Coffey v. Lawman, 7927.

• Decision Date: 14 October 1938
• Docket Number: No. 7927.,7927.
• Citation: 99 F.2d 245
• Parties: COFFEY v. LAWMAN.
• Court: U.S. Court of Appeals — Sixth Circuit

99 F.2d 245 (1938)

COFFEY v. LAWMAN.

No. 7927.

Circuit Court of Appeals, Sixth Circuit.

October 14, 1938.

Charles C. Moore, of Chattanooga, Tenn., for appellant.

J. B. Sizer, of Chattanooga, Tenn. (J. J. Lynch, J. B. Sizer, Lynch, Phillips, Hall & Allison, and Sizer, Chambliss & Kefauver, all of Chattanooga, Tenn., on the brief), for appellee.

Before SIMONS, ALLEN, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

For many years prior to December 31, 1932, the First National Bank of Chattanooga, Tennessee, was engaged in the banking business under a Federal charter.

Under the Acts of December 23, 1913, Chap. 6, Section 24, 38 Stat. 273, and September 7, 1916, Chap. 461, 39 Stat. 754, 12 U.S.C.A. § 371, it engaged extensively in the business of making loans secured by lien on real estate, and under the provisions of the Acts of December 23, 1913, Chap. 6, Section 11, 38 Stat. 261, September 26, 1918, Chap. 177, Sec. 2, 40 Stat. 968, 12 U.S.C.A. § 248 (k), national banks under special permit from the Federal Reserve Board were authorized to act as trustees where doing business in states in which state banks could so act. Under Tennessee Code, § 5936, state banks were authorized to act as trustees.

The bank made three to five year real estate loans bearing semi-annual interest. Part of these loans were held in a pool identified "property of holders of participation certificates." The bank sold participation shares therein, maturing three years from date of issue, bearing six per cent interest, payable semi-annually, against which were issued appropriate certificates.

It kept segregated at all times lien notes, some having an interest rate in excess of six per cent and of an aggregate par value equal to the face value of certificates outstanding. It retained the notes and collected both principal and interest, and mingled these funds with collections of its own notes, and paid to the owners of participation certificates, when due, their pro rata share of both, regardless of collections. It received for its services, all interest collected in excess of six per cent, commissions and fees. It also paid insurance and taxes where the mortgagor defaulted.

Because of the depression, difficulties arose, many debtors defaulted and to meet the maturity interest on certificates, the bank advanced $168,268.62 and paid insurance premiums and delinquent taxes of $23,378.53.

On December 31, 1932, the First National Bank transferred a part of its assets to The Chattanooga National Bank and discontinued the banking business. The old bank continued to operate the mortgage pool until January 12, 1933, but made no new loans. It recouped $56,704.37 of its advancements on participation certificates by collections from mortgagors. On January 12, 1933, the State Chancery Court, Chattanooga, appointed it receiver for the participation pool and in April, 1933, E. H. Lawman was by the same Court appointed co-receiver.

On May 16, 1933, the certificate holders filed in the receivership proceedings in the state court a class suit in the nature of an original action, seeking to remove the bank as co-receiver and recover from it damages for maladministration of its trust. The bank was removed as co-receiver, and thereafter the maladministration action was prosecuted as an original one under the style of Shinbaum, et al. v. First National Bank. Later, the bank was found to be insolvent and placed in the hands of the Comptroller of the Currency of the United States for liquidation, and Charles S. Coffey, appellant, appointed receiver. He was made a party to the Shinbaum suit which was removed by him to the United States District Court, where an agreed judgment was entered against the receiver for $500,000 on which the Comptroller declared a forty per cent dividend. The appellant filed an intervening petition in this action, claiming there should be credited on the dividend $111,564.25 mortgagor's defaulted interest, which the bank had not recovered, and which it had paid on participation certificates and $23,378.53 with accrued interest of $1,790.61 mortgagor's delinquent taxes and fire insurance premiums which the bank had paid. He tendered with his petition clipped coupons equal to the interest offset. The lower court dismissed the intervening petition.

The appellee claims the court is without jurisdiction because the rights of the certificate holders were being administered in the State Court of Tennessee and further the receiver has waived his right to offset because its subject was defensive in the original action. If these contentions are correct, it is unnecessary to consider other questions raised on the appeal.

The Court has jurisdiction. Compare Commonwealth Trust Co. v. Bradford, Receiver, 297 U.S. 613, 620, 56 S.Ct. 600, 602, 80 L.Ed. 920; Commonwealth Trust Co. v. Atwood, 3 Cir., 78 F.2d 92.

The right of setoff was not precluded by the judgment. A defendant may elect to withhold a claim against a plaintiff, though defensive, if it be an independent cause of action not affected or impaired by a judgment against him. The facts on which the appellant based his setoff are not so intimately intertwined with the original action as to preclude him from setting up the claim as a defense to the judgment. Compare Merchants' Heat & Light Co. v. Clow & Sons, 204 U.S. 286, 290, 27 S.Ct. 285, 51 L.Ed. 488; Central Appalachian Co. v. Buchanan, 6 Cir., 90 F. 454; Holland v. Forcum-James Cooperage & Lumber Co., 154 Tenn. 174, 285 S.W. 569.

The First National Bank secured its real estate loans by straight mortgages and sold an interest in some of them to customers...