In re Merchandise Mart of Columbia

• Decision Date: 15 September 1948
• Docket Number: No. B/4397.,B/4397.
• Court: U.S. District Court — District of South Carolina
• Parties: In re MERCHANDISE MART OF COLUMBIA.

79 F. Supp. 686

In re MERCHANDISE MART OF COLUMBIA.

No. B/4397.

United States District Court E. D. South Carolina Columbia Division.

September 15, 1948.

COPYRIGHT MATERIAL OMITTED

Fred D. Townsend, of Columbia, S. C., for petitioner, Citizens & Southern Nat. Bank of Columbia.

Hunter A. Gibbes, of Columbia, S. C., for trustee.

WYCHE, District Judge.

The above matter is before me upon the petitions of the Citizens and Southern National Bank, and the Trustee in Bankruptcy, for the above bankrupt, for review of the Order of the Referee in Bankruptcy adjudicating a question of set-off of a deposit of the bankrupt in the Citizens and Southern National Bank against an indebtedness of the bankrupt to the bank.

The facts certified by the Referee are as follows: Under date March 18, 1947, the bank made a loan of $5,000 to the bankrupt Merchandise Mart for which amount the said Merchandise Mart executed and delivered its negotiable promissory note payable May 27, 1947. Said note was not paid at maturity and thereafter the following payments were made: June 6, 1947 — $1,200, June 12, 1947 — $800, and on June 27 the bank charged $754.02 to the deposit account and credited the same on the unpaid balance of said note, so that if the off-set be allowed there remains due and owing upon said note the sum of $2,245.98.

For some time prior to filing of petition and adjudication of bankruptcy, Merchandise Mart had maintained a general account with the bank. Deposits and withdrawals were made in the usual course of business against this account and nothing was done to build up the account in order to prefer the bank over other creditors.

On June 18, 1947, petition in bankruptcy was filed by certain creditors against Merchandise Mart. Order of adjudication was issued on July 3, 1947.

On June 18, 1947, there was a balance of $1,081.47 in the general checking account of Merchandise Mart. Subsequent to that date deposits and withdrawals were made in the usual course of business until adjudication of bankruptcy. On June 27, when the purported off-set was made by the bank, there was a balance of $889.42. It cannot be doubted that, except under special circumstances or where there is a statute to the contrary, a deposit in a general account creates the relation of debtor and creditor, as in the case here.

From the bankrupt records, it appears that for the period June 18, to June 27, inclusive, deposits in the total amount of $590.25 were made. Withdrawals in the usual course of business, excluding the attempted set-off by the bank, total $769.13. Thus there was "in the hands of the bankrupt" on June 27 in "Old Money", that is money which was on deposit prior to the date petition was filed, the sum of $312.34.

There is nothing in the record to indicate that the bank had actual knowledge of the filing of the petition when it honored the checks drawn upon the bank account of the bankrupt after the filing of the petition. The Referee in his Order says: "The bank has raised the point that it did not have actual notice of the filing of the petition. Under the decisions, it appears that the filing of the petition is constructive notice as stated in the case of May v. Henderson 268 U.S. 111, 45 S.Ct. 456, 69 L.Ed. 870, the filing of the petition is a `caveat to all the world'." The attorney for the bank at the hearing before me stated (and his statement was not questioned at that time): "There is only one thing that the Referee did not make specific mention of, and that is that the bank had no actual knowledge of the filing of the petition of bankruptcy until the date that they charged the account with this seven hundred and some odd dollars, and applied it on the note due by the bankrupt. That's the date that they first knew of the filing of the petition of bankruptcy." It is difficult for me to conceive that the bank would thus honor checks with actual notice of filing of petition in bankruptcy, especially when the bankrupt was at that time indebted to it in the sum of $3,000.

From the foregoing facts the Referee, relying upon the case of In re Hotel Martin Co. of Utica, 2 Cir., 83 F.2d 231, concluded that under, what is called the "first in, first out" rule the bank was entitled to a set-off of $312.34.

The bank contends that it "is entitled to set-off the sum of $754.02, standing to the credit of Merchandise Mart on June 27, 1947, against the unpaid balance due upon the promissory note of Merchandise Mart which became due and payable May 27, 1947, prior to the filing of the petition in bankruptcy, and that the Order of the Referee should be modified accordingly."

The trustee contends "that under the terms of the Bankruptcy Act all moneys and other assets owned by the bankrupt on the date of filing the petition, June 18, 1947, and thereafter automatically became the property of trustee for the benefit of all creditors. * * * that commencing with June 18, 1947, no right of set off existed in favor of the bank, and all of the money, $889.42, should be paid to him (trustee)."

The property which vests in the trustee upon adjudication is that which the bankrupt owned at the time of the filing of the petition. The purpose of the law is to fix "the line of cleavage" with reference to the condition of the bankrupt estate as of the time at which the petition was filed. Everett v. Judson, 228 U.S. 474, 479, 33 S. Ct. 568, 57 L.Ed. 927, 46 L.R.A., N.S., 154. Provable debts are those owing when the petition is filed. Section 63, Bankruptcy Act, 11 U.S.C.A. § 103. The discharge, when granted, relates to the filing of the petition, and an obligation incurred afterwards but before discharge, is not included in it. Zavelo v. Reeves, 227 U.S. 625, 33 S. Ct. 365, 57 L.Ed. 676, Ann.Cas.1914D, 664.

The filing of the petition is "a caveat" to all the world and in fact an attachment and an injunction. May v. Henderson, 268 U.S. 111, 117, 45 S.Ct. 456, 69 L.Ed. 870; Mueller v. Nugent, 184 U.S. 1, 14, 22 S.Ct. 269, 46 L.Ed. 405. While it does not divest the bankrupt of title to his property, it constitutes him in effect a trustee for the benefit of his creditors from that time until adjudication, when adjudication follows. The estate is considered as in custodia legis from the filing of the petition. Acme Harvester Co. v. Beekman Lumber Co., 222 U.S. 300, 307, 32 S.Ct. 96, 56 L.Ed. 208.

Section 68 of the Bankruptcy Act is as follows: "§ 108. 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."

It will be observed that this section provides for set-offs in all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor. It says the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid. Subdivision b, 11 U.S.C.A. § 108, sub. b, imposes certain specific limitations, which do not affect the issues involved in this controversy.

The section recognizes the existence of the right of set-off and provides a method by which it can be enforced, even after bankruptcy. It may be exercised by the parties before the petition is filed. If it is not, then, "under command of the statute", it must be done by the trustee. Studley v. Boylston Nat. Bank of Boston, 229 U. S. 523, 33 S.Ct. 806, 808, 57 L.Ed. 1313; In re Montgomery Bros., D.C., 51 F.2d 284; In re Cross, 2 Cir., 273 F. 39. A deposit of money upon general account with a bank creates the relation of debtor and creditor. New York County National Bank v. Massey, 192 U.S. 138, 24 S.Ct. 199, 48 L.Ed. 380. Thus where a bank receives deposits in the regular course of business, which are subject to withdrawals by check, and there is no collusion or fraud, and no showing by the trustee that the balance was built up for the purpose of giving the bank a preference, and where the depositor is indebted to the bank by note, the bank has the right when the note is due, to set off the amount due to the bank on the note against the amount due from it on the deposit account. In re Cross, 2 Cir., 273 F. 39; In re Ulen & Co., D.C., 46 F.Supp. 437, 439; Bankruptcy Act, Sections 1 (11), 63, sub. a(1), 68, sub. a, 11 U.S.C.A. §§ 1 (11), 103, sub. a(1), 108, sub. a; New York County Nat. Bank v. Massey, supra; Studley v. Boylston Nat. Bank, supra; Scammon v. Kimball, 92 U.S. 362, 23 L.Ed. 483; In re Philip Semmer Glass Co., 2 Cir., 135 F. 77, appeal dismissed; Conboy v. First Nat. Bank of Jersey City, 203 U.S. 141, 27 S.Ct. 50, 51 L.Ed. 128; Doggett v. Chelsea Trust Company, 1 Cir., 73 F.2d 614; Fourth National Bank of Wichita, Kan. v. Smith, 8 Cir., 240 F. 19; Rupp v. Commerce Guardian Trust & Savings Bank, 6 Cir., 32 F.2d 234.

This right exists, even though the depositor is insolvent when the note becomes due, and such insolvency is known to the bank. Continental & Commercial Trust & Savings Bank v. Chicago Title Co., 229 U.S. 435, 33 S.Ct. 829, 57 L.Ed. 1268; New York County National Bank v. Massey, supra.

Section 68 did not create the right of set-off, but protected it "if the petition is filed before the parties have themselves" exercised it. Studley v. Boylston National Bank, supra. 229 U.S. 523, 33 S.Ct. 808

The filing of the petition is "the crucial time" in bankruptcy proceedings provided adjudication follows. Section 1 (13)¹; Sexton v. Dreyfus, 219 U.S. 339, 345, 31 S.Ct. 256, 55 L.Ed. 244. A bank has the right of set-off as to the existing deposit balance when the petition in bankruptcy is filed. Citizens' Union Nat. Bank v. Johnson, 6 Cir., 286 F. 527, 31 A.L.R. 255.

In the leading case of In re Michaelis & Lindeman, D.C., 196 F. 718, 719 the Court said: "Admittedly there must come a time as of which claims against a bankrupt's estate are to be liquidated and stated. This is just as true when there is a set-off or counterclaim...