Walter v. National City Bank of Cleveland

• Decision Date: 25 June 1975
• Docket Number: No. 74-825,74-825
• Citation: 71 O.O.2d 513,42 Ohio St.2d 524,330 N.E.2d 425
• Parties: , 71 O.O.2d 513 WALTER, Appellee, v. The NATIONAL CITY BANK OF CLEVELAND, Appellant.
• Court: Ohio Supreme Court

Page 524

42 Ohio St.2d 524

330 N.E.2d 425, 71 O.O.2d 513

WALTER, Appellee, v. The NATIONAL CITY BANK OF CLEVELAND, Appellant.

No. 74-825.

Supreme Court of Ohio.

June 25, 1975.

Syllabus by the Court

1. Setoff is not strictly limited by statute, and the courts can allow setoff upon equitable principles where necessary to prevent clear injustice.

2. Equitable setoff is not available on grounds of insolvency where the loan sought to be set off was voluntarily and knowingly made after the occurrence of the debtor's insolvency. (Union Properties v. Baldwin Brothers Co., 141 Ohio St. 303, 47 N.E.2d 983, distinguished.)

3. A bank regulation which permits the bank to apply the balance of a commercial account to any indebtedness, whether due or to become due, owed to the bank by the owner of the account, does not permit the bank to set off the account against a promissory note for a date certain before the maturity of the note.

This is an action in civil conversion, involving claims of priority of right to a commercial bank account of Ritzer of Austria, Inc. In the fall of 1969, Ritzer opened a commercial account with The National City Bank of Cleveland, appellant herein. On April 14, 1971, Ritzer executed a 90-day promissory note to appellant in the amount of $3,600, although Ritzer's balance sheet, as of March 31, 1971, showed the company to be insolvent. On May 11, 1971, Robert A Walter, appellee herein, recovered a judgment against Ritzer in the Euclid Municipal Court for $6.831.95. The following day, the appellant bank was served by mail as garnishee with an order in aid of execution. At the time of service, Ritzer had on deposit with appellant the sum of $3,651.75. The unmatured debt on appellant's promissory note totalled $3,626.25, including interest accrued. On May 24, 1971, appellant sent a letter to the Euclid Municipal Court stating that it was setting off the amount of its loan, leaving a balance of $25.50. Appellant mailed its check for the balance to the Euclid Municipal Court on July 22, 1971.

Appellee brought this action in the Court of Common Pleas of Cuyahoga County. Both parties moved for summary judgment, and judgment was granted for appellee. The Court of Appeals affirmed.

The cause is now before this court pursuant to an allowance of a motion to certify the record.

Gary B. Kabat, Cleveland, for appellee.

Craig W. Smith, Cleveland Heights, for appellant.

STERN, Justice.

The appellant bank claims a right of equitable setoff of an unmatured indebtedness of its depositor, as against a judgment creditor seeking to reach the depositor's account by an order in aid of execution. Appellant concedes that it has no statutory right of setoff under R.C. 2309.19.

Setoff, both at law and in equity, is that right which exists between two parties, each of whom under an independent contract owes a definite amount to the other, to set off their respective debts by way of mutual deduction. Witham v. South Side Bldg. & Loan Assn. of Lima (1938), 133 Ohio St. 560, 562, 15 N.E.2d 149.

As a general rule, the courts have held that a bank may set off a bank account against the matured indebtedness of its depositor, although the bank has been garnisheed at the instance of a creditor of the depositor. Schuler v. Israel (1887), 120 U.S. 506, 7 S.Ct. 648, 30 L.Ed. 707; Bennett v. Campbell (1889), 189 PA. 647, 42 A. 373; ANNOTATION, 106 a.l.r. 62. in bank v. BREWING Co. (1893), 50 Ohio St. 151, 33 N.E. 1054, it was held that a bank could set off the amount of an insolvent depositor's checking account against an unpaid and overdue note, without the knowledge or consent of the depositor, and that the bank could refuse payment of a check drawn on the account. The theory of these cases is that a bank stands in the relationship of debtor to its depositor, and has the right to apply the deposit to payment of the depositor's matured debts or obligations held by the bank, in the same way that another debtor might assert setoff as a defense to an action on the debt. Holloway v. First Natl. Bank of Pocatello (1928), 45 Idaho 746, 265 P. 699.

In fact, the exercise of setoff by a bank is often quite different from the case of a usual debtor-creditor relationship. A bank account is a debt, but one which is ordinarily subject to demand withdrawal at any time, and one which imposes clear responsibilities upon the bank depending upon the nature of the account. Historically, the bank's right to setoff derives from the bank lien of the law merchant, and that right still possesses some of the characteristics of a lien, since it permits the bank by self-help to take priority over others claiming a right to the funds on deposit. ¹ Whereas, in the case of an ordinary debtor, setoff is available as an equitable and statutory defense, in the case of a bank, setoff becomes a means by which the bank, because of its position as a commercial middleman, acquires a priority of right whenever it acts as creditor for a depositor.

The courts have generally held that the bank does not have a priority of right in equity where the bank seeks to set off an unmatured indebtedness. United Bank & Trust Co. v. Washburn & Condon (1930), 37 Ariz. 223, 292 P. 1025; Gerseta Corporation v. Equitable Trust Co. of New York (1926), 241 N.Y. 418, 150 N.E. 501; Stockyards Nat. Bank v. Presnall (1917), 109 Tex. 32, 194 S.W. 384. Cf. Valley National Bank of Arizona v. Hasper (1967), 6 Ariz.App. 376, 432 P.2d 924. An unmatured debt is not presently due or collectible and is not available for setoff, since setoff would alter the contract made by the parties.

An exception to this rule has been made in cases where the depositor is insolvent. In Schuler v. Israel, supra (120 U.S. 506, 7 S.Ct. 648, 30 L.Ed. 707), the court noted that a defense in equity was available to a bank-debtor to prevent an insolvent depositor-creditor from obtaining payment of his debt, where an unmatured obligation was available as setoff and would be lost due to the insolvency.

The same equities do not apply in the case at bar. Here, the negotiation of a 90-day promissory note to Ritzer occurred after the date upon which, the bank itself asserts, Ritzer's balance sheet showed the company to be insolvent. In sum, the bank made a loan for a definite term to an insolvent depositor, and now claims that as a matter of equity it is entitled to priority of right to its depositor's account because of the insolvency. We disagree. The extension of credit to an insolvent was a voluntary act, whether negligent or merely lacking in sound banking practice. In the present case, no equity appears which would require granting priority to the bank's unmatured obligation over the judgment of the appellee. ²

Lack of maturity is not always permitted to defeat the right of setoff where that right is the only way to prevent clear injustice, and the courts have frequently applied equitable principles in cases of insolvency. 'Where insolvency has intervened, a court will not be limited to a strict application of statutory set-off but will apply the doctrines of equity.' Union Properties v. Baldwin brothers Co....