Brief for Petitioner — Dakin v. Bayly

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_ Supreme Court of the United States

OCTOBER TERM, 1933

No. 44

L. M. DAKIN (Successor to A. M. Anderson), f

As Receiver of the Figst National Bank

of St. Petersburg, PETITIONER, .

vs.

TAVER BAYLY, As Liquidator of the

Peoples Bank of Clearwater, RESPONDENT.

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT |

COURT OF APPEALS FOR THE FIFTH CIRCUIT.

. 4

BRIEF OF PETITIONER. .

; f DoNalb O. McMULLEN,

ao Attorney for Petitioner.

F. G. AWALT, ae

GEORGE P. BARSE,

GEORGE B. SPRINGSTON,

Attorneys for — of the Currency, |

Of Counsel.

an: and Judgment Below.. .

Jurisdiction . —— x 2

Specification of — — — —

Argument Summarized .......... 1 — —

A sét-off should not be — the “Respondent, Peoples

Bank of Clearwater, Because Beneficial Ownership of the

Items Deposited with it for Collection and Credit, and.

Likewise the Drafts Forwarded by the First National Bank .

ot St. Petersburg in Remitting Payment for such Collection

Items, Remained in the Clearwater Bank's Customers and

so. Stood-When the First National Bank Suspended — 8

* The Rule Governing the Distribution o — of

an Fnsolvent National Bank Stated DETERS ee Nee SORES. 8-12

(2) The Allowance’ of Set-off asa Preference Discussed..12-14

(3) 3 of Set-ott Discussed... -cecececccceceeceeedseeeee¥4-16

(4) The Rule of Law in Set-off Requiring Mutuality

of — Mutuality of Right, and Mutuality of

quality of right discussed —8 15-25

(5) The Character o e Contract, respecting Owner-

ship of the Items Deposited, discussed in connec-

tion with the Relation Between the Clearwater

Bank and its Depestiors in 3 Transaction 3 ———.25-30

—

(6) The Risht of Set-off discussed, where Beneficial

, Ownership of the Claim Vests, not in the Clear-

water Bank, but in its Depositors. 30-31

Analysis of Cases Seemingly Contrary to n Here

Made by Petitioner. — — 4135

The Fact that the St. Petersburg Bank Had Forwarded its ee

Draft in Payment ot the Cash Letter Discussed 35-36

Analagous Principles of Law, Representing Quasi Fiduciary ~ .

Relationships in Offset, Discussed. . 36-41

r ee F 41

AUTHORITIES CITED.

; STATUTES.

; 4 Page

U. S. R. S. See. 5236; 12 U. S. C , ch. 2, Sec. 194 8 . . 1 5, 9

Sec. 721: U. S. C. 28, Sec. ay PPPPPVPPVVVTTTVTVTTTTTTTTVTTCTTTCTT 11

Comp. Gen. Laws of Fla., Sec. 4326 .f! ͤ AO RT 15

6834 — seneennonassanensinecit 28

3 A 8 .

Anderson,. Receiver, \ v. Taver Bayly, 63 Fed. (2) 592........... — -.

B e :

Beauregard v. Case, 91 U. S. 134.......... . 6, 25

Bosworth v. Continental III. Bk. & Trust Co., 65 Fed. (2) 632. 34

! AA 36

Beard v. Independent District of Pella City, 88 Fed. 375 36

Bates v. Cosmopolitan Trust Co., 133 N. E. 758, 760 40

1 5 a

Cook County „ Nat'l Bk. v. United States, 107 U. S. 445.................. 5-9

City of Douglas v. Fed. Res. Bk. of Dallas, 271 U. S. 489............ 7, 26

City of Miami v. First Nat’! Bk. of St. Petersburg, ae pe

eee ee nny ae OL eI) EEN ne OES Se eR =, BT

Commerce Bk. of * v. Armstrong, 148 U. S. 50 ES 7

N D

Davis v. Elmira 1 Bk. 161 U. 8. 275, 285 — ees 10, 14

Dale v. Cook, 14 Johns. Ch, (N. v.) 11, 16.———— expres 38

ane c 28

Empire State Surety Co. v. Carroll County, 194 Fed. 593. 8

Ellis v. Baker-Matthews Lumber Co., 248 8. .. 10.1 P 39

2 F 12

Fed. Res. Bk. of Richmond v. Malloy Bros., 264 U. S. 160 7, 26

First Nat’l Bk. of Shenandoah v. Liéwer, 187 Fed. | | ARO. 11

Fed. Res. Bk. of Richmond v. Early, 30 Fed. (2) 198. woe 8 ä

G- ; .

- Gray v. Rollo, 18 Wall. . h aE ey 6, 24

Gordon v. Union Trust Co., 308 . „„ 6

5 H N

Hirning r r anna ccsc cvs ce kcsvccsecsns 36

Hanover Nat’] Bk. v. Suddath, 215 U. S. 122.. eee aot Aton oe . > ee

. Elliott, r |, rr re —

. ‘ ° I * ‘ -

In Re: G. F. Redmond & Co., Inc., 17 Fed. (2) 501, 502 37

. Kaye v. Metz, 198 Pac. 1047, 1049 EF —— 8 8.40

L .

Larabee Flour Mills v. First Nat‘] Bk., 13 Fed. (2) 330... e 36

Laighton, et al, Executors, v. Brookline Trust Co., 9

225 Mass. 458. —:: V...... AIO, ͤ K 39.

—

AurRHORrrmS CrITED—Continued.

Page

0 M

' McGraw v. Pettibone, 10 Mich. 530.. — 6, 7, *

McCandless v. Dyar, 34 Fed. (2) 989.

Mark v. Westlin, 48 Fed. (2) 609. 8 nia —

e ee ee 36

; Mahon v. — County Nat'l Bxk., 206 P. 224, e

| * ° 4 8 N tg ‘

North Chicago Rolling Mill Co. v. St. Louis Ore & Steel Co. * .

II . v2 6, 14

Nat'i Bk. v. Colby, 21 Wall. 609, 614 1 13

Nomland v. First Nat'l Bk. of Kansas City, 64 Fed. (2) 399 1 32

7 . 0 a

Olmstead v. Scutt, 55 Conn. 126 — catesa date — — 7, 23 : f

Scott v. Armstrong, 146 U. S. 499

Sawyer v. Hoag, 84. U. S. 610 8

Scanimon v. Kimball, Assignee, 92 U. S. 362.

e , ——————çꝙ— ——ů—ů—— 8

Starke v. Myers, 53 N. Y. S. 650, 651 :

The Gloria, 286 Fed. 188. :

„Thomas v. Potter Title & Trust Co., 2 Fed. ‘Save. 12.. .

The „ L — — 38

3 8

Washington Loan & Bking. Co. v. Fourth National Bk.,

„ 38 Fed. (2) 7723 .

‘Wilson v. Codman’s Executor, 3 Cranch 193, 203

e. a4 8 !!!L!ñä P[Ʒũ4 — 7

Supreme Court of the United States

OCTOBER TERM, 1933 |

No. 44

L. M. DAKIN (Successor to A. M. Andergon),

As Receiver of the First National Bank ;

of St. Petersburg, PETITIONER,

vs.

TAVER BAYLY, As Liquidator of the

Peoples Bank of Clearwater, RESPONDENT. —

On Writ OF CERTIORARI TO THE UNITED STATES Circurr ;

COURT OF APPEALS F FOR THE FIFTH Cmcurr.

BRIEF OF PETITIONER.

ae eeu

_ OPINION AND JUDGMENT BELOW.

The opinion of the Circuit Court of Appeals for

the Fifth Circuit (Bryan, Circuit Judge) is reported

in 63 F. (2) 592, and appears at page 20 in the record.

The judgment of the United States District Court for

the Southern District of Florida (Akerman, D. J.) is

not reported, but —— in the record at page 16. |

JURISDICTION.

~ Writ of certiorari was granted May 29, 1933, (R.

STATEMENT OF THE CASE.

This action was brought by A. M. Anderson, as

receiver of the First National Bank of St. Petersburg,

Florida, in the Distriet Court of the United States,

Southern District (R. 1) against the Peoples Bank

of ‘Clearwater, Florida, to recover a balance of 82,

631.30, representing funds collected by the Peoples

Bank for the First National Bank. The defendant

(Peoples Bank, respondent here) pleaded set · off

based on four drafts drawn by the First National

Bank of St. Petersburg in favor of: the Peoples Bank,

aggregating $2,898.20 which were unpaid by reason

of the insolvency and suspension of the First Na-

tional Bank of St. Petersburg. . Plaintiff's replica-

tions alleged that the drafts were drawn in remit-

tance for checks or drafts deposited with the Peoples

Bank for collection and forwarded by the Peoples

Bank to the First National Bank for collection. The

respondent demurred to the replications (R. 10 and

15), the demurrer was sustained, resulting in a judg-

ment for respondent (R. 16), which was affirmed b7

the Circuit Court of Appeals for the Fifth Circuit (R.

-20). The petitioner, L. M. Dakin, was substituted for

A M. Anderson, the plaintiff in the District Court,

appellant in the Circuit Court of Appeals, and now — .

court.

seeks a review of the opinion and judgment of that

The facts in the case are not in dispute.

Prior to June 7, 1930, the First National Bank of

ke St. Petersburg had forwarded two cash letters, in the

respective amounts of $2,540.34 and $90.96, totalling

_ $2,631.30, for collection and remittance, to the Peo-.

ples Bank of Clearwater, and on June 7, 1930, that

bank had collected said sum of $2, 631.30 and was in- ;

debted to the Firat National Bank of St. 6

in this amount.

0 tue same * the First National Bank of St.

Petersburg was indebted to the Peoples Bank of

Clearwater in the sum of $2,898.40, which the St. Pet-

ersburg bank had collected for the Clearwater bank

under a collection and remittance agreement. The

First National Bank attempted to remit payment to

the * Bank by drafts as follows:

June 4, 1930, draft for Three n ed Forty-five

and 69/100 Dollars ($345.69) on Chase National Bank

of New York; June 5, 1930, draft for One Thousand

Five ‘Hundred Twelve and-62/100 Dollars ($1512.62) -

on Chase National Bank of New York; June 6, 1930,

draft for Three Hundred Thirty-two and 21/100 Dol-

lars ($332.21) on Chase National Bank of New York;

and June 7, 1930, draft. for Seven Hundred Seven and

88/100 Dollars ($707. 88) on Chase Na ional Bank of

_— York. :

i So »

The First National — of St. en was

closed and placed in the hands of a receiver, A. M.

414 5

Anderson, by the Comptroller of the Currency on

June 9, 1930, at which e these drafts were out-

standing and unpaid. The District Court allowed the

set-off claimed by the Peoples Bank of Clearwater

and entered judgment against the receiver of the

First National Bank of St. Petersburg for the excess

amount. 8 ear =

In affirming the judgment and allowing the set-off

the Circuit Court of Appeals held that it was a mat-

ter of no concern to the appellant (Receiver—First

National Bank—Petitioner here) whether the Clear-

water bank held the items deposited by its customers

for collection or for value, inasmuch as it had the

right to maintain an action in its own name against

the appellant ; for the amount due it, notwithstanding

the fact that beneficial ownership in the items for-

warded for collection, as a matter of law, vested in

the forwarding bank’s customers. |

IV.

SPECIFICATION OF ERRORS.

(a) The Circuit Court of Appeals erred in hold-

ing that it was a matter of no concern to the receiver

of the insolvent First National Bank of St. Peters-

burg, and his depositors-creditors, whether the Clear-

water bank held the items deposited by its customers

for collection or for value.

— The Circuit Court of Appeals erred in hold-

ing that the right to maintain a suit in the name of

the Clearwater bank, irrespective of ownership of the

items upon which the set-off was based, gave the.

— . timate nll eat tte aa

. bank the statit to set-off, in a suit against

it by the receiver of the St. Petersburg bank for the.

amount of the Clearwater bank’s ‘indebtedness to it.

— ( 0) The Circuit Court of Appeals erred in hold-

_ing that mutual. debts were due to and from the Clear-

water bank and the St. Petersburg Bank in the same

capacity. : .

ARGUMENT SUMMARIZED.

(1) The National Bank Act constitutes a com-

‘plete code in itself governing the distribution of the

assets of such failed banking associations, Cook

County National Bank v. United States, 107 U. S. 445,

and the Federal rule, which controls, United States

v. Robeson, 9 Peters 319, 9 L. Ed. 142, (as it involves

a matter of substantive law, The Gloria, 286 Fed.

188, ) provides that distribution of the assets of an

insolvent national bank must be made in accordance

1 with Section 5236 U. S. R. S. (12 U. S. C. ch. 2, sec.

194) which requires a pro rata distribution of such

assets to the bank’s creditors.

—

(2) The requirement as to ratable dividends is

to make them from what belongs to the bank, not

what belongs of right to a debtor-depositor, hence

where a set-off is otherwise valid its allowance cannot

_be ‘considered a preference, Scott v. Armstrong, 146

U. S. 499; but where the set-off by not allowable: by |

law its allowance a preference in the applica-

MI ln ↄ— 6 and defeats the mandate of

the National Bank Act securing a ratable distribution

of such assets 2 the bank's creditors. 1

(

(3) The right of set-off, non-existent at common

law, was introduced and provided for by statute of

2Geo. II, ch: 24, sec. 4, made permanent by the statute

of 8 Geo. II, ch. 24, secs: 4 and 5, which enacted that

where mutual debts exist between the plaintiff and

defendant one debt may be set off against the other

in order to avoid circuity of action and injustice.

United States v. Eckford, 6 Wall. 484 North Chicago

Rolling MilMBompany v. St. Louis Ore and Steel Com-

pany, 152 U. S. 596. Most of the states of the United

States Have created the right of set-off by statute, |

and in Florida the right is governed by Section 4326,

Compiled General Laws of Florida, 1927, providing

for offset of-mutual debts or demands existing be-

tween parties at the commencement of the action.

(4) The rule of law in set- off requires mutuality

of parties and demand; these requirements contem-

plate mutuality of parties, Beauregard v. Case, 91

U. S. 134; mutuality of right, Gray v. Rollo, 18 Wall:

629; and mutuality in quality of right, Scammon v. .

_ Kimball, Assignee, 92 U. S. 362; Sawyer v- Hoag, 84

U. S. 610. The third requirement; mutuality .in qual-

ity of right, in offset, is — and is based on

the sound legal question to whom does the money or

the claim actually belong, differently stated, is the.

irty seeking. to obtain the ‘benefit of the offset the

real owner of the claim“. Thomas v. Potter Title &

Trust Company, 2 Fed. Supp. 12; Gordon v. Union

Trust Company, 308 Pa. 493; McGraw v. Pettibone,

10 Mich. 530. The claim of ownership must stand

two tests: (1) Can plaintiff bring suit in his own

name? (2) If so, would he be entitled to retain the

money or property recovered as his own? Thomas

v. Potter Title & Trust Company, 2 Fed. Supp. 12; oe

Olmstead v. Scutt, 55 Conn. 125; McGraw v. Petti- 8

bone. 10 Mich. 530. The right to set-off must exist at

the moment of insolvency and suspension, for the

ö rights of the parties are fixed as of that time. Scott

v. Armstrong, 146 U. S. 499, Yardley v. Philler, 167

V. S. 344. McCandless v. Dyar, 34 Fed. (2) 989. |

(5) It is a well settled rule of Federal law that,

in the absence of a controlling statute or contract, the

unrestricted endorsement of commercial paper de-

posited by a customer in a bank passes title to the

paper, the bank becomes ‘the owner of the paper, and.

_ +. the depositor the creditor of the bank, City of Doug-

nas v. Federal Reserve Bank of Dallas, 271 U. S. 489,

but here the relations of the parties are controlled by

Section 6834, Compiled General Laws of Florida, 1927,

which determined the rule of law governing the rights

of the parties, under which rule the bank in which the

items were deposited was a-mere collecting agent for

its customers, Federal Regerve Bank of Richmond v.

Malloy Brothers, 264 U. S.A60, City of Miami v. First

National Bank of St. Petersburg, 58 Fed. (2) .

(6) By reason of this relationship it results that

beneficial ownership of the items deposited remained

in the forwarding bank’s customers until collection of

such items was made by the forwarding bank in cash f

or solvent credits, which result would have terfni 5

the principal agent relationship and establi

relation of debtor-creditor, at which time fle and

_ ownership. of the items would have passed to the

bank, Commercial Bank of Pa, v. Armstrong, 148 U.

: 1 * 5 5

Nite 8 g

a 8. 50: Washington Loan & Banking: Co. v. . 4th Nat.

. 38 Fed. (2) 772. In the case at bar. collection

in cash dr solvent credits never was effected by the

forwarding bank, the agency. relation of the Clear-

water bank to its custom ntinued té exist down

to the moment of insolvency and 8 ion of the St.

Petersburg bank; the Clearwater bank held the re-

mi drafts. as trustee dor ‘the beneficial owners,

its deposi rs, in which situation mutuality i in quality

of right in offset did not exist, and the allowance of

the set-off claimed would constitute an illegal pref- |

‘erence of some of the creditors of the insolvent St.

Petersburg bank ‘over others in violation of the equal i

and ratable distribution rule * for in ~ N a-

tional Bank Act.

VI.

A SET-OFF SHOULD NOT BE .ALLOWED

| THE RESPONDENT, PEOPLES BANK OF CLEAR- |

WATER, BECAUSE BENEFICIAL “OWNERSHIP ~ .-

F THE ITEMS.DEPOSITED WITH IT FOR COL-

LECTION AND CREDIT, AND LIKEWISE THE

. DRAFTS FORWARDED BY THE FIRST NA-

“ ‘TIONAL BANK OF ST. PETERSBURG IN -REMIT- .

_TING,PAYMENT FOR SUCH COLLECTION ITEMS,

-” REMAINED IN THE CLEARWATER BANK’S CUS-

TOMERS AND SO STOOD WHEN THE FIRST | NA- |

TIONAL BANK SUSPENDED. | N <3 on

(1) The rule: governing the distribution of assets

g/ an. insolvent national bank stated.

ig ooigp c ‘County National Bank v. United Rates,

U. S. 445, 448, the court said, in discussing the-

act authorizing the 2 of national banks, that

We e that act as constituting. by

itself a complete system for the establishment

and government of national banks, prescribing

the manner in which they may be formed,

Everything essential to the formation of the

banks, the issue, security, and rédemption of

their notes, the winding up of the institutions,

‘and the distribution of their effects, are fully

provided for, as in a separa ate oo by itself.“

As pointed out in Cook County National Bank v.

United States, supra, after providing for the appoint-

merit of a receiver by the Comptroller of the Currency

upon the suspension or failure of a national bank, the

law requires the receiver to take possession of its

books, records and assets, to collect all debts and

claims belonging to it, to sell or compound bad or

doubtful debts, and the real or personal property of

tne bank, upon an order of a court of competent juris-

diction, and, if necessary in order to -pay. its obliga-

tions, to enforce the individual liability of its share-

holders. It requires the Comptroller, upon appoint- -

ing a receiver to cause notice to be published, calling

upon all persons having claims against the bank to

present the same with legal proof thereof. It then

declares in Section 5236 as follows: =

> “Dividends on sinned titans: distribu-

tion of assets. From time to time, after full

provision has been first made for refunding to

the United States any deficiency in redeeming

the notes of such 2 the comptroller ee

shall make a ratable dividend of the mon

paid over to him by such receiver on all s

claims. as may have been proved to his sati -

faction or adjudicated in a court of competent

_ jurisdiction, and,.as the proceeds the assets

of such association are pajf over to him, shall

make further dividends on all claims previous-

ly proved or adjudicated; and the remainder.

of the ‘proceeds, if „shall be paid over to

tlie shareholders yf such association, or their

é ives, in proportion to the stock

by them respectively held. (R. S. 5236.) “

Then in Davis v. Elmira n Bank, 161 U. S.

2275, 285, the court, * to this section, said:

“In National Bank v. colby, 21 Wall., 609,

“oo 613, 614, the court said:

* to the general ereditors, the act. evi-

dently intends to secure equality among them

in the division of the proceeds of the property a.

of the bank.

Stee

“(The fifty-second section, further to se-

cure this equality, declares that all transfers

by an insolvent bank of its property of every

kind, and all payments of, money made after

the commission of an act of insolvency, or n

contemplation thereof, with a view to prevent

the application of its assets in the manner pe-

_, seribed by, the act, or with the view to the

preference of one creditor over another, except

in the payment of its circulating notes,” shall

be utterly null and void.

LEP “ “There is in tee provisions a clear mani-

feestation of a design on the part of Congress:

Ist, to secure the government for the payment.

of the notes, not only. by reg equiring, in advance <>

‘of their issue, a deposit of bonds of the United

States, and by giving to the government a first

9 lien for any deficiency that may arise on all the | |

2 assets subsequently acquired by the ihsolvent

bank; and, 2d, to secure the assets of the bank

for ratable distribution among its general cred-

itors. elise ar ae

a „his design would be defeated if a pref:

—erence in the application of — assets could be 1

1. obtained ~ 0 proc 895 *

Not benen Section 721 of the Revised Stat-

utes of the United States (United States Code, Title

5 28, Section 725), which provides that the laws of the

several states, except where the Constitution, treaties,

or statutes of the United States otherwise require or

provide, shall be regarded as rules of decision in

‘trials at common law, in the courts of the United

States, in cases where they apply, it is submitted that

the Federal courts are not bound by the decisions or

statutes of the s sit courts on what constitutes the |

principles of sub but will follow the Fed

eral precedents, or — determine what the general or

fundamental law is for theraselves, independent of

state statutes and decisions. It has been so held in

First * Bank of Shenandoah v. ee. _

Fed. 16, 18: ä

And it is the duty of f the national courts to

exercise their independent judgments in deter-

mining all questions of general commercial law,

of general jurisprudence, and of right under

the Constitution and laws of the United States.

They are not controlled by the decisions of

state eourts on questions of general commer- 1

cial law. Railroad Company v. National Bank,

102 U. S. 14, 57, 26 L. Ed. 61. a

Theqanatter would appear Pe be concluded, by the

4 early deeision of United States v. Robeson, 9 Peters, .

wa 323, where the court said:

| : “The first Wen which arises on these |

| excepbions is, whether a claim which has been

subject of set off, under the a | of congress,

to a demand of. the government. If this ques-

tion shall be decided in the negative, it will not

itself constitutes a proper item of set-off. It

seems to have been presented to the proper ac-

counting officer of the government as a credit,

and that he refused to allow it: This is a ques-

tion which arises, exclusively, under the acts

of congress, and no local law or usage can have

any influence upon it. The rule ag, to set-off in

such cases must be uniform in the different

- * gtates; for it constitutes the law of the courts

aaa United States, in a matter which relates

3 to the federal government. *

The foregoing statutes, Ae and discussion

clearly establish three principles, (a) distribution of

the assets of insolvent national banks must be made

ratably among its creditors, (b) the right to set-off

is a matter of substantive law, and (c) in its a

ä the Federal rule prevails,

27 The allowance of set-off a as.a pretininos dis-

| cussed.” 7 ; :

8 e

— 3 * f :

transferred to the defendant, forms à proper 8

ia a be necessary to inquire whether the claim in

”

5 roy

. 13

. There can be no question but that the National :

Bank Act definitely determines the obligations rest-

‘ing upon the Comptroller of. the. Currency with re-

spéct to the distribution of assets of an insolvent na-

tional bank. This Act, together with the pronounce-

ments of this court construing it, of necessity, pre- ·

cludes a preference of one creditor over another. On

the question as to whether or not 2 claim for offset

may or may not be considered a claim for preference :

the statement of this court in Scott v. Armstrong; 146

U. S. 499, 510, is e ,

“Where a set-off i 1S otherwise valid, ‘its ak

percéived how its allowance can be considered ae

a preference, and it is clear that it is only the .

balance, if any, after the set-off is deducted :

which can justly be held to form part of the

assets of the insolvent. The requirement as to

ratable dividends, is to make them from what

belongs to the bank, and that which at the time

of the insolvency belangs of right to —

does not _belong-to, the bank.“

It must be n that where the legal right to

. set-off. exists its allowance cannot be considered a

preference, but, conversely, where the set - off ‘ight

does not exist }

‘allowance ec

ai i Fs or creditors to effect a full 100%:

payment to the: offset claimant, and operates to de-

feat the express mandate of the National Bank Act

securing a ratable distribution of the bank’s assets

among its creditors. It is regpec y urged that the . .

aint had this a in ‘ere aaa Bank v.

Colby, 21 Wall. 609, 614. ond Davis v. Elmira Savings |

Bank, 161 U.S 275, 285, when it said: j oe

This design would be defeated (referring

to the requirement for a ratable distribution

of the. bank's assets to its creditors) if a pref-

erence in the application of the assets could be

3 by adversary proceedings. allt :

(3) The right. of set-off discussed.

‘The right of set-off, — at common law.

was introduced and provided for by statute of 2. Geo.

II. ch. 24, sec. 4, made permanent py the statute of 8

Geo. II, ch. 24, secs: 4a and 5, which enacted that where

mutual debts exist between the plaintiff and defend-

ant one debt may be set off against the other in order

to ‘avoid cireuity of action and injustice. United

States v. Eckford, 6 Wall. 484, North Chicago Rolling

: Mills Company v. St. Louis Ore and Steel Company,

152 U. S. 596) In the case of The Gloria, 286 Fed.

188, 192, 193, Circuit ‘Judge Mack, concerning this

aspect of the law, said:

„with 1 the ail questions here

to be decided, it must be remembered that the

law of set-off and counterclaim is of relatively

recent development. Recoupment only was

known to the common law, and a restricted

right of set-off first developed i in equity. Even

the limited right of set-off, properly so called,

was never recognized at common law, but was

introduced by the statute of 2 Geo. II, c. 22, sec.

13, made permanent by the gtatute of 8 Geo. II,

. C. 24, secs. 4 and 5 Cf. also earlier St. 4 and 8

Anne, c. 17, authorizing set-off in bankruptcy.

15 1

The broader right of. oounterelaim and affirma- l

tive relief was an even more modern innova-

tion. The right of counterclaim and set-off

having been first introduced as a part “of our

+s, procedural.law, halting recognition is just be-

a. 5 - ginning to be given to the fact that the right as

between litigants is something. more than a 7

* . procedural convenience and is really a requife-

Rn ment-of substantive justice. That the right of

c cst-off and counterclaim is regarded in our law

— °. today as affecting, in important aspects, the

substantive relations between the parties, 3

clearly seen in the rules as to the assignment

of choses in action being subject to existing

f set-offs or counterclaims. It is interesting to |

0 note that in Roman law, too, the right-of set-

off was at first grudgingly: recognized as part

of the adjective law and only gradually accept-

ed as a part of the substantive law. Girard,

Manuel Elementaire de Droit ‘Romain (4th

Ed.), pp. 701708; Buckland, A Text- Book of

Roman raw . 6 696-700. . f

a) e. K of /

Practically all of the states of the United States

8 have created the right of set- off by statute, and in

Florida, where this action arose, the right is governed

by Section 4326, Compiled General Laws of Florida, ‘

1927, Wich follows:

„All debts or demands 3 n ‘

between the parties at the commencement of

the action, whether che same be liquidated or

not, shall be proper subjects of set-off, and may.

be pleaded accordingly. pens

* The rule of law in neg requiring mutuality

of parties, mutuality of right, and be ae ocd in wer |

ity of right discussed. \

The court ,below considered that ‘either bank had

the right to plead set - off, if sued, because mutual

debts were due to and from them in the same ca-

pacity, basing such conclusion on the premise that

“since the Clearwater bank had the right to maintain

a suit in its own name for the amount due it by ap-

pellant it had the right of set-off in a suit against it

by appellant for the amount of itd indebtedness to the

St. Petersburg bank.” The court thought it was a

matter gf no concern to the appellant (petitioner

here) whether the Clearwater bank held the checks

of its depositors for cellection or for value. This pre-

sents the basic question as to whether or not the third

requirement in set-off, mutuality in quality of right,

is essential in determining the legal rights of the par-

ties ‘litigant. We seek to establish the doctrine an-

nounced by the: lower court as erroneous, as a matter

ol law, and assert that this court, in | Scammon v. Kim-

ball, Assignee, 92 U.S. 362, 367, repudiates the lower

court’s-rule and conclusively settles the prevailing law

-in | the Federal courts:

“Whether the suit a one at law or in equity,

set-off must be understood as that right which

” exists. between. two parties, each of whom, un-

„ der an independent contract, owes an ascer-

tained amount to the other to set off their re-

., Spective debts by way ‘of mutual deduction, so

- that, in any action brought for the larger debt,

the residue only, after such deduction, shall be

* recovered. Adam's Eq., 6th, Am. Ed., 447.

“Courts of equity, following the law, wilb

not allow a set-off of a joint debt against a

separate debt, or of a separate debt against a

joint debt; nor will s urts allow a set-off

e 2

| 17 a

— .

of debts accruing in different ri except un-

der very special cireums ’ and where the

proofs are clear and the equity is. very strong.

. 2 Story 's Eq. Gti Ed. sect. 1437

The principles 04 rules we eqrnently urge should

2 Fed. Supp. 12, that we quote in extenso from that

case. The facts were that Thomas, Receiver of the

Bank of Pittsburgh, N. A., brought suit against the

Potter Title & Trust Company for $135,787.39, repre-

Potter Title & Trust Company at sfispension of the +-

Bank of Pittsburgh, N. A. The Title & a Com-

pany had on qeposit i in the Bank of Pitts gh, N. A.,

an account designated “Potter Title and t Com-

+ pany Trust Account“, and asserted the right to set-

off. The court, reviewing fundamental principles of

Bree: including the basic question of quality of right

in set-off, presented. in this action, said

“Is defendant entitled to the set-off claim-

ed? What laws shall govern in the determina-

tion of this question, the laws of Pennsylvania

or the laws of the United States? Rev. St. 8721

(28 U. S. C. 8725 ((28 USCA §725) ) provides: g

The laws of the several States, except where

the Constitution, treaties, oF statutes of the

_ ‘United States otherwise’ req or provide,

shall be regarded as rules of d ion in trials

at common law, in the courts of the United

States, in cases where they apply.’ |

An Swift v. Tyson, 16 Pet. 1, 19, 10 L. Ed.

865, a leading case, the Supreme Court, in con-

be adopted and fdilowed by this court arg so wel!

stated in Thomas v. Potter Title & Trust. Company, .

senting funds of the insolvent bank on deposit in the

apes ds 16 oo ae

eee the above act, mal: And we have

not now the slightest difficulty in holding, that

this section, upon its true intendment and con-

struction, is strictly limited to local statutes

and local usages of. the character before stated,

and does not extend to contracts and other

instruments of a commercial nature, the true

interpretation and effect whereof. dre to be

ce sought, not. in the decisions of the local tri-

bunals, but in the general principles and doc-

N trines of commercial jurisprudence. Undoubt-

: edly,-the decisions of the logal tribunals. upon

such subjects are entitled to, and will receive,

the most deliberate attention and respect of

this court; but they cannot furnish, positive

rules, or conel ive authority, by which our

‘own aera are to be bound up ‘and *

erned.’

0 Rollo, 85 U. S. (18 Wall.) 629,

8 632, 21 L. Ed. 927, the Supreme Court said:

In Pennsylvania, it is true, set-off is allowed

in cases where the claims are not mutual, and,

in that State, under the decisions there, it is

probable that set-off would be allowed in such ~

a case as this. But we do not regard the rule

adopted in Pennsylvania as in accord with the

general rules of equity which. govern cases of

set-off. We think the general rule is stated by

Justice Story, in his treatise on Equity Juris-

prudence, where he says: Courts of equity,

following the law, will not allow a ‘sét-off of a

joint debt against a separate debt, of converse-

ly, of a separate debt against a joint debt; or,

to state the proposition more generally, they 8

will not Allow a set-off of debts accruing inidif-

‘ferent rights” Zoo’ : . *

| These rulings impliedly recognize that *

* o\ _. . United 88 exercise an n

* judgment on matters of set-off and do not fol-

low the decisions of the state courts.

i N „ A the determination of this: question in-

8 75 vol ves an interpretation of. the national bank-

. ing laws, which it seemingly does, then the

VDnited States law controls. In McCandless v.

— Dyar (D. C.) 34 F. (2d) 989, 991, defendant

was indebted to a national bank. He set up as

a defense thereto a claim in the nature of a set-

off for money paid by him as a 9 of she

bank. The court said: |

1 Hascthis e the right of set- off

under the circumstances pleaded in this action,

brought by the receiver upon his indebtedness

to the bank? .

5 a ‘The right to the allowance of such an off.

: set in the case at bar must be determined in

the light of ‘the statutes of the United States

controlling suspended national banks in the

hands of a receiver appointed by the. Comp-

troller of the Currency, and especially the pro-

visions of the United States statutes prohibit-

ing preferences in the liquidation of national |

= SE ae | | aa.

An. the United states courte there must be

‘mutuality’ of right before a set-off can be as-

serted. „ N 5 4

After citing the excerpt from Scammon v. Kim-

ball, Assignee, 92 U. S. 362, 367, we heretofore quoted

in our brief, the court continued at page 14:

In Western Tie & Timber Co. v. Brown, 196

U. S. 502, 25 S. Ct. 339, 49 L. Ed. 571, a bank-

~*~ f

rupt was indebted to the timber company. The

timber company was indebted to the bankrupt

as trustee. It was held the timber company

could not set off the trustee debt against the

individual debt. .

: In- United States v. Butterworth - Judson

‘Corp’n et al. 267 U. S. 387, 395, 45 S. Ct. 338,

340, 69 L. Ed. 672, it is stated: A bank having

notice that a deposit is held by one for the use

of or as security for another has only such

right of set-off as is not inconsistent. with the

rights of cand latter.’

“The n cases in principle rule that

defendant cannot set off its deposit in the Bank

- of Pittsburgh, N. A., as trustee against the de-

posit of the E ink of Pittsburgh, N. A., with de-

fendant i in its own right. ; g

8 “The a laid down- in the foregoing

cases is the law of Pennsylvania. On June 27,

1932, the Supreme Court of Pennsylvania, in

William D. Gordon v. Union Trust Company,

308 Pa. 493, 162 K. 293, 294, a case identical in

principle and almost parallel in facts, es

by Mr. Juntioe Kephart, said: a

5 The Commercial Trust Company deposit.

ed $6,429.50 with the Union Trust Company,

the account being styled ‘Commercial Trust

Company Trust Furtds’. The Union Trust Com-

pany had $6,808.45 on deposit with the Com-

mercial Trust Company, this account being

styled ‘Union Trust Company Trust Funds’.

It is conceded that both deposits represented

trust funds of the respective institutions, and,

as such, were the property of various cestuis

‘ ‘que trust or beneficiaries of each bank.

—

nion Trust Company was, and still is, a

solvent going concern, Commercial passed into

the hands of the secretary of banking because

of impairment of capital. The secretary drew

on Union for the trust funds of Commercial

which it held. Payment of his draft was re-

fused since Union claimed a set-off against it

because of the trust fund deposit it had in Com-

mercial. The court below refused to permit

the set-off for the reason that it did not appear

that there was mutuality of demand both as

regards the quality of the right and the iden- 1

tity of the * : “

sai The nee and * of the banking

department have resulted in a general practice

among trust companies of depositing trust

funds exactly as was done in this case. The

beneficial owners of Commercial’s trust ac-

count are A, and C; their money is in the

‘Union Bank. 0 beneficial owners of Union's

trust account are X, X, and Z, and their money

is in the Commer cia Bank. Strike the trust

companies out of the picture, as they are only

trustees holding legal title, and the matter is

reduced to its simplest, form. What is then

asked in the set-off is that the money of A, B.

and C, be used in part to pay the debts to X, .

and 2. This we held in Hunter v. Henning, 259

Pa. 347, 103 A. 61, could not be done. Appel-

lant attempts to limit that decision to its facts

inasmuch as the trust accounts were there

plainly earmarked, but as we said in Trestrail

v. Johnson, 298 Pa. 388, 148 A. 493, 494: Gen- a

erally speaking, in all cases where the owner-

ship of the fund itself has been in dispute, and

not the right to administer it, the court has

been particular to do nothing which would dis-

turb in the 9 the fund reaching its des-

i“ |

. 2

Company in the Bank of Pittsburgh, N. A.,

the Potter Title & Trust Company would re-

tined lawful end, without unnecessary risks

that might come if a more liberal policy was

adopted; it being conceded th nd was a

trust or one that can be called. sue f

8 The dvestion here then is one of owner-

ship, not one of determining the status of a

deposit between the bank and the depositor. a”

The underlying equitable principle set forth in

Trestrail v. Johnson, supra, controls. The

names in which suit could be brought and de-

fended furnish an indication, but are not the

only criterion, of the right of set-off. To whom

do the funds really belong? Mutuality of

right in a. set-off is not circumscribed by the

‘right to bring an action’, but the broader ques-

tion may be, and generally is, of importance.

Whose money or claim is proposed to be used 8

as a set-off? This is the true equitable prin-

| ciple which governs such’ questions.

“If the deposit of the Potter Title & Trust

had been Of its own money, it would have been ;

entitled, under the law, to set off the same

against the deposit of the Bank of Pittsburgh,

N. A., of its money in the Potter Title & Trust

Company, although the result might be that

ceive its entire deposit, while other depositors

of the Bank of Pittsburgh, N. A., might receive

only a portion of their deposits. But the de-

posit of the Potter Title & Trust Company. in

the Bank of Pittsburgh, N, A., was not of its

- Own money, but it was of the money of other

persons in which it had no interest other than

as trustee or agent. Why should the deposit

of such persons be paid in full when such pay-

ment may work a preference as against other

‘ditties and ęreditors of tlie Be of Pitis-

burgh, N. A. Such a result would be unjust,

and is contrary to the decisions of the United

States and Pennsylvania courts.” “.

Ihe general principle of mutuality in . of

right in offset is succintly expressed in „ v.

Scutt, 55 Conn. 125, 127:

“One of the first and b principles

of set-off is, that the demand must be due the

party in his own right, either as original crebd.

itor or as owner hy assignment. The owner-

ship must be such as to stand these two tests:

Ist. Could he bring a suit in his own name as

‘plaintiff? 2d. If he could, would the avails re-

covered be for his qwn use, pleasure and bene-

fit? Parsons on Contracts, (5th Ed.) top page

737.” (Italics — ;

Again adverting to the question of — ' in

quality of right, we believe this requirement is based 2

ona sound legal question, “to whom does the money

or the claim actually belong, or differently stated, is

the party seeking to obtain the benefit of the offset

thé real owner of the ‘claim ? 2?” The rule is previously, 7

but well stated, in Olmstead v. Scutt, 55 Conn. 125,

127. |

And, in an early case in Michigan, the Supreme :

Court of that state held, in McGraw v. Pettibone, 10

Mich. 530, 537; ee gees

Aer

exception—so far as we have been able to dis-

cover that the party who seeks to obtain the

benefit of a set-off. must be the real owner, and

have the control of the counter claim, so that

his .creditor who sues him is his debtor as to

the claim offered i in reduction: 2 Pars. on Cont.

** 2 a

It seems to us that the preferable rule, for which.

authority exists in both the Federal and state courts,’

Thomas v. Potter Title & Trust Company, supra; Gor-

don v. Union Trust Company, supra, and McGraw v.

- Pettibone, supra, is that a set-off cannot be sustained

unless the party seeking to obtain the benefit of the

set- off is the real owner of the @laim, and is equitably

entitled to the funds sued for, which he may use as

his own. It would appear obvious that if mutuality’ b

in quality of right is an essential element in éstab-

lishing the right to set-off then. the conclusion of the

lower court that it was a matter of no concern to the

~ appellant. that the Clearwater bank held the checks

for its depositors for collection, or for. value, was an

erroneous 3 which led the court into error.

Before passing on bo 0 a. ene of the. law re-

specting ownership of the items in question, it should

be noted that the law of set-off also requires mutu-

' ality of parties. In Gray v. ä 18 Wall. 629, 632,

3 court held: : !

“Courts of equity, following the law, will

not allow a set- off of a joint debt against a

separate debt, or conversely, of a separate debt

against a joint debt; or, to state the proposi-

tion more generally, they will not allow a set-

off of debts accruing in different rights.” i

‘And in Resurepard v. Case, 91 v. 8. 134, 141, it

was said: 8

| That indebtedness was. not: e er

and extinguished by operation of law by the

- indebtedness at the time uf the bank to May,

if such existed. Personal debts are only set off

to each other, or compensated the one by the |

a . ° Other, by operation of law, when they are of *

4 the same personal character. |

debt is not thus offset or comper

mand of one indivi member against the

Wcreditor. There is no * in such cases

~ betwee the parties.” * i

It i is here urged that whit ‘itil of the claim

is shown i in parties other than the defendant claiming

the’ set-off. right, thus establishing the lack of mu-

uality in quality of right for offset purposes, it fol-

lows as a matter of law, that mutuality of parties

does not exist and on that ground the 3 for the

„ allowance of set-off fails. ,

That the right to set-off must exist at the moment

of insolvency and suspension, for the „rights of the

parties are fixed as of that time, is a proposition o

well settled by repeated decisions of this court as not

to need argument. Scott v. Armstrong, 146 U. S. 499,

. Yardley v. Philler, 167 U. 8. 344, Davis v. Elmira Sav- .

nn. 161 U. S. 275.

. (5) The ne of in éontract, respecting

ownership of the items deposited, discussed, in con-

_ nection with the relation between the Clearwater

bank and its 3 in * transaction.

a *

i ak

* Proceeding upon the Wh stated under Sub- |

dipision IV of the Argument, supra, that mutuality in

quality of right is essential to the establishment of

the legal right to set-off, and that, a determining the

. existence of this element the i inquiry must be directed

to the question of ownership of the items deposited,

it is submitted that the relation between the Clear-

water bank and its customers from the moment of

the deposit of the items with the Clearwater bank to

the date of suspension of the St. Petersburg bank was

one of agency, under which relation the Clearwater

bank was a mere collecting agent for its customers

without any. interest in, or title ty, the items de-

ö *

1 the deposit of commercial paper in a

85 bank the general rule is stated by this court in “ity

of Douglas v. Federal Reserve Bank of Dallas, 21

U. S. 489, 70 L. Ed. 1051, n a

‘When paper is 1 without n .

tion by a depositor, and is at once passed to

his cregit by the bank to which he delivers it,

he becomes the creditor of the bank; the bank

becomes owner of the paper, and in making the

collection i not the agent for the depositor.

Burton v. United States, 196 U. 8. 283, 49 L. ma.

482, 1 243;

However,’ ‘as Stated in Federal 8 Bank v.

Malloy Brothers, 264 U. S. 160, 68 L. Ed. 617, the rule

+ er)

may, of course, be varied by. contract, 3 or im-

* At page 104. the court said:

, Here the relations of ac payee to the ini- :

** 5 =

( = 5 1

Rit

tial bank of porn are controlled by the Flor-

ida statute with respect to which it must be

erase they dealt with each other.“

With refererice to a similar situation the United

States Circuit.Court of Appeals for the Fifth Circuit

(involving the same insolvent national bank), in the

recent case of City of Miami v. First National Bank

of St. ‘Petersburg, 58 Fed. (2) 561, $62, stated:

+. -“Tt.is held generally that a bank e

items for collection and remittance is before

collection the agent of the sender or the .

owner of the item, according to whether the

New York or the Massachusetts rule applies.

Marine Bank v. Fulton County Bank, 2 Wall.

(69 U. S.) 252, 17 L. Ed. 785; Commercial

Bank v. Armstrong, 148 U. S. 50, 13 8. Ct. 533,

37 L. Ed. 363. In these cases it was said that

this relation of. principal and agent continues

after colléction as to funds collected with the

consequent duty of holding them for, and send-

ing them to, the principal, unless there is an

agreemept as there was in those cases, express

or „as to the funds after collection,

rlaaising tie relation of debtor and creditor.

“Tt is alec. the rule in those jurisdictions j

where the Massachusetts rule prevails that

banks receiving items for collection may select

the other banks to act as subagents for the

owner of the item, and that these banks so

selected, in the absence of other agreement,

représented, not the forwarded), but the owner ~

of the item. This is the rule in Florida by

statute. Federal Reserve Bank v. Malloy, 264

V. S. 160, 44 S. Ct. 296, 68 L. Ed. 617, 31 A. L. R.

1261; Atlantie Nat. Bank v. Pratt, 95 Fla. 822,

1 5 .

116 80. 635; Edwards v. Lewis, 98 Fla. 956,

124 So. 746; Myers v. * Reserve Bank

ae (Fla: ) * 80. 600.“ 1 f

* The state rule is indicated by the ‘following ex-

berpt appearing in in the case of Biwarde v. Lewis, 98

Fla. 956: . ; |

“In the case of Montadoca v. ‘Highlands

Bank & Trust Company, 85 Fla. 158, 95 So. 666,

667, this court, in an opinion prepared by Mr.

Justice:Whitfield, stated. that the statute above

quoted makes the bank in which a check is de-

posited for deposit or collection liable only ris

after actual final payment is received by it ‘un-

> Jess it is negligent in its duty according to the

0 regular course of business ot banks’ and that

| the statute controls, and the decision in Brown

v. Peoples Bank for Savings of St. Augustine;

59 Fla. 163, 52 So. 719, 52 L. R. A. (N. S.) 608,

is not applicable. In other words, the statute

has changed the rule so that now the relation-

ship of the depositor of commercial paper with

his bank of deposit, even though the deposit

is not for collection, is in the nature of prin-

cipal and agent, until such paper has been col-

lected and payment actually received by the

bank, in which event, the depositor becomes 5

the ereditor of his bank, the debtor. * ay

Tne transaction in the case here presented is gov- :

ered by Section 6834, Compiled General Laws of ae

. Florids, 1927, as follows: * .

: @ axe en eg

“When a sient: draft, note or other cr nego. PC

able instrument is deposited in a bank

- credit, or r for ay it shall be considered

due diligence on the part of the bank in. the

collection of any checky draft, note or other

‘negotiable instrument so deposited, to forward

en route the same without delay in the usual

commercial way in use according to the regu-

lar course of business of banks, and the maker,

endorser, guarantor or eurety of any check,

draft, note or other negotiable instrument, so

deposited, shall be liable to the bank until ac-

tual final payment ig received, and when a bank

receives for coll any check, draft; note or

other. negotiable instrument and forwards the.

same for collection, as herein provided, it shall

only be liable after actual final payment is re-

ceived by it, exeept in case of want of due dili-

gence c on its part as aforesaid.’ 9

"Plaintiff's 1 to defendant's IV, V. Vi

eae: and VII pleas, (R. 7-10) and plaintiff's replication to

‘ _- defendant’s III plea (R.. 13-14) allege, and the demur-

7 rers thereto admit, that the checks or drafts which

the Clearwater bank sought to set off against the St.

Petersburg bank's claim were “depo: sited with the de-

fendant, Peoples Bank of Clearwater, for collection,

* which last mentioned checks or dtafts were forward-

“.. ae defendant to the First National Bank of St.

Petersburg“, for collectign and remittance. - Under

Section 684, as construed by this honorable court, by

the United States Circuit Court of Appeals for the

Fifth Circuit, and by the Supreme Court of Florida,

tze title to the checks or drafts sought to be made

; the basis of a plea of set-off by thé Clearwater ba 5

and not in the bank at the time 2 St. Petersburg

: bank closed. * „ kal fee ;

7 ae

„* 4 ‘a —

f g i

0 . 30 oe ee

It is conceded that the right to set-off 00 in

the Clearwater bank’gy customers in the event these

customers’ indebtedness to the St. Petersburg bank

is atively established, and this. conclusion, in

If, negatives the existence of a right to set-off in

thie Clearwater bank.

i (6 1 he right to iii discussed, where bene-

* ficial ownership of the claim vests, not in the Clear- -

ogter bank, but in its depositors. |

8 (a) We er the reasoning adopted and the

eS doctrine’ established by the court below is expressly

refuted by the United States Circuit Court of Appeals

for the Fourth Circuit in Federal Reserve Bank of

Richmond v. Early, 30 Fed. (2) 198, where this iden-

tical question was presented. The court, in discuss-

ing the fundamental principle. here involved, said:

1 “On the second question, we do not think

that the Reserve B has the right to set off

the balance-due by the insolvent bank on the

checks against its stock liability. ‘The Reserve

Bank was not the owner of these checks. It

was merely an agent for collection, and, al-

though it credited them to the actownts of the

«~~ forwarding banks this was upon agreement

that they might be charged back, if not col-

lected, and the second lot of checks has been

charged back. It is perfectly clear that

the liability of ty iowent member bank for

— these checks is al liability owing td the owners

of the checks, in which the Reserve Bank is

not interested, except as collection agent, and

is not “a debt of the insolvent member bank .

to the Federal Reserve Bank,“ within the

* of the statute.

—

“Even in the n of a statutory direc-

tion as to how the liability should be applied,

a2 set- off of checks held for collection against

such a liability would not be allowed, for the .

reason that demands to be set off against each

other must be mutual; that is, they must be.

due to and from the ‘same rs and in the

same capacity.“ fs

It is respectfully one that the correct rule of

law governing the transaction here presented is ‘that

the Clearwater bank was the collecting agent for its

customers of the items deposited by reason of the

Florida statute, which controls, and, by reason of this

“relationship, it results that beneficial ownership of

such items remained in the bank’s customers. until

collection thereof was made. by the Clearwater bank

in cash or solvent credits; and, inasmuch as this re-

sult never occurred, the agency relation of the bank |

continued to exist down to the moment of insolvency

and suspension of the St. Petersburg bank, at which

time the Clearwater bank held the remittance drafts

as trustee for the beneficial owners of the items, its

depositors, in which situation neither mutuality in

quality of right nor mutuality in parties for offset

purposes existed, and the allowance of the set-off

claimed would constitute an illegal preference to the

Clearwater bank’s customers over other creditors of

the insolvent St. Petersburg bank, in direct violation

of the ratable distribution ‘rule required * the Na-

tional Bank Act. 5

—

ANALYSIS OF CASES _ SEEMINGLY CON-

TRARY TO CONTENTIONS . HERE MADE. BY

PETITIONER.

Nomland v. First National Bank of Kansas City,

No., Gs Fed. (2) 399.

Harry Wenne Receiver of the State Bank of

Stockton, Kansas, brought suit against the First Na-

tional Bank of Kansas City, Mo., for $1,460.94 upon

the following facts: The Kansas City bank mailed

a cash letter to the Stockton bank containing checks

amounting to $1, 460. 94 drawn. upon the latter bank

by certain of its depositors, which checks the Kansas

City bank had received from its own depositors, and

had given such depositors credit upon their respec-

tive accounts, the deposit being made under the usual

form of deposit slip used by the Kansas City bank,

which provided that items deposited may be handled

as the customer’s agent, that the bank as agent, or

owner, is not liable for negligence, default or failure

of other banks selected as agents or subagents or for

losses in transit with the right to charge back until

actual cash payment is received. On November 12,

1927, the Stockton bank received said checks from

the Kansas City- bank, charged them to the respective

accounts of its depositors, who had issued them, and

mailed, on that day, a cash letter to the Kansas City

bank containing a draft for $1,460.94 drawn by the

Stockton bank on the Kansas City bank in remittance

for said checks, and debited its own account with the

Kansas City bank with that amount. On that date,

and prior to the time of drawing the draft, the Stock-

ton bank had to its credit: with the Kansas City bank

the sum of $3,592.62. On Monday morning, Novem-.

5 ber 14, 1927, the Kansas City bank received the cash

letter.and the draft from the Stockton bank but be-

| 33 3

fore it had made any entry or record of the receipt of

from the national bank examiner in charge advising

it that the Stockton bank had closed and to withhold

payment on all outstanding drafts. e Stockton

bank did not open for business on November 14, 1927.

The reasoning of the court follows: That assuming

mutuality of debtor-creditor relation is a ‘prerequisite |

to the right of set-off, the answer to the question as

to the set-off right existing depends upon ownership

of the checks transmitted from the Kansas bank to

~ the Stockton bank; that the unrestricted endorse-

ment of thé checks by the Kansas bank's customers

passed title to the Kansas bank; that the deposit con-

tract did not create an agency relation, and since the

Kansas bank was the owner of the checks the moment

the Stockton bank collected them by simply making

proper entries on its books, there arose between the

Stockton bank and the Kansas City bank the mutual

relation of debtor - creditor and the right of set-off

arose in favor of the Kansas bank, which was not de-

feated by the subsequent F and suspension

on the * of the Stockton bank. a

While we do not . that the deposit contract

there under consideration did not represent a special

„agreement controlling ownership of the items deposit -

ed, St. Louis, etc. Railway v. Johnston, 133 U. S. 566,

-& p assert that the basic principle for which we now

contend was there decided in our favor, following.

Hirning v. Federal Reserve Bank, 52 Fed. (2) 382, to

the effect that the relationship of the parties deter-

mines the right to set-off, hence where ovmerahtp of

the items, under a collection agreement, is established

in the bank’ s customers, set-off is not available, but

where ownership is shown to be in the bank set-off is

available. In order to find for the Kansas bank the ,

court found it necessary to determine ownership of

the items in that bank, and having reached this con-

clusion’ we agree that the right to set-off followed.

As a matter of law it will be noted that had the court

reached a different conclusion on the question of own-

ership a contrary result would have followed, in order

for the court to be consistent. Bosworth v. Conti-

nental Illinois Bank & Trust Company, 65 Fed. (2)

632. (Petition for certiorari now pending in this

court. ) a 8 .

x 222

In this case the receiver of | the McCartney Na-

tional Bank of Green Bay, Wisconsin, brought suit to

recover its credit balance in the Continental Illinois

Bank & Trust Company and the latter bank pleaded

its right to set-off, against such deposit balance, a

draft in the sum of $10, 823. 14 issued by the McCart-

ney National Bank on the Federal Reserve Bank of

Chicago in favor of the Continental Illinois Bank &

Trust Company, which failed payment by reason of

the closing of the national bank. The draft repre-

_ sented attempted payment for checks drawn on the

- McCartney National Bank, which had been deposited

in the Continental bank under an agency contract,

and forwarded by the Continental bank to the Me-

Cartney bank for collection and remittance. In |

allowing the set-off the Circuit Court of Appeals for

the Seventh Circuit followed A. M. Anderson, Re-

ceiver, v. Taver Bayly, 63 Fed. (2) 592 (the case

35 ;

now . consideration) , and ‘Henkin’, Receiver v.

‘First National Bank of Kansas City, 64 Fed. (2) 399

The court held that these two cases.dealt with some-

what similar fact situations and were favorable to

the Continental Bank. In view of the fact that cer-

tiorari has been granted in the first case, and is now

being argued on the precise question involved in the

McCartney - Continental case, and that in the Nom

land-First National Bank case ownership of the items

was determined in favor of the Kansas bank, it is

denied that these cases are authority for the decision

reached by the Circuit Court of Appeals for the Sev- .

enth Circuit, and it is respectfully submitted, for the

reasons set forth in the pending case, that the eourt

there reached an erroneous concluston as a matter of

law. ö

THE FACT THAT THE Sr. PETERSBURG

BANK HAD FORWARDED ITS DRAFT IN PAY-

MENT OF THE CASH LETTER DISCUSSED.

Inasmuch as the drafts ‘forwarded by the St.

ecu bank were not paid the relation between

t bank and the Clearwater bank was not changed,

; under the agency contract the Clearwater banks

customers were entitled to get what. their bank had

received at the moment of the insolvency and suspen-

sion of the St. Petersburg bank, or, in other words,

the beneficial owners of the items deposited for col-

lection and credit then became the beneficial owners

of the drafts, upon which they or the bank as their

agent, may prove their claim against the assets of the

insolvent bank in the hands of the Comptroller’ 8 re-

ceiver. It thus results that they are remitted to the

igi $h

general funds, unless they are able to prove the ele-

ments essential to the allowance of a preferred claim,

trust relationship, augmentation and. tracing, on the

authority of Larabee Flour Mills v. First National

Bank of Henryetta, 13 Fed. (2) 330, certiorari denisde

41 Sup. Ct. 238, U. S. 727, Blakey v. Brinson, 286 U. 8.

254, 76 L. Ed. 1089, Hirning v. Federal Reserve Bank,

52 Fed. (2) 382, Empire State Surety Company v.

Carroll County, 194 Fed. 593, Mark v. Westlin, 48 Fed.

(2) 609, Mac Donnell v. Guy, 63 Fed. (2) 334, Schill-

ing v. Rowe, 64 Fed. (2) 188, Beard v. Independent

‘District bf Pella City, 88 Fed. 375. Collection having

been ‘effected by a transfer of credits on the books of

the St. Petersburg bank the settled Federal rule class- )

ifies the claims of the Clearwater bank’s customers

as general only. ö g

ANALAGOUS PRINCIPLES OF LAW, REPRE-

SENTING QUASI FIDUCIARY RELATIONSHIPS

IN OFFSET, DISCUSSED.

| It is difficult to understand why the principles of

* law in the case now under consideration are different,

5 when considering the rule of law governing set-offs,

from the settled 1 rule of law firmly established in both

- Federal and state courts in this country in quasi fidu-

_ ¥ ciary relationships. It would seem clear that, since

the Clearwater bank held the items deposited, and the

draft remitted in payment thereof, under an agency

relation, the Clearwater bank was a trustee for the

beneficial owners, its customers, and, as such, is in

no other or different relation, in applying the rule of

law in set-off, from any other person a prop-

erty ina fiduciary W :

* The principle governing set-off in cases involving

fiduciary funds was first established in Wilson v. Cod-

man's Executor, 3 Cranch 193, 203, in this colloquy

between counsel * the court, — argument:

——

* e en

“Simms, ‘Cine. — No set-off against the:

trustee can be set up against the cestui que

trust. The authorities cited in Winch and

_ Keely can be produced, if the court should re-

quire it. j

Marshall, Ch. J. — There is no necessity to

produce authorities. There can be no question

on that point. If the agent, appointed to col-

lect a debt, is indebted to the debtor, the latter

cannot offset, against the debt due from him to

the principal, claims „ the agent. It can-

not be contested.“

U. S. 122, the court held that where a bank, after re-

| fusing discount paper sent to it by the. ‘insolvent

while a going concern, for that purpose, has retained

the paper, it cannot, as against general creditors, set

‘off against that paper or its proceeds, the bankrupt’s

overdraft, although made after such refusal and

pending the retention of the paper. This holding by .

the court was restated in the case of In Re G. F. Red-

mond & Company, Inc., ics tak (2) 501, 502:

Then i Hanover National Bank v, Suddath, 215

S , e 8

“The contention of the trustees relative to

this right of set-off is based on a well settled

doctrine that a simple debt cannot be set off

against a quasi fiduciary obligation, such as

Ginsburg owed the bankrupt corporation.

Western Tie & Timber Co. v. Brown, 196 U. S.

38 7

502, 25-S. ot. 339, 49 L. Ed. 571; Libby v. Hop-

kins, 104 U. S. 303, 26 L. Ed. 769; Hanover

Nat. Bank v. Suddath, 215 U. S. 122, 30 Sup.

Ct. 63, 54 L. Ed: 120.”

And in an 2 Federal District Court case, The |

Zouave, 29 Fed. 296, 298, the rule is —

“To —— a set-off the debts * *

between the parties in their own. right, and

must be of the same kind or quality, and be

clearly ascertained or liquidated .-. . And by

the civil law it was necessary that the debt or

claim, to be compensated, should be certain and

determinate, and actually due, and in the same

, right and of the same kind as that on. the other

side. ‘Story, Eq. Jur. Sec. -1441.”

The principle that a simple debt cannot be set off

against a quasi fiduciary obligation has been repeat-

edly followed in state cases, and it applies to execu-

tors, see Dale v. Cooke, 4 Johns. Ch. (N. V.) 11, 16,

where Chancellor Kent says:

“Here was an explication | to set off a debt

arising on a contract with an executor, against

a debt arising on a contract with ‘a testator.

They are not debts due to and from the same

persons, in the same capacity, and there is no 7

; mutuality: 2

which holding Was followed 15 Starke v. Myers, 53

N. X. ae 650, 651, to the effect that:

It is well settled that iia against an

executor or administrator individually cannot

be offset against claims in his favor in a repr -

sentative capacity as trustee for the estate.“

ge Oa

and the case of Laighton et al., Executors, v. Brook - 5

7 line Trust Company, a 458, at page 460, 114

| * E. 671, where it was held: 5

We think that the right to set-off is lim-

ited to the balance of the deposit as it existed

at the time of the testator’s death. It could

not successfully be contended that if, upon the -

appointment of the plaintiffs as. executors, they

had opened a new account and made deposits

therein, the d@fendant could have set off its

claim against such account.. . To hold other-

wise would permit the defendant to obtain an

inequitable prefer nce | which would be unjust

to other ereditors

The rule is applicable trustees, see Harris v.

. Biott et al., 48 N. . S. 1020, 1021, where the court

state: . Meee uy |

; t is clear, as a — of . that the

° plaintiff cannot, as against the beneficiaries of

3 a fund which he holds in trust, offset a per-

.. > sonal claim; or, to express it differently, a

trustee cannot set off his personal claims

against a beneficiary so as to avoid 1

e . f

Likewise,. in Eilis v. Baker Matthews Lumber

Company, 248 8. W. 7, 10, it was determined that:

6 *

“A trustee cannot set off: against the trust i

indebtedness an independent debt due him

individually. The trustee is not a debtor. -

Therefore, any debt owing by him or due to

_ him individually is not due in the same right

— capacity as a trustee, _ lacks mutuality. 1

andi in Kaye v. Metz, 198 Pac. 1047, 1049, ere the

court, in denying set-off to creditors of an lvent

corporation for their claims against their unpaid

| holdin in the corporation, seid: ae 5

A. editor stockholder would thus obtain

a preference. In order to warrant a set-off,”

the debts must be mutual, and the principle of

mutuality requires that the debts should not.

only be due to and from the same person, but -

in the same capacity.” 19 Cyc. 894. The trus-

tee in bankruptcy/ held these stock liabilities,

as above stated, as trust funds * * benefit

f ot creditors. * ere

7. A similar sts was reached i in Mahon v. Harney |

ae National Bank, 206 P. 224, 227:

.. .."There is no 5 richt of set-off against a trus-

tee depositor. Sanford v. Pike, 87 Ore. 614,

170 Pac. 729, 171 Pac. 394; Cent. National

Bank v. Conn. Mut. L. Ins. Co., 104 U. S. 54,

- . 26 L. Ed. 693; Union Stockyards Nat. Bank v.

Gillespie, 137 U. S. 411, 11. Sup. Ct. 118, 34 L.

Ed. 724. In order to counterclaim, the debt

must be between the same parties and the

same right.“

and the general rule is announced by the Supreme

Court of Massachusetts in Bates v. —

Trust Co., 133 N. E. 3 760:

)

. Acept W special circumstances and

where the proofs are clear and the equity very

strong, equity, following the law, will not allow

a set-off in different rights than is allowed by

the enacted statutes of set-off. Jump v. Leon,

: be

5 192 Mass. 511, 78 N. E. 582, 116, Am. St. Rep.

% ° (265; Perry v. Pye, 215 Mass. 403, 102 N. E.

653 Scammon v. ann. 92 U. 8. 362, 367,

23 L Ed. 483. 3

E462 a

It is e contended that no island differ- a

ence exists between persons holding funds in a fidu-

¥ ciary capacity, such as executors, administrators,

- _ trustees, : guardians and public officers, and a bank

holding funds or property of its customers or deposi-

tors under a trust relationship ereated through an

agency contract. We believe this court so indicated

in Hanover Nat. Bk. v. Suddath, / 215 U. S. 122, where

it declined to ‘sanction a set-off of credit instruments

held in trust against the insolvent bank's indebted-

ness to the holder of, the discount’ paper which the

N Hanover Bank had refused to discount. To enforce

any other rule would, of necessity: create a prefer-

_ ence to the detriment of the general creditors of the

3 insolvent .

i CONCLUSION...

It is l submitted that the foregoing dis-

cussion discloses that the right to set-off does not

exist in the present case; that the Clearwater bank

was not the beneficial owner of the items deposited N

by its customers, or the remittance:drafts forwarded oes

in payment thereof; that neither mutuality in qual -

ity of right nor of parties exists in this case, and that

the allowance of set-off contravenes the ratable dis-

tribution section of the National Bank Act; that the

lower court’s ruling is.in direct conflict with funda-

mental principles of law controlling decisions of. the

42 oo .

Federal courts; and that an affirmance of the lower

court’s decision will, in effect, overrule the settled law

in this country respecting the allowance of set-off in

the Federal courts, and adversely affect the interests

of ereditors of about two thousand national banks

now in the hands of the Comptroller of the Currency

and his receivers. |

„ 3 e that the Abels of

* * court should be. —— es

* f oa DONALD. C. McMULLEN,

Se ° Attorney for Petitioner.

F. G. AWALT, - : 5 9

GROROE P. . oa eee ee

- GEorcE B. SPRINGSTON, | :

Attorneys for Comptroller of the .

8 f Counsel. Ne

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