The balance of a regular bank account at the time of filing the
petition is a debt due to the bankrupt from the bank, and, in the
absence of fraud or collusion between the bank and the bankrupt
with the view of creating a preferential transfer, the bank need
not surrender such balance, but may set it off against notes of the
bankrupt held by it and prove its claim for the amount remaining
due on the notes.
Pirie v. Chicago Title & Trust Co.,
182 U. S. 438,
distinguished.
The facts are stated in the opinion.
Page 192 U. S. 141
MR. JUSTICE DAY delivered the opinion of the Court.
This is an appeal from the judgment of the Circuit Court of
Appeals for the Second Circuit reversing the order of the
Page 192 U. S. 142
district court affirming the order of the referee in bankruptcy
allowing a claim against the estate of Stege & Brother. This
claim was allowed against the contention of the trustee of the
bankrupt, that it could not be proved until the bank should
surrender a certain alleged preference given to them in
contravention of the Bankrupt Act. The circuit court of appeals
reversed the order of the district court, holding that the bank
must first surrender the preference before it could be allowed to
prove its claim. 116 F. 342. The circuit court of appeals made the
following findings of fact:
"For a number of years past the bankrupts, George H. Stege and
Frederick H. Stege, were engaged in the City and County of New York
in the business of dealing in butter, eggs, etc. at wholesale,
under the firm name and style of Stege & Brother. On January
27, 1900, they filed a voluntary petition of bankruptcy in the
district court, with liabilities of $67,232.49 and assets of
$20,729.66, and upon the same day were duly adjudicated bankrupts.
Among their liabilities there was an indebtedness of $40,000 to the
New York County National Bank for money loaned upon four promissory
notes for $10,000 each. The money was loaned to the bankrupts and
the notes were originally given as follows:"
"April 26, 1899, $10,000, 6 months, due October 26, 1899."
"April 26, 1899, $10,000, 7 months, due November 26, 1899."
"June 26, 1899, $10,000, 4 months, due October 26, 1899."
"August 2, 1899, $10,000, 4 months, due December 2, 1899."
"None of these notes were paid when they fell due, but were all
renewed as follows:"
"October 26, 1899, $10,000, 3 months, due January 26, 1900."
"November 26, 1899, $10,000, 75 days, due February 9, 1900."
"October 26, 1899, $10,000, 3 months, due January 26, 1900."
"December 2, 1899, $10,000, 69 days, due February 9, 1900."
"On January 23, 1900, in the morning, the bankrupts went to the
New York County National Bank and asked the officers to have the
two notes of $10,000 each, which fell due on January 26, extended.
The bankrupts at that time informed the
Page 192 U. S. 143
bank officers that they were unable to pay the notes then about
to fall due. In the afternoon of the same day, January 23, 1900,
the bankrupts again called upon the bank officers, and at that time
they delivered to them a statement of their assets and liabilities,
which statement was not delivered until after the deposit of
$3,884.47 had been made on that day. This statement as of January
22, 1900, showed their assets to be $19,095.67 and their
liabilities $65,864.61."
"The bankrupts kept their bank account in the New York County
National Bank since May 6, 1899. On January 22, 1900, their balance
in the bank was $218.50. On the same day, they deposited in that
account $536.83; on January 23, 1900, $3,884.47; on January 25,
1900, $1,803.95, making a total of $6,225.25 deposited in the three
days mentioned. Of this amount, there was left in the bank account
on the day of the adjudication in bankruptcy, January 27, 1900, the
sum of $6,209.25, the bank having honored a check of Stege Brothers
after the date of all these deposits."
"At the first meeting of creditors, February 9, 1900, the New
York County National Bank filed its claim for $33,790.25."
"In its proof of claim, the bank credited upon one of the notes
which became due on January 26, 1900, the deposit of $6,209.25. The
claim was allowed by the referee in the sum of $33,750.25, being
$40,000 less the amount on deposit in bank ($6,209.25) and a small
rebate of interest on the unmatured notes. Some of the creditors at
this meeting reserved the right to move to reconsider the claim of
the New York County National Bank; the referee granted this
request. Afterwards, the trustee, as the representative of the
creditors, moved before the referee to disallow and to expunge from
his list of claims the claim of the New York County National Bank
unless it surrendered the amount of the deposit -- namely,
$6,209.25 -- which had been credited by the bank upon one of the
notes. The referee denied that motion, and an appropriate order was
made and entered. The trustee thereupon duly filed his petition to
have the question certified to the district judge. The district
judge, on
Page 192 U. S. 144
the 25th day of November, 1901, made an order affirming the
order of the referee. From that order an appeal was duly taken by
the trustee to the circuit court of appeals. The deposits were made
in the usual course of business; at the time, they were made, Stege
Brothers were insolvent."
As a conclusion of law, the court of appeals held that the
deposit would amount to a transfer enabling the bank to obtain a
greater percentage of the debt due to it than other creditors of
the same class, and that allowance of the claim should be refused
unless the preference was surrendered. This case requires an
examination of certain provisions of the Bankrupt Law. Section 68
of that law provides:
"SEC. 68. Set-offs and counterclaims:"
"(
a) In all cases of mutual debts or mutual credits
between the estate of a bankrupt and a creditor, the account shall
be stated and one debt shall be set off against the other, and the
balance only shall be allowed or paid."
"(
b) A set-off or counterclaim shall not be allowed in
favor of any debtor of the bankrupt which (1) is not provable
against the estate, or (2) was purchased by or transferred to him
after the filing of the petition or within four months before such
filing, with a view to such use and with knowledge or notice that
such bankrupt was insolvent or had committed an act of
bankruptcy."
Section 60 provides (prior to the amendment of February 5,
1903):
"SEC. 60. Preferred creditors:
a. A person shall be
deemed to have given a preference if, being insolvent, he has . . .
made a transfer of any of his property, and the effect of the . . .
transfer will be to enable any one of his creditors to obtain a
greater percentage of his debt than any other of such creditors of
the same class."
Section 57
g provides (prior to amendment of February 5,
1903): "Claims of creditors who have received preferences shall not
be allowed unless such creditors shall surrender their
preferences."
Page 192 U. S. 145
Considering, for the moment, section 68, apart from the other
sections, subdivisions
a contemplates a set-off of mutual
debts or credits between the estate of the bankrupt and the
creditor, with an account to be stated and the balance only to be
allowed and paid. Subdivision
b makes certain specific
exceptions to this allowance of set-off, and provides that it shall
not be allowed in favor of the debtor of the bankrupt upon an
unproved claim or one transferred to the debtor after the filing of
the petition in bankruptcy, or within four months before the filing
thereof, with a view to its use for the purpose of set-off, with
knowledge or notice that the bankrupt was insolvent or had
committed an act of bankruptcy. Obviously the present case does not
come within the exceptions to the general rule made by subdivision
b. It cannot be doubted that, except under special
circumstances or where there is a statute to the contrary, a
deposit of money upon general account with a bank creates the
relation of debtor and creditor. The money deposited becomes a part
of the general fund of the bank, to be dealt with by it as other
moneys, to be lent to customers, and parted with at the will of the
bank, and the right of the depositor is to have this debt repaid in
whole or in part by honoring checks drawn against the deposits. It
creates an ordinary debt, not a privilege or right of a fiduciary
character.
National Bank v.
Millard, 10 Wall. 152. Or, as defined by MR.
JUSTICE WHITE in the case of
Davis v. Elmira Savings Bank,
161 U. S.
288:
"The deposit of money by a customer with his banker is one of
loan, with the superadded obligation that the money is to be paid,
when demanded, by a check."
Scammon v. Kimball, 92 U. S. 369.
It is true that the findings of fact in this case establish that,
at the time these deposits were made, the assets of the depositors
were considerably less than their liabilities and that they were
insolvent, but there is nothing in the findings to show that the
deposit created other than the ordinary relation between the bank
and its depositor. The check of the depositor was honored after
this deposit was made, and, for aught that appears, Stege
Brothers
Page 192 U. S. 146
might have required the amount of the entire account without
objection from the bank, notwithstanding their financial
condition.
We are to interpret statutes, not to make them. Unless other
sections of the law are controlling, or, in order to give a
harmonious construction to the whole act, a different
interpretation is required, it would seem clear that the parties
stood in the relation defined in § 68
a, with the right to
set off mutual debts, the creditor being allowed to prove but the
balance of the debt.
Section 68
a of the Bankruptcy Act of 1898 is almost a
literal reproduction of § 20 of the act of 1867. So far as we have
been able to discover, the holdings were uniform under that act
that set-off should be allowed as between a bank and a depositor
becoming bankrupt.
In re Petrie, 7 N.B.R. 332, Fed.Cas.
No. 11,040;
Blair v. Allen, 3 Dill. 101, Fed.Cas. No.
1,483;
Scammon v. Kimball, 92 U. S.
362. In
Traders' Bank v.
Campbell, 14 Wall. 87, the right of set-off was not
relied upon, but a deposit was seized on a judgment which was a
preference.
But it is urged that, under § 60
a, this transaction
amounts to giving a preference to the bank by enabling it to
receive a greater percentage of its debts than other creditors of
the same class. A transfer is defined in § 1(25) of the act to
include the sale and every other and different method of disposing
of or parting with property, or the possession of property,
absolutely or conditionally, as a payment, pledge, mortgage, gift,
or security. While these sections are not to be narrowly construed
so as to defeat their purpose, no more can they be enlarged by
judicial construction to include transactions not within the scope
and purpose of the act. This section, 1(25), read with sections
57
g and 60
a, requires the surrender of
preferences having the effect of transfers of property "as payment,
pledge, mortgage, gift, or security which operate to diminish the
estate of the bankrupt and prefer one creditor over another."
Page 192 U. S. 147
The law requires the surrender of such preferences given to the
creditor within the time limited in the act before he can prove his
claim. These transfers of property, amounting to preferences,
contemplate the parting with the bankrupt's property for the
benefit of the creditor, and the consequent diminution of the
bankrupt's estate. It is such transactions, operating to defeat the
purposes of the act, which, under its terms, are preferences.
As we have seen, a deposit of money to one's credit in a bank
does not operate to diminish the estate of the depositor, for when
he parts with the money, he creates, at the same time, on the part
of the bank, an obligation to pay the amount of the deposit as soon
as the depositor may see fit to draw a check against it. It is not
a transfer of property as a payment, pledge, mortgage, gift, or
security. It is true that it creates a debt which, if the creditor
may set it off under § 68, amounts to permitting a creditor of that
class to obtain more from the bankrupt's estate than creditors who
are not in the same situation and do not hold any debts of the
bankrupt subject to set-off. But this does not, in our opinion,
operate to enlarge the scope of the statute defining preferences so
as to prevent set-off in cases coming within the terms of §
68
a. If this argument were to prevail, it would, in cases
of insolvency, defeat the right of set-off recognized and enforced
in the law, as every creditor of the bankrupt holding a claim
against the estate subject to reduction to the full amount of a
debt due the bankrupt receives a preference in the fact that, to
the extent of the set-off, he is paid in full.
It is insisted that this Court, in the case of
Pirie v.
Chicago Title & Trust Co., 182 U.
S. 438, held a payment of money to be a transfer of
property within the terms of the Bankrupt Act, and when made by an
insolvent within four months of the filing of the petition in
bankruptcy, to amount to a preference, and that case is claimed to
be decisive of this. In the
Pirie case, the turning
question was whether the payment of money was a transfer within the
meaning of the law, and it was held
Page 192 U. S. 148
that it was. There, the payment of the money within the time
named in the Bankrupt Law was a parting with so much of the
bankrupt's estate, for which he received no obligation of the
debtor but a credit for the amount on his debt. This was held to be
a transfer of property within the meaning of the law. It is not
necessary to depart from the ruling made in that case that such
payment was within the operation of the law, while a deposit of
money upon an open account subject to check, not amounting to a
payment, but creating an obligation upon the part of the bank to
repay upon the order of the depositor, would not be. Of the case of
Pirie v. Chicago Title & Trust Co. it was said in
Jaquith v. Alden, 189 U. S. 78,
189 U. S.
82:
"The judgment below was affirmed by this Court, and it was held
that a payment of money was a transfer of property, and when made
on an antecedent debt by an insolvent was a preference within §
60
a, although the creditor was ignorant of the insolvency,
and had no reasonable cause to believe that a preference was
intended. The estate of the insolvent, as it existed at the date of
the insolvency, was diminished by the payment, and the creditor who
received it was enabled to obtain a greater percentage of his debt
than any other of the creditors of the same class."
In other words, the
Pirie case, under the facts stated,
shows a transfer of property to be applied upon the debt, made at
the time of insolvency of the debtor, creating a preference under
the terms of the Bankrupt Law. That case turned upon entirely
different facts, and is not decisive of the one now before us. It
is true, as we have seen, that, in a sense, the bank is permitted
to obtain a greater percentage of its claim against the bankrupt
than other creditors of the same class, but this indirect result is
not brought about by the transfer of property within the meaning of
the law. There is nothing in the findings to show fraud or
collusion between the bankrupt and the bank with a view to create a
preferential transfer of the bankrupt's property to the bank, and
in the absence of such showing, we cannot regard the deposit as
having other effect than
Page 192 U. S. 149
to create a debt to the bankrupt, and not a diminution of his
estate.
In our opinion, the referee and the district court were right in
holding that the amount of the deposit could be set off against the
claim of the bank, allowing it to prove for the balance, and the
circuit court of appeals, in holding that this deposit amounted to
a preference, to be surrendered before proving the debt, committed
error.
Judgment of the circuit court of appeals reversed, and that
of the district court affirmed; cause remanded to latter
court.
MR. JUSTICE McKENNA dissents.