Darby v. Freedman's Savings & Trust Co.

delivered tbe opiniou of the court, in substance as follow's:

We think the decree below should be affirmed. It is admitted that Mrs. Darby proposed to pay the debt of her husband to the assignees of the company, provided they would allow her to set off the amount of $1,752 which stood in her own name and exclusive credit on the books of the company. They refused that offer and insisted upon selling the property embraced in the trust deed to pay the whole of it out of the estate of her husband.

The company is insolvent, and the defendants, who are its assignees, contend that she can only be allowed the dividends upon her deposit, like the other creditors of the institution. She files her bill for an account and to restrain the threatened sale, and claims the right in equity to set off the amount of her said deposit against the sum due upon the promissory note of her husband. On the other hand, the assignees filed a cross-bill to obtain a decree for the sale of the property. The court below enjoined the sale and decreed the assignees to credit her with the whole amount the company owed her separately upon the debt, and that she should pay the balance, or the property should be sold. From this decree they have taken an appeal, and insist with great earnestness that they are entitled to collect all the money due upon the note, and that she is only entitled to the dividend of a general creditor.

The rule in a court of equity, where the wife executes a security for the indebtedness of the husband, is explained to some extent in the case of Huntington v. Huntington, 2 Brown’s P. C., 110, and is still more fully stated in the American notes to this case in White and Tudor’s Leading Cases in Equity, beginning at page 1938, where it is said: “A wife who mortgages her estate for the benefit of her husband is a surety, and as such is entitled to an indemnity from him, and his assets will, if the circumstances admit, be taken in the first instance to satisfy the mortgage.” It is also said, in a subsequent part of the same note, that “ the equitable principles relating to sureties apply equally to a wife mortgaging her *357estate for her husband’s benefit; and it is well settled that a valid agreement between the creditor and husband, by which the time of payment is extended, will, if unauthorized by the wife, discharge her mortgage.” The wife in this instance having mortgaged her owu property for the debt of her husband, is entitled to the rights that belong to any other surety, and the fact that she did not join in the note cannot deprive her of this privilege. This court has already decided that a debtor to this company at the time of its failure will uot be allowed to set oft' debts which he has subsequently bought up from other parties. The creditors of the institution all stand upon an equal footing, and a party will not be permitted to gain an advantage in that way. But that is not the question here. Mrs. Darby had funds to her credit in the hands of the company at the time of the failure. Her husband is now dead, and the company have advertised the property for sale. We have seen that she occupies the position of a surety on her husband’s debt, and the question is, whether, as such surety, she shall be allowed to set oft' her own claim against the indebtedness of the husband. If the principal was entitled to a credit in the company’s books at the time of its failure, he could undoubtedly set it off against his $2,000 note. The surety is not in a worse condition than the principal in a court of equity. And surely if the principal, upon being sued by the creditor, could claim in equity a set-off, the surety is entitled to the same benefit.

There is a very learned note in 2 Smith’s Leading Cases, marginal paging 320, sixth American edition, from which I feel at liberty, in view of the importance of the question, to extract one or two passages. After stating the general doctrine in regard to set-off, the author says:

“ It follows from these principles that when a cause of action is transferred by an assignment which passes the legal title, a debt due by the assignor cannot be pleaded as a defense to a suit brought by the assignee, because the mutuality which is essential to a set-off is gone in form, and the court cannot look outside of the record to see whether it ex*358ists in substance. (Spencer v. Babcock, 22 Barb., 326; Beckwith v. The Union Bank, 5 Seld., 211.) But the injustice which this rule is calculated to produce has been remedied in some instances by statute, and in others by the judicial introduction of a more equitable principle; and it is now.well settled, in general, that when the assignees or personal representatives of a bankrupt or insolvent are plaintiffs or defendants, the right of set-off will extend to all demands that could be proved by or against the estate, without regard to the period when they become due, or the person in whom the right of action is nominally vested. (Clark v. Hawkins, 5 R. I., 219; Aldrich v. Campbell, 4 Gray, 284; Fennell v. Nesbit, 16 B. Monroe, 551; Morrow v. Bright, 20 Miss., 298.) Thus, in Marks v. Baker, 1 W. C. R., 178, a liability incurred by endorsing the bills of a bankrupt was allowed' to be set off against a suit brought by his assignee, on the ground that although it would not have been provable as a debt, it was clearly a case of mutual credit; and a similar view was taken in Jones v. Robinson, 26 Bark., 310, of the relation between a bank and one of its depositors, whose acceptance it had discounted. Dealings between an insurance company and its customers have also been held to have a character of mutuality which entitles the latter to set off’ the amount due for losses, although not yet definitely ascertained or liquidated in a suit brought for premiums by the assignees or receiver’s who are charged with the task of winding up the affairs of the company. (Holbrook v. Receiver, 6 Paige, 220.) For as an assignee in bankruptcy or insolvency is not a purchaser, he will take subject to any equity that could have been made available against the assignor. (Mess v. Goodman, 2 Hilton, 275.) In Tucker v. Oxley, 5 Cranch, 24, a debt due by a partnership was held to be a defense brought by the assignees of an insolvent member of the firm, thqre being special circumstances which gave both demands the character of mutual credits. And it is well settled in Massachusetts that unliquidated demands, and demands growing out of a partial failure of consideration, may be set off’ in an action brought by the *359assignee of an insolvent during Ms life, or by his executors after his decease.”

The doctrine is illustrated in the numerous cases cited, but I will only refer to that of Aldrich v. Campbell. The opinion of the court was delivered by Thomas, J., in which he says:

“This case is not to be determined upon the technical rules of set-off, but upon the principles regulating the settlement of insolvent estates, whether of persons living or deceased. The settlements with such estates are final, and all mutual demands are to be balanced; claims not liquidated and debts absolutely due, though payable in future, are to be included. In the case of an insolvent estate of one deceased, all claims existing at the time of the death are to be set off; in the case of an insolvent estate of a person living, all claims existing at the time of the first publication of the notice of the issuing of the warrant. The rules are the same in whatever form the question is to be settled.”

And to support these reviews he cites many cases. The same note contains a great variety of decisions showing when a set-off will be allowed and when refused. But it is plain from the authorities already referred to, that if Darby himself had been alive at the time of the failure of the company, with a credit on its books of $1,750 and owing it $2,000, the company could only claim the difference between these two sums. His wife, who occupies the position of a surety, has a much stronger equity to set off against the claim the money which she is entitled to as a depositor in the bank. For these reasons a majority of the justices who heard the argument are of opinion that the decree of the court below ought to be affirmed.

dissenting, said:

That he did not think the claim of Mrs. Darby could be set off' in this case, for the reason that the demands were not mutual debts, as that term is understood in a court of equity. It is undoubtedly true, that if Darby, in his life-time, could have claimed to set off the indebtedness to his wife against *360Ills own note, sho would now he entitled to the same benefit. But I suppose it will not be pretended that this set-oii' would be allowed the husband if he were alive and the assignees were suing him upon his note. IIow, then, can the wife have a benefit which would be denied the husband ? Simply not for the reason that the debts are not mutual, aud the wife is therefore in the same plight and condition as her husband. It is said she is a surety. But the liability of the surety arises only upon the default of the principal, and upon satisfying the debt she is entitled to be subrogated to all the securities in the hands of the creditor. Now, what is the case here ? The defendants are assignees or trustees of an insolvent corporation. They take its assets just in the condition they were at the time of the failure; and the rights of the creditors of the corporation from that moment become vested, and cannot be impaired by any subsequently acquired claims of other persons. It is true that the debtors do not lose any of their rights of set-off which they had at the time the corporation became insolvent. But the assignees or trustees take the assets subject to this and other existing liens in trust for equal distribution among all the general creditors, and no one can obtain any advantage over them by means of anything that may happen afterwards. This doctrine is fully sustained by the cases cited in the note referred to in 2 Smith’s Leading Cases, 6th Am. ed., 320. And this court has decided, with reference to this institution, that a debtor could not set off a claim purchased after notice of the failure of the bank. This is upon the principle that no one can obtain an unfair advantage to the injury of the other creditors. Now, Mrs. Darby acquired her title absolute to the property in question long after the corporation had closed its doors. The note was made by Darby in August, 1872, payable in one year. On June 29, 1874, after the note was overdue, the bank suspended and the trustees took possession of all its hooks and assets. Afterwards, in March, 1875, Darby died, leaving a will giving all his property to his wife. Before this event the corporation creditors had become entitled *361to an equal distribution of its assets, just as they were in the month of June of the previous year. Among those assets was Darby’s note for $2,000, which had been overdue for nearly a year. When the bank stopped, clearly Darby, who was then alive, could not have availed himself of the offset now claimed; and the whole amount of the note therefore became vested in the trustees for the benefit of the creditors. The subsequently acquired title of Mrs. Darby.could not affect this vested interest. At the time she joined in the trust deed, she was only entitled to a life estate in a portion of the property, and I am unable to see how the subsequent death of her husband, leaving a will whereby he devised her all his property, can-divest to any extent the equities already acquired by the trustees for the benefit of other creditors. If it be admitted that she is in the situation of a surety in respect of her life estate in a portion of the property, which was the only interest she could convey, it cannot, I think, be pretended that she is also a surety in respect of the land belonging in fee-simple to her husband, or the title to the rest of the property of which he was seized in fee in right of his wife. With reference to these she could acquire no rights of suretyship which could affect the interest of the creditors, for she did not and could not mortgage them. . In my judgment she should not, therefore, be permitted to take all the real-estate securities without this incumbrance, simply upon paying the difference between her husband’s debt and her own claim.

I have not found a decision which sustains the doctrine that a surety can seize upon all the collateral securities and set off at the same time a personal claim against the indebtedness of the principal. Perhaps it would be indecorous in me to say there are no authorities to that effect, since a fuller examination than I have had an opportunity to bestow might discover that I was in error. But for the reasons stated I am of opinion that the deci’ee below ought to be reversed.