United States v. National City Bank of New York

• Decision Date: 06 April 1936
• Docket Number: No. 237.,237.
• Citation: 83 F.2d 236
• Parties: UNITED STATES v. NATIONAL CITY BANK OF NEW YORK et al.
• Court: U.S. Court of Appeals — Second Circuit

83 F.2d 236 (1936)

UNITED STATES v. NATIONAL CITY BANK OF NEW YORK et al.

No. 237.

Circuit Court of Appeals, Second Circuit.

April 6, 1936.

Lamar Hardy, U. S. Atty., of New York City (Francis H. Horan and Clarence W. Roberts, Asst. U. S. Attys., both of New York City, of counsel), for the United States.

Shearman & Sterling, of New York City (Philip A. Carroll and Otey McClellan, both of New York City, of counsel), for appellee.

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

The State of Russia, on December 6, 1917, had an account in the name of three members of the Russian Mission of Ways of Communication in the United States in the Bankers Trust Company of New York. A dispute arose as to the proper party to whom to pay this deposit, and, to protect itself, the Bankers Trust Company in August, 1918, transferred the balance, $115,333.06, to the appellee bank, where it is held in an account entitled "S. Ughet, Russian Financial Attache, segregated for Bankers Trust Company per S. Ughet's letter August 13, 1918, #1650, and B. A. Bakmeteff's letter June 14, 1922." An agreement then made provided that the fund was to be segregated on the books of the appellee until Bankers Trust Company was furnished satisfactory evidence that the fund was in fact the exclusive property of the Russian government.

In March, 1925, the Russian Financial Attaché, S. Ughet, furnished evidence that he, as representative of the Russian government, was entitled to the money. This, however, did not satisfy the Bankers Trust Company, and it refused to consent to payment. This suit was then commenced by the State of Russia against appellee, interpleading the Bankers Trust Company, for a decree directing the appellee to pay the fund to S. Ughet on behalf of the State of Russia as owner without receipt of the Bankers Trust Company's consent. The answer filed by the appellee alleged that the money transferred to it from the Bankers Trust Company was the exclusive property of the State of Russia, but that the appellee owned and held unpaid Treasury notes of the State of Russia, which should be set off against the appellant's claim to this fund because the State of Russia was a nonresident, without funds within the jurisdiction with which to pay the Treasury notes, and the appellee had no means of enforcing or compelling payment thereof except by way of set-off in this action.

It was held below that the fund was released from any claim of the Bankers Trust Company, and that the appellee was entitled to set off against the claim an equal amount of the sum owing by the claimant to the appellee on account of its ownership of the Russian government's Treasury notes. An order of severance was entered, and the State of Russia was granted an appeal without the necessity of joining the Bankers Trust Company. The United States, as the assignee of Russia by an international agreement of November 16, 1933, became the substituted appellant. State of Russia v. National City Bank of New York, 69 F.(2d) 44 (C.C. A.2).

The first question is whether Equity Rule 30 (28 U.S.C.A. following section 723) bars a set-off of the Russian debt to the bank against the balance of the deposit. Rule 30 provides: "The answer must state in short and simple form any counterclaim arising out of the transaction which is the subject-matter of the suit, and may, without cross-bill, set out any set-off or counterclaim against the plaintiff which might be the subject of an independent suit in equity against him."

This suit is in equity, where it is recognized that debts should be paid, and the adjustments of demands by set-off rather than by independent suit is favored and encouraged. Insolvency of a party against whom a set-off is claimed is sufficient ground for equitable interference; so is nonresidence of the party against whom the set-off is asserted. North Chicago Rolling Mill Co. v. St. Louis Ore & Steel Co., 152 U.S. 596, 14 S.Ct. 710, 38 L.Ed. 565; Lindsay v. Jackson (1831) 2 Paige (N.Y.) 581. But cf. Green v. Farmer (1768) 4 Burr. 2214.

The principle of equity jurisdiction is in no way diminished or restricted by Equity Rule 30. No rule of court, even if so intended, can restrict jurisdiction. See Washington-Southern Nav. Co. v. Baltimore Co., 263 U.S. 629, 635, 44 S.Ct. 220, 68 L.Ed. 480. Indeed, Equity Rule 30 is designed to increase rather than decrease the set-offs usually permissible in equity by extending them to independent transactions. General Electric Co. v. Marvel Rare Metals Co., 287 U.S. 430, 434, 53 S.Ct. 202, 77 L.Ed. 408; American Mills Co. v. American Surety Co., 260 U.S. 360, 364, 43 S.Ct. 149, 67 L.Ed. 306. Under Rule 30, a legal demand cannot be set off in equity if there is an adequate remedy at law, Hyde v. Blaxter, 299 F. 167 (C.C. A.8), unless the set-off arises out of the same transaction and the plaintiff waives his right to a jury, Clifton v. Tomb, 21 F.(2d) 893 (C.C.A.4). In Chase National Bank v. Sayles, 30 F.(2d) 178, 182 (D.C. R.I.), the court, overruling a motion to strike out answers classed as counterclaims because neither could be the subject of an independent suit in equity, stated: "Equity rules are promulgated to do equity, not to defeat it." The distinction between a set-off in equity where there is no remedy at law against the plaintiff and a setoff in equity where there is an adequate remedy at law has been frequently pointed out. See Sinclair Refining Co. v. Midland Oil Co., 55 F.(2d) 42, 47 (C.C.A.4); Maryland Casualty Co. v. Board of Education, 20 F.(2d) 799, 801 (C.C.A.3). And, where special circumstances render the legal remedy inadequate, the set-off is available to a defendant in equity. Dykes v. Widdows, 31 F.(2d) 745 (C.C. A.8). It has been expressly recognized that "the argument for allowing a set-off is the stronger if the creditor, from any cause its sovereign immunity, cannot be coerced to pay this demand." United States v. Mann, 26 Fed.Cas. page 1151, No.15,716.

There has never been any doubt either at law or in equity that one debt was equally as entitled to payment as another. The only doubt was whether the trial of the two claims in the same case was convenient. In equity, inconvenience is not allowed to accomplish an injustice by preventing a set-off if it appears that a defendant has no adequate means for recovery in a separate action.

The next question is whether sovereign immunity from suit bars this set-off. Set-offs against the sovereign United States have been allowed where it was plaintiff. United States v. Wilkins, 6 Wheat.(19 U.S.) 135, 5 L.Ed. 225; United States v. MacDaniel, 7 Pet.(32 U.S.) 1, 8 L.Ed. 587; United States v. Kimball, 101 U.S. 726, 25 L.Ed. 835; United States v. Ringgold, 8 Pet. (33 U.S.) 150, 8 L.Ed. 899. The Supreme Court has held, independently of any statute, that, where the sovereign brings a suit, it submits to the application of the same principles which govern private suitors. The Paquete Habana, 189 U.S. 453, 23 S.Ct. 593, 47 L.Ed. 900; The Nuestra Senora de Regla, 108 U.S. 92, 2 S.Ct. 287, 27 L.Ed. 662; The Siren, 7 Wall.(74 U.S.) 152, 19 L.Ed. 129. In The Siren, supra, the principle of a sovereign plaintiff's submission to jurisdiction was held subject to the qualification that no affirmative judgment could be entered, but in The Nuestra Senora Case, supra, an affirmative judgment against a sovereign was upheld, and the previous qualification of the right against the government was removed. This was followed in 1902 in The Paquete Habana, supra, and later reaffirmed in United States v. The Thekla, 266 U.S. 328, 45 S.Ct. 112, 69 L.Ed. 313.

If a sovereign state goes into court seeking its assistance, it is in accord with the best principles of modern law that it should be obliged to submit to the jurisdiction in respect to a set-off or counterclaim properly assertable as a defense in a similar suit between private litigants. The Gloria, 286 F. 188 (D.C.S.D.N.Y.). See French Republic v. Inland Nav. Co., 263 F. 410, 411 (D.C.E.D.Mo.). Where a sovereign voluntarily litigates, he must play the role of a litigant like any other suitor and abide by the consequences. See Richardson v. Fajardo Sugar Co., 241 U.S. 44, 36 S.Ct. 476, 60 L.Ed. 879; People of Porto Rico v. Ramos, 232 U.S. 627, 34 S.Ct. 461, 58 L.Ed. 763; Clark v. Barnard, 108 U.S. 436, 447, 448, 2 S.Ct. 878, 27 L.Ed. 780. It is now established that, where a sovereign comes into court, he is unarmed with immunity as against the rights of a defendant who has a proper set-off to his claim. These considerations are effective in suit by governments functioning with normal powers and privileges. They are just as applicable to a suit by the State of Russia as here presented by the appeal of an assignee from Soviet Russia.

Claims arising out of the same transaction may be set off...