Woodlawn Federal Savings Loan Ass'n v. Williams , 237 Ala. 446 ( 1939 )

Our understanding of the status of this situation may be explained by first assuming that at the time of insolvency of the bank it held a debt against Richards, and one against Hershey secured by a pledge of an obligation which the association owed them, respectively. We will first treat the situation as though that obligation were for the immediate payment of money. So that at that time the bank, as pledgee, could, without foreclosure of the pledge, sue the association as collateral debtor. Missouri State Life Ins. Co. v. Robertson Banking Co., 223 Ala. 13, 134 So. 25, and cases there cited.

There could be in that status no reason to suppose that in such a suit against the association it could not offset against its liability as collateral debtor the amount of the deposit owing it by the bank. The right of a pledgee to enforce payment of claims held in pledge before foreclosure is not to be confused with the liability of the pledgee as a stockholder. A pledgee of stock is not liable for its obligations until it is foreclosed and he becomes the purchaser. 7 Corpus Juris 773, section 617; Rankin v. Fidelity Ins. Co., 189 U.S. 242, 23 S. Ct. 553, 47 L. Ed. 792.

But the argument is that conceding that to be true, the effect is to reduce the debts of Richards and Hershey to the bank by the amount of such offset, for as to them it would amount to a collection of that much of their debts to the bank, and thereby reduce their value as assets of the bank, without adding corresponding value. But conceding that result, it is a status which existed at the moment of insolvency, and the debts of Richards and Hershey to the bank were subject to that value on that account by virtue of a status existing at that moment. The effect of the offset on those debts was merely the result of conditions then existing. As assets of insolvency and at the inception of the trust status under which they were held they had this burden fixed upon them. When those debts were created and the collaterals transferred, they became subject to the right of set-off and thereby was created the value of those debts as assets, and they went into insolvency in that legal status and became assets subject to that encumbrance.

When so, all the authorities agree that insolvency does not prevent the assertion of the right of set-off, and thereby no preference is created.

As we have pointed out, the fact that the liability of the association had not then matured into a status whereby it owed money as the collateral debtor, its contract with Richards and Hershey at the time of the pledge and as a part of it was such as thereby it later became an obligation to pay money, but subject to the offset insofar as the bank was concerned in equity, because in equity it would be treated as a liability from the beginning. The equitable right of set-off was effective on it while it was a potentiality, enforceable when it ripened into an obligation to pay money. So that in no aspect has any feature of the trust fund been depreciated since the trust began by or on account of such a set-off.

KNIGHT, J., concurs in the foregoing dissent.