstrong
demurred, his demurrer was sustained, the bill dismissed, and an
appeal taken to the Circuit Court of Appeals for the Sixth Circuit.
That court certified to this Court for instructions as to the
proper decision seven questions, accompanied by a brief statement
of the contents of the bill and proceedings thereon.
The bill, as summarized by the court, rehearsed the facts set
forth in the answers in the suit at law somewhat more in detail,
and, among other things, stated that "on the 20th day of June,
1887, said Fidelity Bank was closed by order of the Bank Examiner
of the United States, and thereafter remained closed;" that
"on June 27, 1887, the Comptroller of the Currency of the United
States, having become satisfied that said Fidelity Bank was
insolvent, appointed the appellee, David Armstrong, receiver of
said bank to wind up its affairs, as provided under the authority
given by the laws of the United States in such case made and
provided, and said receiver qualified and entered upon the
performance of his duties as such. On July 12, 1887, the charter of
said Fidelity Bank was forfeited and said banking association
dissolved by decree of the Circuit Court of the United States for
the Southern District of Ohio;"
and that
"said Fidelity Bank was in good credit at the time said discount
was made, and was then thought by said Scott and said State Bank,
with good reason for so thinking, to be solvent, but was in fact
insolvent, and known so to be by said Harper,"
its managing officer, with whom the transaction had been
had.
Page 146 U. S. 502
The recovery of the judgment and pendency of the writ of error
were also set forth, and it was averred
"that said Scott and said State Bank were advised said circuit
court sitting as a court of law had not jurisdiction to entertain
and adjudge upon the setoff pleaded as aforesaid, and that relief
should be sought in a court of equity."
The tender was reiterated, and it was prayed, among other
things, "that the collection of the judgment at law might be
enjoined, and that the setoff might be established and allowed."
The grounds of demurrer were:
"1. That it appeared from the bill that the complainants were
not entitled to the relief sought."
"2. That the complainants had an adequate remedy at law for the
relief sought, which had been already adjudicated."
The case on certificate is No. 1,025. The first, second, and
fourth questions are as follows:
"1. Where a national bank becomes insolvent, and its assets pass
into the hands of a receiver appointed by the Comptroller of the
Currency, can a debtor of the bank set off against his indebtedness
the amount of a claim he holds against the bank, supposing the debt
due from the bank to have been payable at the time of its
suspension, but that due to it to have been payable at a time
subsequent thereto?"
"2. Has a circuit court of the United States sitting in Ohio as
a court of law jurisdiction to entertain a defense of setoff as
against an action brought by a receiver appointed by the
Comptroller of the Currency to wind up the affairs of a national
bank doing business in Ohio because of its insolvency, upon a note
held by said bank, which note matured and became payable after the
appointment of such receiver?"
"4. Where a national bank doing business in Ohio in 1887
discounts a promissory note with the understanding that the
proceeds of the discount are to remain on deposit with it subject
to the checks of the borrower, and any balance of such deposit
remaining undrawn at the maturity of the note is to be applied as a
credit thereon, and where at the time such discount was made said
bank was in fact insolvent, and known so to be by the officer
through whom it acted in making such
Page 146 U. S. 503
discount and agreement, but such bank was then in good credit,
and thought by the borrower to be solvent, with good reason for so
thinking, and where afterwards, the insolvency of said bank
becoming known to the Comptroller of the Currency, that officer
assumed charge of said bank, and afterwards, in June, 1887, but
before the maturity of the note so discounted, appointed a receiver
to close up the affairs of said bank, can such borrower, by suit in
equity against such receiver, compel a setoff of the balance of
said deposit account at the time of the suspension of said bank
against the amount due upon such note at its maturity?"
The third, fifth, sixth, and seventh related to the effect of
the judgment at law as a bar to the bill in equity.
Page 146 U. S. 506
MR. CHIEF JUSTICE FULLER, after stating the facts in the
foregoing language, delivered the opinion of the Court.
The Fidelity National Bank was closed by order of the bank
examiner June 20th, the receiver was appointed June 27th,
Page 146 U. S. 507
and the charter of the bank was forfeited and the bank dissolved
by the decree of the circuit court, July 12, 1887. Title to its
assets was necessarily thereby transferred to the receiver.
National Bank v.
Colby, 21 Wall. 609.
The note in controversy did not mature until September 7, 1887,
but the deposit to the credit of the Farmers' Bank was due for the
purposes of suit upon the closing of the Fidelity Bank, as under
such circumstances no demand was necessary. The receiver took the
assets of the Fidelity Bank as a mere trustee for creditors, and
not for value and without notice, and, in the absence of statute to
the contrary, subject to all claims and defenses that might have
been interposed as against the insolvent corporation before the
liens of the United States and of the general creditors
attached.
The right to assert setoff at law is of statutory creation, but
courts of equity from a very early day were accustomed to grant
relief in that regard independently as well as in aid of statutes
upon the subject.
In equity, relief was usually accorded, says Mr. Justice Story,
(Eq.Jur. § 1435),
"where, although there are mutual and independent debts, yet
there is a mutual credit between the parties, founded at the time
upon the existence of some debts due by the crediting party to the
other. By 'mutual credit' in the sense in which the terms are here
used, we are to understand a knowledge on both sides of an existing
debt due to one party, and a credit by the other party, founded on
and trusting to such debt, as a means of discharging it."
This definition is hardly broad enough to cover all the cases
where, as the learned commentator concedes, there being a
"connection between the demands, equity acts upon it, and allows a
setoff under particular circumstances." Section 1434. Courts of
equity frequently deviate from the strict rule of mutuality when
the justice of the particular case requires it, and the ordinary
rule is that where the mutual obligations have grown out of the
same transaction, insolvency on the one hand justifies the setoff
of the debt due upon the other.
Blount v. Windley,
95 U. S. 173,
95 U. S.
177.
In
Carr v. Hamilton, 129 U. S. 252,
129 U. S. 262,
it was decided
Page 146 U. S. 508
that when a life insurance company becomes insolvent and goes
into liquidation, the amount due on an endowment policy, payable in
any event at a fixed time, may, in settling the company's affairs,
be set off against the amount due on the mortgage deed from the
holder or the policy to the company by way of compensation, and Mr.
Justice Bradley, delivering the opinion of the Court, said:
"We are inclined to the view that where the holder of a life
insurance policy borrows money of his insurer, it will be presumed
prima facie that he does so on the faith of the insurance
and in the expectation of possibly meeting his own obligation to
the company by that of the company to him, and that the case is one
of mutual credits, and entitled to the privilege of compensation or
setoff whenever the mutual liquidation of the demands is judicially
decreed on the insolvency of the company."
And the case of
Scammon v. Kimball, 92 U. S.
362, was referred to, where it was held that a bank,
having insurance in a company which was rendered insolvent by the
Chicago fire of 1871, had a right to set off the amount of his
insurance on property consumed against money of the company in his
hands on deposit, although the insurance was not a debt due at the
time of the insolvency.
Indeed, natural justice would seem to require that where the
transaction is such as to raise the presumption of an agreement for
a setoff, 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.
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 to mutual credits applied. It was
therefore the balance upon an adjustment of the accounts which was
the debt, and the Farmers' Bank had the right, as against the
receiver of the Fidelity Bank, although the note matured after the
suspension of that bank, to set off the balance due upon its
deposit account unless the provisions of the national banking law
were to the contrary. Whether this was so or not is the question on
which the opinion of the
Page 146 U. S. 509
district judge turned, and which was chiefly urged in argument
upon our attention.
Sections 5234, 5236, and 5242 are the sections relied on.
Section 5234 provides for the appointment of a receiver by the
Comptroller of the Currency, and defines his duties as follows:
"Such receiver, under the direction of the Comptroller, shall
take possession of the books, records, and assets of every
description of such association, collect all debts, dues, and
claims belonging to it, and, upon the order of a court of record of
competent jurisdiction, may sell or compound all bad or doubtful
debts, and, on a like order, may sell all the real and personal
property of such association, on such terms as the court shall
direct, and may, if necessary to pay the debts of such association,
enforce the individual liability of the stockholders. Such receiver
shall pay over all money so made to the Treasurer of the United
States, subject to the order of the Comptroller, and also make
report to the Comptroller of all his acts and proceedings."
Section 5236 provides:
"From time to time, after full provision has been first made for
refunding to the United States any deficiency in redeeming the
notes of such association, the Comptroller shall make a ratable
dividend of the money so paid over to him by such receiver on all
such claims as may have been proved to his satisfaction or
adjudicated in a court of competent jurisdiction, and, as the
proceeds of the assets of such association are paid over to him,
shall make further dividends on all claims previously proved or
adjudicated, and the remainder of the proceeds, if any, shall be
paid over to the shareholders of such association, or their legal
representatives, in proportion to the stock by them respectively
held."
Section 5242 reads:
"All transfers of the notes, bonds, bills of exchange, or other
evidences of debt owing to any national banking association, or of
deposits to its credit; all assignments of mortgages, sureties on
real estate, or of judgments or decrees in its favor; all deposits
of money, bullion, or other valuable thing for its use, or for the
use of any of its shareholders or creditors; and
Page 146 U. S. 510
all payments of money to either, made after the commission of an
act of insolvency, or in contemplation thereof, made with a view to
prevent the application of its assets in the manner prescribed by
this chapter, or with a view to the preference of one creditor to
another, except in payment of its circulating notes, shall be
utterly null and void, and no attachment, injunction, or execution
shall be issued against such association or its property before
final judgment in any suit, action, or proceeding in any state,
county, or municipal court."
The argument is that these sections by implication forbid this
setoff, because they require that after the redemption of the
circulating notes has been fully provided for, the assets shall be
ratably distributed among the creditors, and that no preferences
given or suffered, in contemplation of or after committing the act
of insolvency, shall stand. And it is insisted that the assets of
the bank existing at the time of the act of insolvency include all
its property, without regard to any existing liens thereon or
setoffs thereto.
We do not regard this position as tenable. Undoubtedly any
disposition by a national bank, being insolvent or in contemplation
of insolvency, of its choses in action, securities, or other
assets, made to prevent their application to the payment of its
circulating notes, or to prefer one creditor to another, is
forbidden; but liens, equities, or rights arising by express
agreement, or implied from the nature of the dealings between the
parties, or by operation of law, prior to insolvency and not in
contemplation thereof, are not invalidated. The provisions of the
act are not directed against all liens, securities, pledges, or
equities, whereby one creditor may obtain a greater payment than
another, but against those given or arising after or in
contemplation of insolvency. Where a setoff is otherwise valid, it
is not perceived how its allowance can be considered a preference,
and it is clear that it is only the balance, if any, after the
setoff is deducted which can justly be held to form part of the
assets of the insolvent. The requirement as to ratable dividends is
to make them from what belongs to the bank, and that which at the
time of the insolvency belongs of right to the debtor does not
belong to the bank.
Page 146 U. S. 511
There is nothing new in this view of ratable distribution. As
pointed out by counsel, the Bankruptcy Act of 13 Eliz. c. 7,
contained no provision in any way directing a setoff or the
striking of a balance, and by its second section commissioners in
bankruptcy were to seize and appraise the lands, goods, money, and
chattels of the bankrupt, to sell the lands and chattels,
"or otherwise to order the same for true satisfaction and
payment of the said creditors, that is to say, to every of the said
creditors a portion, rate and rate alike, according to the quantity
of his or their debts."
4 Statutes of the Realm, Part I, 539. Yet, in the earliest
reported decisions upon setoff, it was allowed under this statute.
Anonymous, 1 Mod. 215,
Curson v. African Co., 1
Vern. 121;
Chapman v. Derby, 2 Vern. 117.
The succeeding statutes were but in recognition, in bankruptcy
and otherwise, of the practice in chancery in the settlement of
estates, and it may be said that in the distribution of the assets
of insolvents under voluntary or statutory trusts for creditors,
the setoff of debts due has been universally conceded. The equity
of equality among creditors is either found inapplicable to such
setoffs or yields to their superior equity.
We are dealing in this case with an equitable setoff, but if on
June 20 the note had matured, and each party had a cause of action
capable of enforcement by suit at once, upon the argument for the
receiver the legal setoff would be destroyed just as effectually as
it is contended the equitable setoff is. We cannot believe Congress
intended such a result, or to destroy by implication any right
vested at the time of the suspension of a national bank.
The state of case where the claim sought to be offset is
acquired after the act of insolvency is far otherwise, for the
rights of the parties become fixed as of that time, and to sustain
such a transfer would defeat the object of these provisions. The
transaction must necessarily be held to have been entered into with
the intention to produce its natural result, the preventing of the
application of the insolvent's assets in the manner prescribed.
Venango National Bank v. Taylor, 56 Penn.St. 14;
Colt
v. Brown, 12 Gray 233.
Page 146 U. S. 512
Our conclusion is that this setoff should have been allowed, and
this has heretofore been so held in well considered cases.
Snyder Sons' Co. v. Armstrong, 37 F. 18;
Yardley v.
Clothier, 49 F. 337;
Armstrong v. Warner, 21
Wkly.Cin.Law Bull. 136; 27 Weekly Law Bull. 100.
The Ohio Code of Civil Procedure abolishes the distinction
between actions at law and suits in equity, requires all actions
(with some exceptions) to be brought in the name of the real party
in interest, and permits all defenses, counterclaims, and setoffs,
whether formerly known as legal or equitable, to be set up therein.
Rev.Stats. Ohio, §§ 4971, 4993, 5071.
Section 914 of the Revised Statutes, in providing that the
practice, pleadings, and forms and modes of proceeding in civil
causes in the circuit and district courts shall conform as near as
may be to the practice, pleadings, and forms and modes of
proceeding existing at the time in like causes in the courts of
record of the state within which such circuit or district courts
are held, in terms excludes equity causes therefrom, and the
jurisprudence of the United States has always recognized the
distinction between law and equity as under the Constitution matter
of substance, as well as of form and procedure, and accordingly
legal and equitable claims cannot be blended together in one suit
in the circuit courts of the United States, nor are equitable
defenses permitted.
Bennett v.
Butterworth, 11 How. 669;
Thompson
v. Railroad Companies, 6 Wall. 134;
Scott v.
Neely, 140 U. S. 106;
Montejo v. Owen, 14 Blatchford 324;
La Mothe
Manufacturing Co. v. National Tube Works Co., 15 Blatchford
432.
We are of opinion that the circuit court had no power to grant
the setoff in question in the suit at law. Judgment, however, was
given in that case on the merits upon sustaining the demurrer to
the defense of equitable setoff, and, as we think that the setoff
should have been allowed, we do not feel called upon, having the
judgment before us and under our control for affirmance, reversal,
or modification, to sustain it upon a jurisdictional ground not
passed upon by the circuit court.
We shall therefore reverse it without discussing the question
whether, if affirmed, it would or would not be a bar to
Page 146 U. S. 513
relief in the suit in equity.
Butler v. Eaton,
141 U. S. 240;
Ballard v. Searls, 130 U. S. 50.
It follows from what we have said that the first question
certified from the United States Circuit Court of Appeals for the
Sixth Circuit must be answered in the affirmative and the second in
the negative, and that the other questions propounded require no
reply.
Judgment in No. 53 reversed and cause remanded to the
circuit court with directions for further proceedings in conformity
with this opinion.
In No. 1,025, the answers to the first and second questions
above indicated will be certified.
