Bandy v. FIRST STATE BANK, OVERTON, TEX.

GAMMAGE, Justice,

dissenting.

I respectfully dissent. The court adopts a substantive rule favoring banks to the great detriment of decedents’ estates. Part IV of the court’s opinion states its “agreement with the majority rule,” but then adopts the minority rule that a bank *623 may offset a deceased customer’s accounts against unmatured debts even though the decedent’s estate is solvent. The court reaches this conclusion out of concern for the bank’s ability to know whether the estate is insolvent, thereby apparently abandoning the rule that the burden of proof for insolvency is on the bank claiming the exception to justify the offset. The court expresses concern for the bank in the face of express trial court findings that this bank’s offset against the decedent’s accounts disrupted the orderly administration of the estate and forced a “fire sale” of one of the estate’s principal assets.

The administrator has a fiduciary duty to preserve the assets of the estate. The bank defeated the administrator’s efforts to preserve the estate by destroying the estate’s liquidity. The majority rule which Texas has heretofore recognized is designed to preserve the liquidity of estates by allowing offset of unmatured debts only if the estate is insolvent. This case demonstrates the wisdom of that rule. I therefore dissent from the court’s opinion and judgment.

I first address where Texas law was before the court’s opinion in this ease. Texas early recognized a bank’s right of offset independent of the claims procedure for the probate code then in effect. The probate code then required presentment of the claim to the personal representative. In Smalley v. Trammel’s Admr., 11 Tex. 10 (1853), this court held that one may setoff an unpresented claim to defeat the claim asserted by the estate. In Mitchell v. Rucker, 22 Tex. 66 (1858), this court clarified that a bank’s unpresented claims could offset only to the extent of the estate’s claim to assets held by the bank. If the offset against a bank-held asset left a net amount due from the estate on the bank’s claim, it was not collectible because it had not been presented. In other words, on the bank’s claim, the set-off principle recognized for unpresented claims was purely defensive in nature. Moreover, it applied only to matured debts, those that had become due.

In Traders’ Nat’l Bank v. Cresson, 75 Tex. 298, 12 S.W. 819 (1889), the court likewise held that a debt matured at the time of death could be asserted defensively against a claim by an administrator, although it had not been presented in the probate court. The opinion states:

The court erred in ruling that the bank could not assert the defense of set-off against the plaintiff’s demand, but was required to assert its claim in the county court. The debt pleaded in set-off appears from the answer to have been due from the appellee’s intestate, at the time of his death, to the appellant, and having, therefore, been contracted in the intestate’s life-time, it extinguished, as far as it went, the claim sued on; and, to the extent it so extinguished the claim sued on by the administrator, the defendant below was entitled to plead it in set-off. [Smalley; Mitchell.]

Cresson, 12 S.W. at 820 .

The other Texas cases do not, strictly speaking, deal with probate offsets. Stockyards National Bank v. Presnall, 109 Tex. 32 , 194 S.W. 384 (1917), was a garnishment case. A judgment creditor garnished a bank which had an account of the judgment defendant. The bank claimed it could offset two unmatured promissory notes against the amount in the judgment debtor’s account because he was a non-resident. This court wrote:

No contention is made that he was insolvent. We decline to hold that the mere fact of his non-residence entitled the bank to offset the deposit against the unmatured notes and thus destroy the effect of the garnishment. It is a primary rule that a debt must have matured to be available as a set-off. An exception is made where the debtor is insolvent. No such equitable consideration is presented here by the mere non-residence of the debtor.

Stockyards, 194 S.W. at 385 (emphasis added).

The Stockyards case is instructive in three ways. First, the burden of proof is on the bank to raise and prove the insolvency exception to the rule that an unmatured *624 debt may not be offset. Second, an unma-tured debt may not in general be set off. Third, if the debtor is insolvent, an unma-tured debt may be offset against the balance owed the debtor.

If Texas law on solvent or insolvent estates is generally to follow its law for solvent or insolvent living debtors, as cases from other jurisdictions have suggested is proper, 1 then the burden to prove insolvency is on the bank. 2 Further, Texas would follow the majority rule that a bank, or similar financial institution, could not offset an unmatured note against the accounts of the decedent. The court’s opinion concedes the majority rule is “no offset against unmatured debts for solvent estates”. I would go further and observe that, among jurisdictions that allow offset of unmatured notes for insolvency, the no-offset rule for unmatured debts is generally followed. See e.g. Citizens’ Bank & Trust Co. v. Turner, 23 Ala.App. 23 , 122 So. 311 , 312, cert. denied, 219 Ala. 366 , 122 So. 312 (1912); Sullivan v. Merchants Nat’l Bank, 108 Conn. 497 , 144 A. 34, 35 (1928); Gardner v. First Nat’l Bank, 10 Mont. 149 , 25 P. 29 (1890); Jones v. Jones, 21 N.H. 219, 222-23 (1850); Polkowitz v. Goldberger, 9 N.J.Misc. 880, 156 A. 1 , 1-2 (1931); Armstrong v. Pratt, 2 Wis. 299, 307 (1853). It is clear that following this majority rule is most consistent with our Texas cases.

It is true that two opinions not issued by this court may be misinterpreted to allow a broader offset. Jeter v. Citizens Nat’l Bank, 419 S.W.2d 916, 918 (Tex.Civ.App.—Eastland 1967, writ ref d n.r.e.), dealt with the contractual right of offset (from the decedent and subsequently the executor), although it quotes language from a Minnesota case 3 which suggests a broader right to offset, but which in fact addresses the contractual right of offset. Likewise, Black v. Gray, 280 S.W. 573, 574 (Tex. Comm’n App.1926, judgm’t adopted), contains dicta that a broader right of offset exists as to unmatured debts absent the insolvency exception; but that case involved the offset of a note “duly declared matured under an accelerating clause” and the offset occurred before the death of the depositor. These cases do not mean that Texas did not follow the majority rule, and the court’s opinion does not suggest otherwise, but purports instead to decide an open question.

What are the reasons the court’s opinion gives for adopting a minority rule? First it tells us that insolvency has different definitions and it is hard for a bank to know which one to use. Then it suggests it is unfair for a bank to have to “guess” whether its deceased customer is solvent, assuming it knows which definition to use. Finally it tells us that “no harm” is done to a solvent estate if the offset is allowed for unmatured debts because, after all, the estate is solvent. I will address these arguments in order.

For purposes of probate proceedings (administration), the correct standard is balance-sheet solvency. The probate code may set aside certain exempt property or allowances, or both, and expenses of administration may add some uncertainty to the ultimate equation, but basically administrations exist to pay the unsecured creditors and see that debts are paid. The nonexempt assets will go to pay creditors. The bottom line of the assets affects all creditors, and the administrator has a fiduciary duty to maximize those assets. The majority rule is that balance-sheet insolvency is the standard for allowing the offset of unmatured debts against a decedent’s estate, with the burden of proof on the party *625 claiming the offset. Thomas v. National Bank, 16 N.J.Misc. 271, 198 A. 539, 543 (1938). The court errs in confusing cash-flow insolvency, and related concepts, with insolvency for an estate.

Second, a bank’s difficulty determining whether an estate is insolvent is certainly no greater than anyone else’s. In fact, the financial institution’s experience dealing with balance sheets, loan qualification data and other accounting information should give it a substantial advantage over others, possibly over the administrator or executor as well. Difficulty of proof has not kept most states from adopting the majority rule, out of fairness to others interested in the estate.

Finally, the argument that offset will not hurt a solvent estate is the simplistic and, I believe, erroneous analysis apparently made jurisdictions 4 adopting the minority rule. It assumes that all assets of the estate are converted to cash instantaneously and that the bank with a deposit to

offset harms no one by taking its debt as cash. That ignores liquidity and cash-flow problems. Walton’s estate exhibited both problems. Walton had several businesses. His administrator needed to keep the businesses going because, among other reasons, an on-going business will normally bring a higher price than a defunct one. Walton’s estate included real property. Real property is not a liquid asset. Denying the estate the cash represented by the bank deposits and CDs placed a cash-flow squeeze on the administrator’s efforts. When real property is sold under distress sale conditions, it simply does not bring its market value, and all the other creditors as well as the heirs of the estate are harmed. Although in a slightly different context, one court has explained this liquidity problem in these terms:

It would make the conduct of business hazardous if the bank, which was the holder of unmatured discounted notes, could at its option take over the deposits of its customers in payment of claims not *626 due upon learning of possible [cash-flow] insolvency, thus withdrawing the working capital with which the debtor was conducting his business.

Kurtz v. County Nat’l Bank, 288 Pa. 472 , 136 A. 789, 790 (1927).

The correct rule of “no harm” for a solvent decedent’s estate is to allow all parties with unmatured debts to file their claims with the probate proceedings:

The rule we maintain will not work hardship. If the estate of a decedent is solvent, the creditor has only to await distribution or bring his cross action. If there are any circumstances existing which render it inequitable to deny him a set-off, he may set them up in the action on the demand against himself and invoke the equity power of the court.

Jordan v. Nat’l Shoe & Leather Bank, 74 N.Y. 467, 476 (1878).

The court errs in adopting a minority rule that will disrupt the orderly administration of many estates, to protect banks in the area where they already have the most expertise. The court should require the financial institution to plead and prove insolvency of the estate to entitle it to an offset.

MAUZY and DOGGETT, JJ., join in this dissent.

. See, e.g., Little’s Adm’r v. City Nat’l Bank, 115 Ky. 629 , 74 S.W. 699, 699 (1903); Laighton v. Brookline Trust Co., 225 Mass. 458, 114 N.E. 671 , 672 (1917); Troup v. Mechanics’ Nat’l Bank, 24 R.I. 377 , 53 A. 122, 124 (1902).

. The burden is apparently normally placed on the financial institution claiming the insolvency exception. See, e.g., Gilmartin v. Osborne Trust Co., 266 App.Div. 1022 , 44 N.Y.S.2d 938, 939 (1943), aff’d, 292 N.Y. 629 , 55 N.E.2d 505 (1944) (defendant trust company’s summary judgment evidence failed to show decedent was insolvent or had perpetrated a fraud in connection with note that did not become due until after his death).

.Browning v. Eiken, 189 Minn. 375 , 249 N.W. 573 (1933).

. Determining which jurisdictions allow offset of an unmatured debt against an account passing to a solvent estate, is itself a problem. The leading case advocating that view appears to be Ainsworth v. Bank of California, 119 Cal. 470 , 51 P. 952, 954 (1897), in which there was no finding or evidence on the solvency of the estate and the court wrote that "if the estate be solvent, ... no harm can come by applying the rule.” The only way to allow offset without knowing whether the estate is solvent is to allow offset against solvent estates as well. Nevertheless, in Pendleton v. Heilman Commercial Trust & Sav. Bank, 58 Cal.App. 448 , 208 P. 702, 704 (1922), the lower California court required the bank to show insolvency and wrote, “It is not to be denied that under ordinary conditions, where the debt to the bank is not due, the banker’s right to set-off a deposit against such debt does not exist."

Oklahoma apparently follows the rule, because the Ainsworth language is quoted with approval in Kasparek v. Liberty Natl Bank, 170 Okl. 207 , 39 P.2d 127, 130 (1934), although in Kasparek the record clearly showed the estate was insolvent.

In Convery v. Langdon, 66 Ind. 311 (1879), the court held that the state’s probate code language of "cross demands,” required that unmatured debts be offset. 66 Ind. at 313 . The court nevertheless went on to write that it would hold the right existed at common law and that solvency or insolvency had no bearing to the right to offset the unmatured debt. Id. at 315-16 . Later, under a perhaps more modern probate code, an intermediate appellate court wrote that the decedent was insolvent at the time of his death and that his estate was probably insolvent. First Natl Bank v. American Fletcher Natl Bank & Trust, 480 N.E.2d 964, 968 (Ind.App. 1985). Perhaps Indiana follows the minority rule.

Kentucky also presents an interesting question. In Little’s Adm’r v. City National Bank, 115 Ky. 629 , 74 S.W. 699 (1903), a note matured the day after decedent died. The court quoted the rule that if the estate is insolvent, then the offset is allowed. The court does not say the estate involved was insolvent. Rather it states that the offset is allowed “for its debt had matured before there was an administration on the estate of the decedent, or any demand made of it for the deposit.” 74 S.W. at 699 . The court then quoted with approval some language from Bosler’s Administrators v. Exchange Bank, 4 Pa. 32, 33-34 (1846), to the effect that in a solvent estate the bank is entitled to its whole debt and no harm to other claimants would occur from an offset. Pennsylvania is one of the minority jurisdictions that does not allow offset of unma-tured debts for insolvency. Little’s has been interpreted to mean Kentucky follows the minority rule allowing offset for unmatured debts, but in Ohio Valley Nat'l Bank v. Edwards, 492 S.W.2d 195 (1973) (involving an insolvent estate), the court’s opinion points out that the parties agreed that under Kentucky law an un-matured debt could be offset even though the estate was solvent.