Victor Werlhof Aviation Ins. v. Garlick, 88-528

• Decision Date: 06 April 1989
• Docket Number: No. 88-528,88-528
• Citation: 771 P.2d 962,237 Mont. 51
• Parties: VICTOR WERLHOF AVIATION INSURANCE, Plaintiff and Respondent, v. Ronald GARLICK, d/b/a Garlick Helicopters, Defendant. v. FARMERS STATE BANK, a Montana Banking corp., Garnishee-Appellant.
• Court: Montana Supreme Court

Page 962

771 P.2d 962

237 Mont. 51

VICTOR WERLHOF AVIATION INSURANCE, Plaintiff and Respondent, v. Ronald GARLICK, d/b/a Garlick Helicopters, Defendant. v. FARMERS STATE BANK, a Montana Banking corp., Garnishee-Appellant.

No. 88-528.

Supreme Court of Montana.

Submitted on Briefs Jan. 12, 1989.

Decided April 6, 1989.

Jeffrey H. Langton, Hamilton, for garnishee-appellant.

Charles J. Tornabene, Patterson, Marsillo, Tornabene and Schuyler, Missoula, for plaintiff and respondent.

George T. Bennett, Montana Bankers Associates, Helena, for amicus curiae.

SHEEHY, Justice.

The principal issue in this case is whether a bank, otherwise lawfully entitled to a setoff, may exercise its right of setoff against a depositor's account at the same moment it is presented with a writ of execution which seeks to levy on the same depositor's account. We uphold the right of the Bank to the setoff.

A second issue is whether a bank may set off a matured debt against a depositor's account when the debt is secured by collateral. Again, we hold that the Bank's right of setoff in this case is not barred by the presence of collateral.

A third issue is whether Sec. 30-4-303, MCA, modifies the Bank's right of setoff. We hold that Sec. 30-4-403 has no application in this case.

Farmers State Bank appeals from an order of the District Court, Fourth Judicial District, Ravalli County, which held that the Bank holds property of a depositor to which a judgment creditor of the depositor Victor Werlhof Aviation Insurance, had a right. The order forbade the Bank to transfer or otherwise dispose of the depositor's monies until the judgment creditor, Victor Werlhof Aviation Insurance, could commence and prosecute to judgment an action against the Bank for recovery of the monies which the District Court held were wrongfully set off by the Bank. The order is in the nature of an injunction and is thus appealable under Rule 1, M.R.App.P. We reverse the District Court and vacate the prohibitive order.

There is no dispute as to the evidentiary facts. Victor Werlhof Aviation Insurance first obtained a judgment against Garlick Aviation on April 11, 1986 in Missoula County District Court for $10,391.46. The judgment was abstracted to Ravalli County District Court on May 19, 1986. That court issued a writ of execution on June 4, 1986 directed to appellant Farmers State Bank of Victor, Montana, against Garlick's account in the Bank. Garlick owed monies on a delinquent note to the Bank at the time of the execution of the first writ. The return of service of the June 4 execution indicated that Garlick's account held $3,276.97, but the Bank claimed a setoff against the monies for a delinquent note of $80,000.00 which Garlick had executed to the Bank in 1982.

On January 15, 1988, on behalf of Victor Werlhof Aviation Insurance, a second writ of execution was issued by the court. This writ was presented by the sheriff to the Bank in the same manner as the first writ. At the time the Bank received the writ, Garlick owed the Bank a monthly payment of $2,895.10 which was due as of January 1, 1988. The overdue payment was a monthly obligation in satisfaction of a debt underlying a contract for deed which had been assigned to the Bank in a separate bankruptcy by a party not involved in these proceedings. The Bank, when the judgment creditor's writ was presented, set off Garlick's checking account balance toward the January 1, 1988 overdue installment. Victor Werlhof Aviation Insurance then sought supplemental proceedings in aid of execution against the Bank. The District Court held against the Bank and it appealed to this Court.

1. May the Bank claim set off against a depositor's account at the moment it is presented with a writ of execution to be levied upon the account?

The basis of a bank's right to set off its depositor's accounts against matured debts owed by the depositor to the bank was recently discussed by this Court in Bottrell, Reeve and Northern Line Layers, Inc. v. American Bank (f/k/a Western State Bank), Jim Beaton and Marty Derrig, --- P.2d ---- (No. 87-209, Decided April 5, 1989). There we said, citing Spratt v. Security Bank of Buffalo, Wyo. (Wyo.1982), 654 P.2d 130, 135-136:

We next reach appellant's claim that the bank's set-off should fail for lack of mutuality between appellee and Gail Fanning. Before going further, we need to discuss a bank's right to setoff against the general deposits in its possession. The bank's right of set-off to secure the payment of its depositor's indebtedness is a part of the law merchant and well established in commercial transactions. (Citing authority.) For a bank to establish a right to set off, three conditions must be met: "the fund to be setoff must be the property of the debtor, the fund must be deposited without restrictions, and the existing indebtedness must be due and owing." (Citing authority.) The bank's right to setoff does not arise until the time the depositor's indebtedness to the bank has matured. (Citing authority.) Addressing appellant's point, for set-off to be permissible, there must be mutuality of obligation between the debtor and his creditor, as well as between the debt and the fund on deposit. (Citing authority.) Debts to be used as set-offs must be due to and from the same persons in the same capacity. (Citing authority.)

The right of setoff is not limited exclusively to banks. Such right exists between any mutual debtors and creditors where the debts have matured and the parties mutually are debtors and creditors of and to each other. Thus, because setoff is a common law right, it exists independently of statutes, unless, of course, statutes affecting setoff have been enacted.

The banker's right to setoff is the common law equitable right of the bank to apply the general deposits of a depositor against the matured debts of the depositor. The right grows out of the contractual debtor-creditor relationship created between the depositor and the bank at the time the account is opened, Security State Bank of Comanche, Okl. v. W.R. Johnston & Co. (1951), 204 Okl. 160, 228 P.2d 169; and it rests on the principle that it would be inequitable to permit the debtor-depositor to carry an open account that induces the bank to extend credit, and then allow the debtor to apply the funds to other purposes because he had not expressly agreed to apply them to the debt. Melson v. Bank of New Mexico (1958), 65 N.M. 70, 332 P.2d 472; Southwest Nat'l Bank v. Evans (1923), 94 Okl. 185, 221 P. 53. It is a general rule that when a depositor is indebted to a bank, and the debts are mutual--that is, between the same parties and in the same right--the bank may apply the deposit, or such portion thereof as may be necessary, to a payment of the debt due it by the depositor, provided there is no express agreement to the contrary and the deposit is not specifically applicable to some other particular purpose. Security State Bank of Melrose, Minn. v. First Nat'l Bank of Ismay (1927), 78 Mont. 389, 254 P. 417. For a bank to establish the right to setoff, the fund to be set off must be owed by the Bank to the debtor, the fund must be deposited without restrictions, and the existing indebtedness must be due and owing. Federal Deposit Ins. Corp. v. Pioneer State Bank (1977), 155 N.J.Super. 381, 382 A.2d 958.

As to the writ of execution levied against the Bank on June 4, 1986, the District Court held that though the Bank was not entitled to a setoff, since Victor Werlhof did nothing further about it, Victor was barred by laches from recovery as to the proceeds of the first writ of execution. Victor Werlhof has not cross-appealed on this holding, and so we do not concern ourselves with the result in the District Court as to the levy of the first execution writ.

As to the second writ of execution, it is undisputed that Garlick was delinquent under the contract for deed in not making the monthly payment of $2,895.10 due the Bank on January 1, 1988. On January 21, 1988, when presented by the sheriff with the second writ of execution, the Bank claimed a setoff of $1,697.41 from Garlick's checking account against the delinquent indebtedness. Victor Werlhof contends that since the Bank had taken no action to set off the account before the writ was presented, the checking account was subject to the writ from the moment of its issuance on January 15, 1988, and thus preceded any right of the Bank to setoff. The Bank, on the other hand, contends that its setoff occurred when the monthly payment was not made--at the moment the debt matured in other words.

Neither contention is correct. The Bank acquired a right to setoff when Garlick's payment became delinquent, but the Bank must take positive steps to accomplish the setoff. As to a...