Wisdom v. Guess Drycleaning Co.

• Decision Date: 13 January 1934
• Docket Number: No. 440.,440.
• Citation: 5 F. Supp. 762
• Court: U.S. District Court — Southern District of Mississippi
• Parties: WISDOM et al. v. GUESS DRYCLEANING CO., et al.

5 F. Supp. 762

WISDOM et al. v. GUESS DRYCLEANING CO., et al.

No. 440.

District Court, S. D. Mississippi, Jackson Division.

January 13, 1934.

H. V. Wall, of Brookhaven, Miss., for plaintiffs.

Brady, Dean & Hobbs, of Brookhaven, Miss., for defendants.

HOLMES, District Judge.

This is a suit in equity to foreclose a deed in trust given to secure a partnership indebtedness. It was filed by the receiver of an insolvent national bank, who alleges that he has every reason to believe that the property described in the trust deed will not bring enough to satisfy the indebtedness, and asks for a decree for any deficiency against the individual members of the firm.

At the time the bank closed its doors, the indebtedness was evidenced by a note of $2,300, and one of the partners, Mrs. E. B. Guess, had on deposit $2,095. The other partner, D. W. Love, being unable to make any substantial contribution to the payment thereof, Mrs. Guess paid to the receiver the interest, accrued to date, and $300 upon the principal, thereby reducing the firm's indebtedness to $2,000, and directed the receiver to charge this balance against her individual deposit and cancel the note. This, the receiver refused to do, claiming that a partnership is a separate entity, distinct from the individuals composing it, and that a set-off of an individual deposit against a partnership debt is not permissible. The defendants are not asking for any decree in their favor, but merely to offset an amount of Mrs. Guess' deposit equal to the plaintiffs' claim, after all proper credits have been deducted from the indebtedness due by the partnership.

The Mississippi statute with reference to releasing one or more joint or joint and several debtors, and giving the right to sue them separately or to sue jointly and obtain separate judgments against them, without releasing the others (chapter 39, Code 1930 sections 2027, 2028), abolishes all distinctions in remedies upon joint and several obligations (Steen v. Finley, 25 Miss. 535), but does not abolish the distinction in substance between such obligations. Kimbrough v. Ragsdale, 69 Miss. 674, 13 So. 830. Equity Rule 42 (28 USCA § 723) provides: "In all cases in which the plaintiff has a joint and several demand against several persons, either as principals or sureties, it shall not be necessary to bring before the court as parties to a suit concerning such demand all the persons liable thereto; but the plaintiff may proceed against one or more of the persons severally liable." Although cited and relied on in the briefs, neither the above statute nor rule will solve our present problem, wherein there is a plea of set-off to a suit in equity, and all interested parties are represented. The solution will be found in the general principles of equitable set-off, and a local law creating set-off as a statutory right, considered in connection with the relation of individual partners to firm liabilities.

According to the modern view, the question is one of substance and not of procedure. The Gloria (D. C.) 286 F. 188, 192, 193; Champlin Refining Co. v. Gasoline Products Co. (C. C. A.) 29 F.(2d) 331, 338, affirmed U. S. v. The Thekla, 266 U. S. 328, 45 S. Ct. 112, 69 L. Ed. 313. It is controlled by federal decisions, except to the extent that the right may be enlarged by section 537, Mississippi Code 1930, as construed by state decisions. Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co. (C. C. A.) 15 F.(2d) 509, 513; Id., 276 U. S. 518, 529, 48 S. Ct. 404, 72 L. Ed. 681, 57 A. L. R. 426; First National Bank of Shenandoah v. Liewer (C. C. A.) 187 F. 16, 18; United States v. Robeson, 9 Pet. 319, 323, 9 L. Ed. 142. Debts which are mutual may be set off against each other. Barrington v. Maner (C. C. A. 5th Cir.) 54 F.(2d) 917. There must be mutuality of rights as well as of parties. A trustee may not set off a trust deposit against a personal debt. Thomas v. Potter Title & Trust Co. (D. C.) 2 F. Supp. 12. A separate debt may not be set off against a joint debt, and vice versa. 2 Story's Eq. (6th Ed.) § 1437; Scammon v. Kimball, 92 U. S. 362, 367, 23 L. Ed. 483. Courts of equity frequently deviate from the strict rule of mutuality when the justice of the particular case requires it; for instance, on account of the insolvency or nonresidence of the judgment plaintiff. Blount v. Windley, 95 U. S. 173, 177, 24 L. Ed. 424; Scott v. Armstrong, 146 U. S. 499, 507, 13 S. Ct. 148, 36 L. Ed. 1059. In North Chicago Rolling Mill Co. v. St. Louis Ore & Steel Co., 152 U. S. 596, 14 S. Ct. 710, 38 L. Ed. 565, it is held that insolvency of the party against whom a set-off is claimed is a sufficient ground for equitable interference. The court also stated (at page 615 of 152 U. S., 14 S. Ct. 710, 715): "The adjustment of demands by counter-claim or set-off, rather than by independent suit, is favored and encouraged by the law, to avoid circuity of action and injustice. Florida Railway Co. v. Smith, 21 Wall. 255 22 L. Ed. 513."

This brings us to the concrete question, whether a separate debt may be set off against a joint and several obligation in a suit in equity, by the receiver of an insolvent national bank, when a personal decree is being sought against each of the individuals composing the partnership. The receiver contends that, while the debt to Mrs. Guess is several, the debt of the partnership to the bank is joint. The fundamental error in this is believed to lie in the distinction between joint and joint and several obligations. A partnership is not an entity distinct from its members. Blackwell v. Reid, 41 Miss. 102; Francis v. McNeal, 228 U. S. 695, 33 S. Ct. 701, 702, 57 L. Ed. 1029, L. R. A. 1915E, 706. In the latter case, Mr. Justice Holmes said: "But the fact remains as true as ever that partnership debts are debts of the members of the firm, and that the individual liability of the members is not collateral like that of a surety, but primary and direct, whatever priorities there may be in the marshaling of assets. The nature of the liability is determined by the common law, not by the possible intervention of the bankruptcy act. Therefore ordinarily it would be impossible that a firm should be insolvent while the members of it remained able to pay its debts with money available for that end. A judgment could be got and the partnership debt satisfied on execution out of the individual estates." This case is cited and followed by the Supreme Court of Mississippi in Nashville Saddlery Co. v. Green, 127 Miss. 98, 89 So. 816. To the effect that the liability of partners is joint and several, see, also, Dinwiddie v. Glass, 111 Miss. 449, 71 So. 745; Bank of Tupelo v. Hulsey, 112 Miss. 332, 73 So. 621; Wise v. Cobb, 135 Miss. 673, 100 So. 189.

While the decisions of state courts are persuasive only, except as previously indicated, many, in actions at law, uphold the defendants' contention that the set-off should be allowed. Some, with blended legal and equitable jurisdictions, administer the relief without stopping to consider whether they are construing a statute or invoking inherent equitable powers. Wilson v. Exchange Bank, 122 Ga. 495, 50 S. E. 357, 69 L. R. A. 97, 2 Ann. Cas. 597; Leach v. Lambeth, 14 Ark. 668; McAllister v. Millhiser, 96 Ga. 474, 23 S. E. 502; Boeger & Buchanan v. Hagen, 204 Iowa, 435, 215 N. W. 597, 55 A. L. R. 562; Loeb v. Loeb, 24 Okl. 384, 103 P. 570; McKay v. H. A. Hall & Co., 30 Okl. 773, 120 P. 1108, 39 L. R. A. (N. S.) 658; Pitcher v. Patrick's Adm'rs, Minor (Ala.) 321, 12 Am. Dec. 54. In a note to Gregg v. James, 12 Am. Dec. at page 156, it is stated: "Where the demand sued is joint and several, any one of the defendants may set off a debt due to himself alone from the plaintiff. This is put on the ground that in reality there is a distinct action against each defendant in such a case for the whole debt, to which he may separately plead payment or tender out of his own money; and that a plea of set-off rests upon the same principle. Citing authorities."

In 24 R. C. L. 866, the rule is thus stated: "It is established in most of the states that in a suit against two or more persons on a joint obligation, set-off is not available to less than the entire number of defendants. The reason of this rule is plain. A joint obligation is indivisible. Each one of the obligors is bound to the same extent and in the same manner as all the others. A separate judgment against less than the entire number would be impossible; and in this very fact of indivisibility lies the security to the obligee of accepting a joint obligation. But though contrary to the English rule, it is quite generally held in the United States that where two or more defendants are joined in an action to which they are severally liable, and in which a separate judgment may be taken against them, a cross demand in favor of any one of the defendants against the plaintiff comes within a fair construction of the requirement of mutuality, and may be asserted. This is put on the ground that in reality there is a distinct action against each defendant in such a case for the whole debt, to which he may separately plead payment or tender out of his own money; and that a plea of set-off rests upon the same principle. This rule has been made statutory in a number of states. Though the demand was originally joint, if it afterwards becomes separate, as in an action by a surviving partner, a separate debt due from him is a good set-off. And if the plaintiff has treated an obligation as due from him to all the defendants he is estopped to allege that it is an obligation due to one only. In several jurisdictions it is held that one of the makers of a joint obligation may set off a debt due from the obligee to him individually, and in some jurisdictions all distinctions between joint and several obligations have been abrogated by statute. It seems that in the absence of any statute requiring it, a claim to recoup need...