Gray v. School Dist. of Borough of Brownsville, 5064.

• Court: U.S. Court of Appeals — Third Circuit
• Writing for the Court: WOOLLEY and THOMPSON, Circuit , and FORMAN
• Citation: Gray v. School Dist. of Borough of Brownsville, 67 F.2d 141 (3rd Cir. 1933)
• Decision Date: 22 September 1933
• Docket Number: No. 5064.,5064.
• Parties: GRAY v. SCHOOL DIST. OF BOROUGH OF BROWNSVILLE.

67 F.2d 141 (1933)

GRAY v. SCHOOL DIST. OF BOROUGH OF BROWNSVILLE.

No. 5064.

Circuit Court of Appeals, Third Circuit.

September 22, 1933.

Henry Eastman Hackney, Joseph W. Ray, Jr., and Shelby, Hackney & Ray, all of Uniontown, Pa., for appellant.

John C. Sherriff and John M. Reed, both of Pittsburgh, Pa., and Harry A. Cottom, of Brownsville, Pa., for appellee.

Before WOOLLEY and THOMPSON, Circuit Judges, and FORMAN, District Judge.

WOOLLEY, Circuit Judge.

The School District of the Borough of Brownsville had money on deposit with the Monongahela National Bank of Brownsville, Pennsylvania, in three accounts, designated as follows: (a) Checking Account, $807.34; (b) Sinking Fund No. 1, $4,321.71; and (c) Sinking Fund No. 2, $10,271.79. The School District owed the bank $13,000 for money borrowed for general school purposes on certificates of indebtedness conformably with state statute. The bank failed. In attempting settlement, its receiver refused to set off the debt which The School District owed the bank against the sinking fund debts which the bank owed The School District, agreeing, however, to a set-off of the checking account. Thereupon The School District, by its bill in equity, sought to compel a set-off of the respective debts. The District Court by its decree allowed the set-off and permitted The School District to prove and file its claim with the receiver for the difference.

The receiver of the bank appealed on several grounds which arose from rulings of the court adverse to him, the pertinent ones being that, as he contends, the debts are not mutual, the sinking fund accounts being of trust funds; that the money represented by deposits in the sinking fund accounts belongs not to The School District but in reality to the holders of its bonds; and that, anyhow, The School District, because of surety given by the bank to protect its deposits, would not lose if the set-off were disallowed.

Of course the learned trial court recognized that to permit a debt of one person to be set off against a debt of another, both must be mutual and subsisting debts and must be due in the same capacity or right. On their face such were the debts in this case; The School District owed the bank for money borrowed and the bank owed The School District for money deposited.

The moneys deposited in the two sinking fund accounts were raised by The School District by taxation for the purpose, as the law required, of paying running interest and ultimately the principal of two bond issues. By impressing their purpose upon the funds so deposited, the receiver of the bank regards them as trust funds and, accordingly, maintains that after deposit they do not constitute debts of the bank to The School District in the same capacity or right as the debt of The School District to the bank and therefore are not open to set-off. That they are mutual debts subsisting between the same parties — and so far fall within the rule — cannot be validly questioned although, seemingly, the trend of the receiver's argument is to the contrary. The case really turns on whether the debts are due in the same capacity or right and whether on the facts equity calls for a set-off.

Although both funds were raised for particular purposes, The School District drew money from Sinking Fund No. 1 rather freely and used it for general school purposes. From Sinking Fund No. 2 it drew money for purposes other than those for which it was created, yet less freely.

Sometimes funds created for a purpose are impressed with a trust to carry out the purpose. When this occurs between fiduciary and personal debts, mutuality as to capacity or right is lacking. This happens of course where a deposit is made by an executor, administrator, trustee, and also when made personally yet for distribution among creditors to the knowledge of the bank, and even in instances where, under particular circumstances, it is made for the retirement of bond issues. In such cases set-off will not, at law, be allowed. The law will not permit a person to pay his debt with the money of another. On the other hand, money to be used for a definite purpose may not be impressed with a capacity different from the personal capacity of the depositor. For instance, money of a client deposited to the personal account of his attorney does not thwart a claim of set-off by the attorney, and deposits of money of estates undergoing public administration have been set off against the debt of the public administrator. Miller v. Receiver of Franklin Bank, 1 Paige (N. Y.) 444. On the varying facts of close cases the test of "capacity", whether fiduciary or personal, is not limited to the purpose of the fund representing the debt but extends to the ownership of the debt and the capacity of the owner to sue for it. Recognizing this, the bank's receiver takes the stand that the sinking funds in question are not the property of The School District (except as trustee) but belong to the holders of the bonds. We cannot subscribe to this position. The money which was deposited in the sinking fund accounts belonged to The School District. Though intended for use in...