Rodgers v. Tindal , 46 N.C. App. 783 ( 1980 )

CLARK, Judge.

The question presented in this appeal is whether the trial court erred in entering the judgment in this action allowing the defendant to set off the amount owed by the decedent to defendant, at the time of the decedent’s death, against defendant’s debt owed to plaintiff for the post mortem purchase of assets in the decedent’s insolvent estate. We now reverse.

This case is controlled by Pate v. Oliver, 104 N.C. 458 (1889), in which an action was brought by the creditors of an intestate’s estate against the administrator of the estate on his administrator’s bond. At the time of his death, the intestate was engaged in the turpentine business and had leased for the year turpentine “boxes” for certain stipulated sums, payable at different periods. The administrator sold the turpentine in the boxes and the unexpired leases thereon. In certain instances the lessors were purchasers of the turpentine and unexpired leases. In actions brought by the administrator to recover the purchase price, the lessors interposed as a setoff or counterclaim the amount agreed to be paid by the intestate as rent for the whole year. On appeal the Supreme Court held:

“The estate is insolvent, and in such cases it is well settled that no counterclaim can be allowed which will give an undue priority to any creditor, and thus defeat the rights of the others to have the assets applied pro rata to their claims. (Citations omitted.)

The application of the proceeds of the sale of the unexpired terms as set-offs falls within the condemnation of the foregoing principle. They should have been collected and applied, like other assets, to the payment of the debts . . . .”

104 N.C. at 465.

The defendant asserts that Pate is not controlling because (1) the decision is an old one; and (2) the cases upon which Pate relies are not sound precedent for Pate. We are not persuaded by the first of these arguments and we are not at liberty to reverse a decision of our Supreme Court.

The defendant, however, contends that the general hierarchy of priorities for the payment of claims against a decedent’s estate in North Carolina, is not applicable because the defendant is both a creditor and a debtor of the estate. This argument does not bear up to close scrutiny. While it is true that a setoff would be allowed with respect to debts (mature or unmature) existing before decedent’s death (and this rule does not only apply to banks) this rule does not apply where, as here, the defendant became a debtor of the estate after the insolvent decedent’s death, the time at which the proportional rights of all creditors become vested. To allow the defendant to collect more in his role as a creditor merely because he “purchased” assets from the estate would, as the court in Pate observed, unduly prejudice all the other creditors. Contrary to the argument of the defendant, we will not “do equity” as between the estate and defendant at the inequitable expense of all the other creditors of the estate. This is precisely the kind of arrangement which G.S. 28A-19-13, set forth below, was designed to prevent:

“No personal representative or collector shall give to any claim any preference whatever, either by paying it out of its class or by paying thereon more than a pro rata proportion in its class.”

This result is supported by numerous cases in other jurisdictions. Barber v. Westchester Bank and Trust Company, 205 Misc. 673, 129 N.Y.S. 2d 376 (1954); Supreme Liberty Life Insurance Company v. Ridley’s Administrator, 261 Ky. 403, 87 S.W. 2d 940 (1935); Hampton Roads Fire & Marine Insurance Company v. Cobum Motor Car Company, 158 Va. 675, 164 S.E. 723 (1932); Mahon v. Harney County National Bank, 104 Or. 323, 206 P. 224 (1922); Laighton v. Brookline Trust Company, 225 Mass. 458, 114 N.E. 671 (1917); Annot. 36 A.L.R. 3d 693 (1971); Annot. 7 A.L.R. 3d 908 (1966).

We do not see this result as inconsistent with the procedural rules allowing a setoff to be pleaded as a counterclaim. Rule 13(b), N.C.R. Civ. P. The mere fact that one may plead a right does not determine the extent to which that right exists. Here defendant’s counterclaim against the estate is limited to his pro rata share of the funds available for his class of creditors. This outcome may be harsh, but it is no harsher than the consequences of the insolvency faced by all of the creditors in his class.

Reversed.

Judges Hedrick and Vaughn concur.