Ex Parte M.F.S. L. Ass'n , 199 S.C. 23 ( 1942 )

I find myself out of agreement with the main opinion in this case, written by Mr. Associate Justice Baker.

The whole spirit of the leading opinion is that the appellant is entitled to the offset it claims, under the liberal principles of equity.

The appellant, in its brief, states the question for determination by the Court as follows: "Did the Mechanics Federal Savings and Loan Association, indebted by notes to the insolvent Central Union Bank, which said association was a depositor of the bank, lose its right of set-off because, before insolvency, the bank had pledged and hypothecated the association's notes with the Reconstruction Finance Corporation to secure a debt which the bank's conservator paid in full?"

That statement does not seem to me to embrace all that is embodied in the question to be decided by the Court. The respondent, in his argument, states this: "Appellant's statement at page 5, folio 17 of its argument of the `Question for Determination', seems to us inaccurate, in that it fails to include the facts that the said notes were negotiable promissory notes, were pledged to the Reconstruction Corporation in due course before maturity, without notice of any defect therein or defense thereto, for an amount greatly exceeding the amount of said notes; were paid by appellant to the Reconstruction Finance Corporation on its demand; were never returned to the pledgor, and that the bank's notes to the Reconstruction Finance Corporation were collected by it from its pledged collateral."

The facts of this case are fully stated in the record, and may be thus summarized: The appellant. The Mechanics Federal Savings and Loan Association of Rock Hill, South Carolina, is a corporation under the laws of the State of South Carolina; that at the times hereinafter mentioned the Central Union Bank of South Carolina was a corporation, organized under the laws of the State of South Carolina, which closed its doors as a going concern on March 4, 1933; that Simpson J. Zimmerman was appointed conservator of the said bank and is now acting in that capacity; that at the time of the closing of its doors, The Mechanics Federal Savings and Loan Association, which we may hereafter call the association, had on deposit in said bank the sum of $13.953.55; that while the said bank was a going concern, the association made and delivered to it, its three negotiable promissory notes, payable to the bank, aggregating the sum of $14,827.45; that at the time of the closing of said bank, it was indebted to the Reconstruction Finance Corporation, for money borrowed of said corporation, in an amount exceeding one million dollars, and the bank had pledged with said corporation the notes of this association, along with notes of other debtors of the bank, of like nature and import, as collateral security; that when the notes of the said association fell due, they were voluntarily paid by it to the Reconstruction Finance Corporation, and the notes were cancelled and surrendered to the conservator-receiver of said bank along with other collateral which was not collected or applied on its debt by the said pledgee; that the value of the collateral so returned exceeds the amount of the claim of The Mechanics Federal Savings and Loan Association of Rock Hill, and of others claiming preference out of said returned collateral; that the total assets of the said bank, pledged and unpledged, are insufficient to pay in full the claims of the deposits and creditors of the bank, irrespective of whether preference be allowed on the petitioner's claim, or on other like claims, and that the allowance and payment of the claimant's claim as a preference would diminish the percentage which the other creditors and depositors in the said bank will otherwise receive. It also appears from the record that a total of $4,186.07 has been paid to the association, in dividends, by the conservator of the bank.

It seems to me that the question really to be decided is more accurately stated in the brief of the respondent, as follows:

"1. Where one having a deposit in a bank which has failed, had previously issued his note payable to said bank, which as a going concern, thereafter in due course for value endorsed and delivered said note before maturity to another bank, which took same as collateral security for a present loan made to the pledgor bank by the pledgee bank, and which note the pledgee bank thereafter duly collected from the maker who paid under protest, said note never having been redeemed by the pledgor, whether under such circumstances said depositor has any right after said pledge or after such payment of his note to offset his deposit against said note; or does such pledge or such payment, either or both, preclude and destroy the right of set-off which the depositor would have had if his note had remained the property of the payee-pledgor bank at the time of its insolvency, and had not been so endorsed and delivered to the pledgee and collected by it?

"2. The question may be otherwise stated as follows: Did the voluntary payment by the association to the Reconstruction Finance Corporation, as pledgee-holder in due course of the association's negotiable promissory notes theretofore given by the said association, payable to the order of the Central Union Bank, extinguish the life of the said notes and render them thenceforth unavailable as obligations of the said association (as an asset of the original pledgor bank-payee) against which said association can interpose by way of offset the claim which it had against the Central Union Bank (arising out of a deposit balance) at the time of the payment to the said Reconstruction Finance Corporation of said notes so given by said association?"

As I have heretofore said, the main opinion predicates its holding upon the plea of equity. To my mind, such holding violates the principles of equity as established and followed by this Court.

That eminent jurist, Mr. Justice Woods, of this Court, afterward a Justice of the Fourth Circuit, United States Court of Appeals, in the case of Livingstain v. ColumbianBanking Trust Company, 77 S.C. 305, 57 S.E., 182,184, 22 L.R.A. (N.S.), 442, 122 Am. St. Rep., 568, had this to say:

"* * * the issue here is not between the petitioners and the Bank of Commerce or the Columbian Bank as a solvent institution, able to pay all creditors, but it is between the creditors of the Columbian Bank, an insolvent institution, and the petitioners, who are claiming a preference in the distribution of the assets.

"No rule of equity appeals more to the judicial conscience than that which requires the assets of an insolvent corporation to be distributed ratably among creditors. Against this equity there is no principle of subrogation which can avail petitioners."

That statement of the eminent jurist has become a canon of the law in South Carolina, and I think the ruling of the main opinion runs counter to this established rule of equity, because in my opinion the showing made for the petitioner does not disclose any special equity which entitles it to preference over the claims of others who are the creditors and depositors of the defunct bank.

The notes of the association to the bank were promissory negotiable notes, and were pledged by it in due course to the Reconstruction Finance Corporation. When they fell due, they were cancelled by the Reconstruction Finance Corporation, and were returned not to the association, but to the bank. The association had received from the bank cash for those notes, so that when the notes were paid by the association to the Reconstruction Finance Corporation, they were relieved from this liability.

It is patent from the record: "That the total assets of the said bank pledged and unpledged are insufficient to pay in full the claims of the deposits and creditors of the said bank, irrespective of whether preference be allowed herein, or in other like claims and that the allowance and payment of the claimant's claim as a preference would diminish the percentage which the other creditors and depositors in the said bank will otherwise receive."

The petitioner in this case is not seeking to offset its obligation on the notes with its deposit, but it is seeking to have the application of the funds of the bank, represented by the surplus collateral returned to the bank, paid on its claim in preference to its payment of other like deposits and claims.

I cannot see in this case any grounds for preference in this claim over other depositors and creditors of the bank. The association has been paid in dividends by the conservator-receiver of the bank the sum of $4,186.07.

The petitioner founds its claim against the conservator-receiver upon the doctrine of set-off. It does not need authorities to show that that doctrine applies only when there are mutual accounts between the parties. Mutuality is the very foundation of the right of set-off. In the case of Peurifoy,Receiver, v. Gamble, Receiver, 145 S.C. 1,142 S.E., 788, 791, 71 A.L.R., 783, Mr. Justice Stabler said: "* * * the general rule in equity, as well as at law, is that the demands to be set off must be mutual, and that debts accruing in different rights cannot be set off against each other. * * *"

The rights of all the parties in question were fixed the day the bank closed. In the case of Bank of Anderson v. Allenet al., 146 S.C. 167, 143 S.E., 646, 647, 60 A.L.R., 580, this Court said: "It is the general rule that the right to set-off against an insolvent bank has to be governed by the state of facts existing at the time of insolvency and not by the conditions that might be created afterwards. * * *"

In this same connection, see also the case of Peurifoy, Receiver,v. Continental Finance Company (Rice v. City ofColumbia), 164 S.C. 261, 162 S.E., 458.

In the present instance, I do not think there is any such claim.

It passes my comprehension that the appellant has a claim against the bank, or against the conservator-receiver of the bank, because the petitioner had borrowed from the bank some $14,000.00, and had paid said notes in full to the party to whom the bank had pledged them, namely, the Reconstruction Finance Corporation. The notes are now paid, and they were paid to the assignee of the bank, and were extinguished. They were paid because the petitioner had borrowed that money from the bank. By what process of reasoning or logic can it be claimed that they may now offset those notes against their deposits?

As a matter of fact, there is no question of offset, but they are claiming a preferment in the application of the assets of the bank.

At page 223, Section 163, of 3 Michie on Banks and Banking appears the following statement: "All preferences should be resisted by the public authorities, and except where statutory, should be disposed of by the Court on the principle that equality is equity."

I cannot, in view of these facts, concur in the opinion that the petitioner is entitled to preference in the payment of its claim. Therefore, I must dissent.

I think the decree of the Circuit Judge ought to be affirmed.