Federal Deposit Ins. Corp. v. Mademoiselle of California

• Decision Date: 06 June 1967
• Docket Number: No. 21375.,21375.
• Citation: 379 F.2d 660
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of San Francisco National Bank, Appellant, v. MADEMOISELLE OF CALIFORNIA, a Co-Partnership, Edward Wieger and Ruth Carlson, Individually and as Co-Partners doing business under the firm name and style of Mademoiselle of California, Nancy Wieger, Wendell R. Carlson, and Union Bank, a Corporation, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

379 F.2d 660 (1967)

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of San Francisco National Bank, Appellant, v. MADEMOISELLE OF CALIFORNIA, a Co-Partnership, Edward Wieger and Ruth Carlson, Individually and as Co-Partners doing business under the firm name and style of Mademoiselle of California, Nancy Wieger, Wendell R. Carlson, and Union Bank, a Corporation, Appellees.

No. 21375.

United States Court of Appeals Ninth Circuit.

June 6, 1967.

Charles A. Legge, Alan I. Kaplan, Bronson, Bronson & McKinnon, San Francisco, Cal., John F. Lee, Leslie H. Fisher, FDIC, Washington, D. C., for appellant.

LeRoy Hersh, Hersh & Hadfield, San Francisco, Cal., for appellee, Mademoiselle of Calif. and others.

William T. Doyle, Doyle & Clecak, San Francisco, Cal., for appellee, Union Bank.

Before JERTBERG and MERRILL, Circuit Judges, and TAYLOR, District Judge.

JERTBERG, Circuit Judge:

This is an appeal from summary judgment in favor of appellees, Mademoiselle of California (hereinafter Mademoiselle) and Union Bank (hereinafter Union). Appellant, as receiver of San Francisco National Bank (hereinafter SFNB), brought this declaratory judgment action to determine 1) whether Mademoiselle is entitled to set off its deposit in account with SFNB against a note due SFNB, and if so 2) whether Union, as holder of an 80% participation interest in that note, is entitled to a preferred claim for 80% of the set-off. We affirm as to Mademoiselle and reverse as to Union.

The district court made findings of fact as follows:

On July 31, 1964, Mademoiselle, a co-partnership of appellees Edward Wieger and Ruth Carlson, borrowed $60,000 from SFNB and executed a promissory note in that amount. Appellees Wieger and Carlson guaranteed the note.

On November 9, 1964, SFNB sold and assigned to Union an 80% interest in said note. The principal of the note had been reduced to $58,000 by previous payments, so that Union's participation amounted to $46,400. Mademoiselle was not notified of this assignment at any time prior to the date SFNB was declared insolvent.

On January 22, 1965, the Comptroller of Currency declared SFNB insolvent and appointed appellant as receiver of SFNB. On that date, Mademoiselle had a commercial account at SFNB with a balance of $7,473.01. Mademoiselle's outstanding balance due on its promissory note exceeded that amount.

On that date Union was and now is entitled to 80% of such deposit.

On the basis of these findings, the district court concluded that there was no genuine issue of material fact and that, as a matter of law, Mademoiselle was entitled to set off the deposit against the note and that Union was entitled to a preferred claim against the assets of SFNB for 80% of the deposit.

In addition to the foregoing findings and conclusions, the record discloses that the note was made payable on demand or on July 31, 1965. The note remained in the hands of SFNB, and Mademoiselle continued to make its payments on the note to SFNB after the assignment of the 80% interest to Union. The terms of the participation certificate held by Union are set out below.¹

I

The distribution of the assets of a national bank declared to be insolvent is governed by 12 U.S.C. § 194, part of the National Bank Act. That section provides in pertinent part:

"* * * 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; * * *."

Under the statute, the allowance of claims against the assets is a matter of federal law. American Surety Co. of New York v. Bethlehem Nat. Bank, 314 U.S. 314, 62 S.Ct. 226, 86 L.Ed. 241 (1941). As the Supreme Court noted in that case, "Congress has seen fit not to anticipate by specific rules solution of problems that inevitably arise in national bank liquidations. Instead, it chose achievement of a `just and equal distribution' of an insolvent bank's assets through the operation of familiar equitable doctrines evolved by the courts." 314 U.S. at 316, 62 S.Ct. at 228.

Though the right of set-off did not exist at common law, equity has long recognized it. Clark, Set-Off in Case of Immature Claims in Insolvency and Receivership, 34 Harv.L.Rev. 178, 179 (1920). A common application of setoff occurs when a depositor is indebted to his bank, the bank is declared insolvent, and the depositor's account balance is set off against his indebtedness to the bank. See 3 Clark on Receivers § 661(d) (3rd ed. 1959). Such a set-off is allowed under the National Bank Act, so that only the balance of the debt after set-off is considered an asset of the insolvent bank. Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 36 L.Ed. 1059 (1892). The claim of Mademoiselle in our case would come squarely within that rule were it not for the sale and assignment to Union of the 80% participation in Mademoiselle's promissory note.

Appellant argues that the partial assignment to Union deprives the debts between Mademoiselle and SFNB of their mutuality. While it is generally true that a separate debt cannot be set off against a joint demand, insolvency may give rise to circumstances that work against the strict application of that rule. The usual case is one in which the depository bank pledges the depositor's note to another bank as collateral for the depository bank's own note. Subsequently, the depository bank becomes insolvent. If the receiver then pays off the depository bank's note and receives back the depositor's note, the depositor is entitled to set off his deposit against his note. Clute v. Warner, 8 App.Div. 40, 40 N.Y.S. 392 (1896). Or if the depositor pays the pledgee directly, he is then entitled to full repayment from the receiver in the amount of his deposit. Hall v. Burrell, 22 Colo.App. 278, 124 P. 751 (1912). As was stated by the court in People ex rel. Nelson v. Bank of Harvey, 273 Ill.App. 56 (1933):

"It has long been the settled rule that a depositor indebted to a bank which is closed on account of insolvency, may reduce his indebtedness by setting off his deposit. citations omitted. There is no controversy as to this rule of law, but the receiver contends that when the Bank of Harvey pledged the promissory notes, including the petitioner\'s to the First National Bank as collateral, to secure the payment of its indebtedness to the First National Bank, the notes passed to and became the property of the First National Bank, and that since they were possessed and owned by the First National Bank at the time the Bank of Harvey failed, the petitioner, who subsequently paid his note to the First National Bank, was not entitled to have the note reduced by setting off his deposit.

"* * *.

"* * * in the case at bar a number of the makers of the pledged notes were allowed to set off the amount of their deposits in reduction of their respective notes. And we think the fact that petitioner had paid his note to the First National Bank, while makers of others of the pledged notes had not done so, ought not to prejudice him. * * * But the equities of the case are that when petitioner paid $5,000 to the First National Bank, the indebtedness of the Bank of Harvey to the First National Bank was thereby reduced by $5,000, which necessarily increased the assets of the Bank of Harvey the same amount.

"Petitioner having by his payment of $5,000 increased the assets of the bank in the hands of the receiver to that amount ought in equity and good conscience, under the law, to be allowed the amount of his deposit at the time the bank closed." 273 Ill.App. at 58, 59-60.

To the same effect, see Becker v. Seymour, 71 Minn. 394, 73 N.W. 1096 (1898). The fact that the note is pledged does not deprive the depositor of his right to a set-off.

Appellant cites Plante v. M. Shortell & Son, 92 N.H. 38, 24 A.2d 498, 139 A.L.R. 1325 (1942), in support of his contention that the debts lack mutuality. In that case the creditor was suing for rent and served trustee process on the bank where the defendant had his account. Defendant was also the maker of a note held by the Reconstruction Finance Corporation. The trustee purchased a 50% participation in this note and then sought to set off that participation against the defendant's deposit to avoid the creditor's claim against it. The court disallowed the set-off because the debts were not mutual, since the note was due jointly to R.F.C. and the bank.

Plante is a normal application of the mutuality requirement for the equitable remedy of set-off. But that case did not involve the insolvency of the defendant, and there was no showing or claim that the indebtedness sought to be set off would not be fully paid. In our case, however, the insolvency of SFNB raises those inequities. "It is well settled that the insolvency of a party against whom a set-off is claimed constitutes a sufficient ground for the allowance of a set-off not otherwise available." People v. California Safe Deposit & Trust Co., 168 Cal. 241, 141 P. 1181, 1185, L.R.A.1915A 299 (1914).

Appellant also cites Bernheimer v. First National Bank of Beverly Hills, 78 F.2d 139 (9th Cir. 1935). In that case, a depositor in the bank borrowed from the bank and gave his note on the loan. The note was transferred for value to the bank's trust department. The trust department then sold participation certificates in the note to several private trusts for value. The bank was declared insolvent shortly thereafter. The depositor sued to obtain a set-off of his deposit against the amount due on the note. The court held he was not entitled to the setoff because the rights of third parties, the trust beneficiaries, had arisen and prevented the set-off.

But in Bernheimer, the transfer of the note and the sale of the participation certificates were both...