Nix v. Ellis

• Decision Date: 11 August 1903
• Citation: 45 S.E. 404,118 Ga. 345
• Parties: NIX v. ELLIS.
• Court: Georgia Supreme Court

45 S.E. 404

118 Ga. 345

NIX v. ELLIS.

Supreme Court of Georgia

August 11, 1903

Syllabus by the Court.

1. Only mutual demands of the same nature can be set off against each other, but the debts need not grow out of the same transaction, nor be the result of mutual dealings, nor have arisen between the same parties. Hence a transferred chose in action, which can be sued on in the name of the assignee, may be used as a set-off.

2. When the parties are mutually indebted, there are mutual debts within the meaning of Civ. Code, § 3746.

3. One indebted to a bank may purchase a claim due by it, and use the same as a set-off when subsequently sued on the debt due by himself.

4. A receiver takes choses in action of a bank in the same plight in which they existed at the time of the filing of the equitable proceedings under which he was appointed, and subject to all set-offs which might have been pleaded thereto in a suit by the bank itself.

5. The right of set-off in such cases exists only to the extent of the concurrence of the two claims. No lien can be obtained against the receiver for any excess due the defendant.

6. By statute in many jurisdictions a debtor of an insolvent corporation cannot purchase claims after the act of insolvency, so as to use the same as a set-off against his own liability, and thereby, in effect, secure a preference of the claim so purchased.

7. In this state, under Civ. Code, § 2719, the right to purchase claims and use the same by way of set-off continues up to the time of the filing of the petition for the appointment of a receiver.

8. The defendant's right of set-off was vested at the time of his purchase of the claim, and was not destroyed by the subsequent filing of a creditor's equitable petition and the appointment of a receiver, though at the time the claim was acquired the purchaser may have had notice of the insolvency of the bank.

9. Officers of a corporation, having peculiar opportunity to know of its condition, or those liable as stockholders to creditors or occupying a trust relation of any sort, cannot use their position to escape liability by the purchase of claims to be used as a set-off.

Error from City Court of Americus; C. R. Crisp, Judge.

Action by G. R. Ellis, receiver, against G. S. Nix. Judgment for plaintiff, and defendant brings error. Reversed.

J. H Lumpkin, for plaintiff in error.

W. A Dodson and E. A. Hawkins, for defendant in error.

LAMAR J.

Nix was indebted to the People's Bank of Americus $208. The bank was indebted to Hines as a depositor $355. On March 20, 1902, the bank made an assignment for the benefit of its creditors, and Ellis, assignee, entered and took possession. On the next day Hines, for value received, duly transferred his account against the bank to Nix. On the following day Sullivan and other creditors of the bank filed an equitable petition asking for a receiver and a decree declaring the assignment void. Under this bill Ellis was subsequently appointed receiver for the assets of the bank, and the deed of assignment was declared null and void. The receiver thereupon instituted a suit against Nix, who admitted the indebtedness, but claimed the right to set off the amount of the bank's indebtedness to Hines, which he had purchased. Nix was not an officer of the bank, and occupied no fiduciary or trust relationship to the creditors. Wilkinson v. Bertock, 111 Ga. 187, 36 S.E. 623. But on the ground that these claims were not mutual, or that the right of set-off, if it ever existed, was defeated by the fact that the purchase was made after the doors of the bank were closed, the judge directed a verdict for the receiver.

It is remarkable that there is hardly a case in our Reports which in express terms recognizes the right of a defendant to purchase choses in action and to use the same by way of set-off. Compare Lee v. Lee, 31 Ga. 26, 76 Am.Dec. 681 (2); Whitaker v. Pope, 48 Ga. 13; Morrow v. Merchants' Bank, 35 Ga. 267. Although it avoided a useless circuity of actions, and was founded in natural equity, this reasonable right was not allowed until the statute of 2 Geo. II, c. 22, which is the basis of section 3746 of the Civil Code. Meriwether v. Bird, 9 Ga. 594, 597. By it any mutual demand between the parties existing at the commencement of the suit may be set off. Except in the case of dishonored notes (Civ. Code, § 3750), the debts need not be connected, need not grow out of the same transaction, need not have arisen in mutual dealings, and the debt sought to be so used need not originally have been due to the defendant. It is true that the ancient opposition to assignments of choses in action caused the courts long to lean to a construction which restricted the right so to use assigned claims. But it was finally conceded, because otherwise an insolvent might recover his demand, while the solvent defendant with a valid claim could get nothing except a judgment in the separate and independent suit he was forced to institute against the other party. The transferee of an account or other chose in action having the right to sue in his own name (Civ. Code, § 3077), the question as to how the claim arose is of little importance. If at the commencement of the suit each party has a cause of action of the same nature against the other in his own name, and in the same capacity, one demand may be set off against the other; "for, if the parties are mutually indebted, there are mutual debts." They do not ipso facto extinguish one another, as at the civil law, for the defendant must plead his set-off in bar; but where this is done, and the claim is established, the result, in some degree, relates to the condition existing at the time of filing the suit, and in effect determines that the two claims had canceled each other by operation of law, and that when the suit was filed the real cause of action was for the difference after balance struck. Meriwether v. Bird, 9 Ga. 597; State v. Brobston, 94 Ga. 95, 21 S.E. 146, 47 Am.St.Rep. 138; Van Wagoner v. Paterson Gas Co., 23 N. J. Law, 283; Finnell v. Nesbit, 16 B. Mon. 351; Richardson v. Parker, 2 Swan, 529. Assignees, trustees in bankruptcy, and receivers are not purchasers for value, and take the estate of the insolvent subject to all set-offs, liens, and incumbrances, and in the plight existing at the date to which his title is ultimately referred. Powers v. Central Bank, 18 Ga. 658; Georgia Seed Co. v. Talmadge, 96 Ga. 255, 22 S.E. 1001. It may work an inequality in this case, but the assignment, having been declared to be void, is to be ignored, except in so far as it affects the question of notice of insolvency. After it was set aside, if no receiver had been appointed, it would not have deprived Nix of his right of set-off had he been sued by the bank. The written transfer of the account made him creditor, and the bank his debtor. He could at once have brought suit thereon in his own name (Civ. Code, § 3077; Mordecai v. Stewart, 37 Ga. 379 (6); Loudermilk v. Loudermilk, 93 Ga. 443, 21 S.E. 77), with the privilege of securing liens by garnishment or attachment; or, unless prevented by some statute, he might have obtained from his debtor a preference by mortgage, collateral or otherwise. He also had the fixed and vested right of set-off, whereby, in effect, his debt to the bank was canceled, paid off, and discharged, and the bank's debt to him was satisfied to the extent of their concurrence. And, relying on this right, he may have failed to resort to others which would have equally availed him, and caused the same result to the other creditors. The bank really had no asset in its claim against Nix. It was as worthless as a note to which a valid plea of payment could have been interposed. If the bank had continued a going concern, it is evident that this debt from Nix was not a source from which it could pay creditors generally, nor was it available in any manner except as a credit on the account formerly due to Hines. If it was not an asset in the hands of the bank prior to filing the petition, it surely did not become such when a receiver was appointed. And so it has been held, "in cases of cross-indebtedness, the assets of the bank consist only of the balance of the accounts. That is all the fund which the bank itself would have had to satisfy its creditors in case no receiver had been appointed. And there is no equality and no equity in putting a debtor of the bank, who has a just and legal set-off as against the corporation, in a worse position, and creditors in a better position, by the failure of the bank and the appointment of receivers." Van Wagoner v. Paterson Gas Co., 23 N. J. Law, 283. In Finnell v. Nesbit, 16 B. Mon. 351, it was ruled that the balance which remains after the set-off is deducted is all that is actually due to the estate, and which can be rightfully and justly applied in the course of administration. See, also, Richardson v. Parker, 2 Swan, 529.

But it is claimed that, even if a defendant has a general right to buy, and set off when sued by a receiver, it ceases as soon as the corporation becomes insolvent; that otherwise one with knowledge of the insolvency can obtain a preference and an unjust advantage over others equally entitled to share in the estate. And these reasons have appealed so strongly to many legislative bodies that some have prohibited setting off claims assigned after the act of insolvency. Scott v Armstrong, 146 U.S. 499, 511, 13 S.Ct. 148, 36 L.Ed. 1059; Davis v. Knipp, ...