Nashville Trust Co. v. Fourth Nat. Bank

• Decision Date: 08 March 1892
• Citation: 18 S.W. 822,91 Tenn. 336
• Parties: Nashville Trust Co. v. Fourth Nat. Bank.
• Court: Tennessee Supreme Court

18 S.W. 822

91 Tenn. 336

Nashville Trust Co. v. Fourth Nat. Bank.

Supreme Court of Tennessee.

March 8, 1892

Appeal from chancery court, Davidson county; Andrew Allison, Judge.

Action by the Nashville Trust Company against the Fourth National Bank to recover certain deposits. Decree for defendant. Complainant appeals. Affirmed.

Pitts Special Judge.

The Connell-Hall-McLester Company, a Tennessee mercantile corporation located at Nashville, executed a general assignment to the Nashville Trust Company, for the benefit of creditors, on the 4th day of June, 1891. The deed of assignment conveyed to the assignee all the property and assets belonging to the assignor company, schedules being annexed under oath, specifying, among other things, all moneys on deposit in the Fourth National Bank of Nashville. At the date of the assignment the assignor company had on deposit, subject to its check, in said bank, $5,222.66, and the bank held its four notes for borrowed money, due as follows:

One due July 3, 1891, for ..... $10,000 00

One due July 17, 1891, for ...... 4,500 00

One due July 19, 1891, for ...... 9,000 00

One due August 22, 1891, for .... 4,500 00

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Making a total of .......... $28,000 00

The bank, after the assignment was made and noted for registration, and on the same day it was made, with knowledge of the assignment, applied said deposit to the credit of the assignor upon its indebtedness to the bank on the above-stated notes. Within three days after the assignment the assignee drew its check upon the bank for the amount of the deposit, caused the same to be presented for payment, and payment was refused. The assignor is insolvent, and was insolvent at the date of the assignment, and will not pay its debts in full. On the 4th day of December, 1891, the assignee and the Fourth National Bank submitted an agreed case to the chancery court at Nashville for decision upon the foregoing facts; the assignee claiming, as stated in the agreed case "that it had the right to collect the deposit, and that it still has such right, or, if it has not this right, that in the pro rata distribution of the proceeds of the assets among the creditors of the Connell-Hall-McLester Company, it has the right to charge said bank with the sum so on deposit and appropriated, as so much cash received on its pro rata share of said proceeds upon its debt of $28,000;" and the bank claiming "that it had the right to appropriate said deposit in payment on said notes prove its debt for the balance, and collect its pro rata share of the trust fund on said balance as other creditors, and that it now has such right." These questions were submitted for decision, with the agreement that costs should be paid by the losing party. The chancellor held for the defendant, the bank, grounding his decision upon the doctrine of equitable set-off, and the complainant has appealed.

Two questions are now presented for decision. The first is whether the doctrine of equitable set-off applied, and gave to the bank, immediately upon the assignment being made and the insolvency of the assignor established, the right to have the deposit credited upon or allowed as a set-off against the indebtedness of the assignor not then due. The complainant's counsel argues, with much force and plausibility, that the mere fact that one of the parties to independent cross-indebtedness is insolvent constitutes no ground for equitable set-off; that some connection of dependence, or "mutual credit," in addition to insolvency, is essential; that more especially is this so when the indebtedness of one of the parties is not due, and that, too, of the party who is seeking to obtain the set-off; that to apply the doctrine of set-off to such a case would be to allow a party to collect a debt before it is due, without the consent of his debtor, and thus violate the contract which the parties have made; and that in this case such a result would give the bank a preference over other creditors of the assignor, and violates the statute which provides for the equal pro rata distribution of the assets of insolvent debtors under general assignments, as well as the like statutory provisions in regard to insolvent corporations. On the other hand, it is argued with equal force and plausibility for defendant that insolvency is, of itself, a sufficient ground for equitable set-off, without any connection or "mutual credit" between the debts or parties; that connection and insolvency are separate and distinct grounds for such relief, each being alone sufficient; that, where insolvency exists, it makes no difference that the indebtedness on one side is not due, nor which party is insolvent,-whether the party seeking the set-off or the party resisting it; that, under the statutes providing for the equal pro rata distribution of the assets of insolvent persons and corporations, the assets of the insolvent, in respect to choses in action, are only the balances due the insolvent estate after deducting all proper credits, counterclaims, and set-offs, as its liabilities are only the balances due from it, ascertained in like manner, and therefore that to allow the set-off claimed in this case is not to disturb, but to preserve and enforce, equality among creditors; and that to refuse it would be to give other creditors a preference over the bank, and work injustice to the latter by compelling it to pay in full what it owes to the insolvent, and take a pro rata on what the insolvent owes it.

The second question is, the indebtedness on both sides being due when the agreed case was filed, whether the bank has the legal right of set-off. On this question, in addition to the contentions already suggested, it is insisted for complainant that the rights of the parties were fixed at the date of the assignment, and, the bank having no right to set-off at that date, it has not such right now; that the lapse of time did not enlarge defendant's right in this respect; and that the assignee represents the creditors of the assignor, and not the assignor only; and therefore that the assignee is not to be regarded as standing in the shoes of the assignor simply. On the other hand, it is insisted for defendant that the assignee takes, not only as a volunteer, subject to all the equities existing against the assignor, and not as a purchaser for value, but also as the personal representative of the assignor, and stands for and in the place of the assignor in all respects, except as to personal liability; that the agreed case is, in effect, a suit to recover the deposit by the Connell-Hall-McLester Company, by its assignee and personal representative, and that, the debts being mutual and all due, the bank has the legal right of set-off to the extent of the deposit.

Opposed as they are to each other, the positions of counsel are each supported by apparently well-considered cases on both of the general questions stated; but no adjudication of this court, upon a similar state of facts, has been cited, nor is the court aware of any case in this state in which the precise questions here raised have been decided. The adjudged cases in this country and in England, and the text-books founded upon them, are in hopeless and irreconcilable conflict on many of the points involved. Any effort to reconcile them would be utterly futile. There is no touchstone of reason that will distinguish and harmonize them upon any general principle applicable to all of them, for their antagonism is not apparent, simply, but real and fundamental. They but furnish one of the many illustrations of that diversity of judgment which is inherent in the minds of men, which often, out of substantially similar raw materials and general conditions, has founded and built up dissimilar systems of jurisprudence, and which too often proves a delusion and snare to the worshiper of mere precedent. We must therefore look for guidance to the policy of our own state on the general subject, and to the principles involved which appear to be sustained by reason and the weight of authority; and, first of all, it must be remembered that the doctrine of set-off, whether legal or equitable, is essentially a doctrine of equity. It was that natural justice and equity which dictates that the demands of parties, mutually indebted, should be set off against each other, and only the balance recovered, that gave birth to the idea of accomplishing the result in a judicial proceeding. The common law, for simplicity of procedure, determined otherwise, and held that each claim must be prosecuted separately. "The natural sense of mankind," says Lord Mansfield, "was first shocked at this in the case of bankrupts; and it was provided for by 4 Anne, c. 17, § 11, and 5 Geo. II. c. 30, § 28." Gree v. Farmer, 4 Burrows, 2214, 2220, cited in 2 Story, Eq. Jur. § 1433. "In pursuance of these old statutes, and of the dictates of equity," says the supreme court of the United States in Carr v. Hamilton, 129 U.S. 255, 256, 9 S.Ct. 295, "the principle of set-off between mutual debts and credits has, for nearly two centuries past, been adopted in the English bankrupt laws, and has always prevailed in our own whenever we have had such a law in force on our statute book; and it mattered not whether the debt was due at the time of bankruptcy or not,"-citing authorities.

The jurisdiction of courts of equity over the subject of set-off was exercised before there was any statute upon the subject (Hawkins v. Freeman, 2 Eq. Cas. Abr. 10; Chapman v. Derby, 2 Vern. 117), and has often been applied in cases not within the statutes, (Williams v. Davis, 2 Sim. 461; Ex parte Prescott, 1 Atk. 331; Lanesborough v. Jones, 1 P. Wms. 326; Greene v. Darling, 5 Mason, 207.) By the civil law, from which the...