274; Barbour v. National Ex-
change Bank, 50 Ohio St. 90, 20
L. R. A. 192, 33 N. E. 542; Farm-
er's Deposit Nat. Bank v. Penn
Bank, 123 Pa. 283, 2 L. R. A. 273,
16 Atl. 761; Merchants Exchange
Bank v. Fuldner, 92 Wis. 415, 66
N. W. 691.
2 A set-off, arising out of an ex-
press contract with bank respect-
ing claim sued on, may be allowed.
Park V. Carmichael, 20 Ga. App.
36, 92 S. E. 397.
The debtor of an insolvent cor-
poration has the same equitable
right of set-off against a claim of
the receiver that he had against
the corporation, but no right to a
judgment against the receiver.
Van Wagoner v. Paterson Gas-
light Co., 23 N. J. L. 283; Cumber-
land Bank v. Hann, 18 N. J. L.
222; Ryall v. Larkin, 1 Wils. 155,
BuUer's N. P. 181; McDonald v.
Webster, 2 Mass. 498; Colt v.
Brown, 12 Gray (Mass.) 233.
The remedy of set-off has been
much enlarged in equity. Thus at
law a joint demand can not be
set off against a general one, nor
a general demand against a joint
one; but equity adopts a different
rule where, on account of the in-
solvency of one of the parties, the
other is in dan.t::er of losing his
claim. Generally equity will en-
force the right of set-off. Arm-
strong V. Warner, 49 Ohio St. 376,
17 L. R. A. 466, 31 N. E. 877;
Louis Snyders' Sons Co. v. Arm-
strong, 37 Fed. 18; Yardley v.
Clothier, 49 Fed. 337; President,
etc., of State Bank at New Bruns-
wick V. Receivers of Bank of New
Brunswick, 3 N. J. Eq. 266.
In Scott V. Armstrong, 146 U. S.
499, 36 L. Ed. 1059, 13 Sup. Ct. 148,
it is held that a receiver of an
insolvent national bank on the dis-
solution of the bank takes the as-
sets in trust for creditors, and in
the absence of a statute to the
contraiy, subject to all claims and
defenses that might have been
interposed against the insolvent
corporation. The ordinary equity
rule of set-off in case of insolvency
is that where the mutual obliga-
tions have grown out of the same
transaction, insolvency on one
hand justifies the set-off of the
debt due on the other; and there
is nothing in the statutes relating
to national banks which prevents
the application of that rule to the
receiver of an insolvent national
bank. Thus where a customer of
a national bank, who, in good faith,
borrows money of the bank, gives
his note therefore due at a future
day and deposits the amount bor-
rowed to be drawn against any
balance applied to the payment of
the note when due, has an equi-
table but not a legal right, in case
of the insolvency and dissolution
of the bank and the appointment
of a receiver before the maturity
of the note, to have the balance
of his credit at the time of the
insolvency applied to the payment
of his indebtedness on the note.
See, also, Van Dyck v. McQuade,
1422 LAW OF RECEIVERS.
vency and not by conditions thereafter created.' Al-
though a set-off may be permitted of a dividend upon a
claim as against a debt owing by the claimant/ the
right of set-otf is generally limited to claimants whose
obligations are of the same class. Thus it has been held
that in a suit by a receiver to foreclose a mortgage, the
mortgagee who is a depositor may not set-off his deposit
to the prejudice of other depositors.^* So also a judgment
debtor who is also a depositor may not set off his deposit
against the judgment.^
Where defendant purchased a claim against a bank to
which he was indebted, and the bank goes into a receiver-
ship, the assignment of the claim does not give him the
right to have it applied on his note to the bank pending
the receivership; but if the bank resumes business, and
the deposit having remained intact, defendant is then en-
titled to have the assigned claim credited against his
indebtedness, subject to the bank's right to deduct there-
from any debt owing to it by the assignor.^ The party
claiming the set-off has the burden of establishing his
85 N. Y. 616; Lanier v. Gayoso 4a People v. Market Street Bank,
Sav. Inst. 9 Heisk. (Tenn.) 506; 18 Cal. App. 698, 124 Pac. 568;
Stone V. Dodge, 96 Mich. 514, 21 Hannon v. Williams, 34 N. J. Eq.
L. R. A. 280, 56 N. W. 75. ^55, 38 Am. Rep. 378.
3 People V. California Safe De-
5 Spellman v. Payne, 84 Va. 435,
4 S. E. 749.
posit & Trust Co.. 168 Cal. 241, ^ Borough Bank of Brooklyn v.
L. R. A. 1915A. 299, 141 Pac. 1181. ^^^^nsweig, 147 App. Div. 175, 132
A check which has not been pre- n Y. Supp. 84,
sented for payment is not a valid in King v. Armstrong, 50 Ohio
counterclaim against a note held st. 222, 34 N. E. 163, it is held that
by the receiver of an insolvent where a person is entitled to share
bank. Le Breton v. Stanley Con- jn the distribution of a trust fund
tracting Co., 15 Cal. App. 429, 114 and is also indebted to the fund
Pac. 1028. and is insolvent, his indebtedness
4 A dividend wholly earned after may, in equity, be set off against
the receivership can not be set off his distributive share; and such
against an unpaid deposit. Chip- right of set-off will not be de-
ley State Bank v. McNeill (Fla.) feated by the assignment of the
82 So. 292. claim, though made before the
BANKS AND BANKING MATTERS. 1423
claim by a preponderance of the evidence/ In determin-
ing the right of set-off in a suit by the receiver of a
national bank, a state court will follow the rule in such
matters prevailing in the federal courts.*
§ 481. Right of Set-OfF by Borrower Who is Also a Depositor.
The most frequent cases of set-off naturally occur in
suits by the receiver to recover on notes given by depos-
itors who had a balance in the bank at the time when the
receiver w^as appointed. The trend of the decisions is
toward a liberal policy in the allowance of set-offs in the
case of insolvency of the party against whom the set-off
is claimed so that only the true balance will be required
to be paid to the insolvent estate. Hence the general rule
is that if a bank becomes insolvent a depositor who is also
indebted to the bank may set off the amount of his deposit
in an action by the receiver to recover on the indebted-
ness due to the bank.^ Where under statutory provi-
amoiint of his indebtedness or dis- One claiming a set-off against
tributive share is ascertained. the receiver of a banking partner-
See, also, Barbour v. National ship has the burden of establish-
Exch. Bank, 50 Ohio St. 90, 20 ing his claim by preponderance of
L. R. A. 192, 33 N. E. 542; Hughitt the evidence. In re Farmers' &
V. Hayes, 136 N. Y. 163, 32 N. E. Merchants' Bank, 194 Mich. 200,
706. 160 N. W. 601.
In Armstrong v. Warner, 49 One wrongfully holding prop-
Ohio St. 376, 17 L. R. A. 466, 31 erty belonging to the bank can-
N. E. 877, it is held that when the not as a condition for its return
holder of a claim not yet due, require that the receiver allow him
arising upon contract, becomes in- on a set-off or counterclaim which
solvent and transfers the same be- he claims. State v. Commercial,
fore maturity and the debtor at the etc., Bank, 37 Neb. 174, 55 N. W.
time of the transfer holds a sim- 640.
ilar claim then due against the s Curtis v. Davidson, 164 App.
assignor, his right of set-off is pre- Div. 597, 150 N. Y. Supp. 205.
served against the assignee when i Funk & Son v. Young (Ark.),
the latter's cause of action arises. 210 S. W. 143; People v. Cali-
Equity will in general enfol-ce the fornia Safe Deposit & Trust Co.,
right of set-off by decreeing the 168 Cal. 241, L. R. A. 1915A, 299,
compensation of mutual demand 141 Pac. 1181; In re Bell's Estate,
so far as they equal each other. 168 Cal. 253, 141 Pac. 1179; Robin-
LAW OF RECEIVERS.
sions, depositors who have not stipulated for interest are
given a preference in case of insolvency over other cred-
itors, the holder of an interest-bearing certificate of the
bank has been held not entitled to set-off its amount
against his note.- Where a bank holding collateral secur-
ities to a note fails to protect them and as consequence
loses them, the banker may set off the loss in a suit on
the note by the receiver.^
son V. Aird, 43 Fla. 30, 29 So. 633;
Yardley v. Clothier (C. C.) 49 Fed.
337; affirmed 51 Fed. 506, 2
C. C. A. 349, 17 L. R. A. 462; In re
Shultz (D. C.) 132 Fed. 573; Build-
ing & Engineering Co. v. Northern
Bank, 206 N. Y. 400, 99 N. E. 1044;
Scott V. Armstrong, 146 U. S. 499,
36 L. Ed. 1059, 13 Sup. Ct. 148.
See Rhodes v. Guhman, 156 Mo.
App. 344, 137 S. W. 88.
A depositor in a national bank
who has borrowed money from the
bank and given his note for it and
deposits the money so borrowed to
be drawn on by him, has an equi-
table set-off against the receiver.
Scott V. Armstrong, 146 U. S. 499,
36 L. Ed. 1059, 13 Sup. Ct. 148.
In Gates v. Smith, 176 Ala. 39,
57 So. 438, which involved the
right of a debtor to set off a debt
of the bank acquired after its in-
solvency against a debt due the
bank, the court, recognizing the
rule that in ordinary cases of re-
ceivership the receiver gets no title
to the debtor's assets, passed by the
question whether the receiver was
vested with the legal title, basing
its decision upon the trust-fund
nature of the assets of the insol-
vent bank, which of itself forbade
In a suit by the receiver on a note,
the paper maker may set-off his de-
posit, even though the note had
not yet matured at the time of the
insolvency and appointment of the
receiver. Colton v. Drovers' P.
Bldg., etc., Assn., 90 Md. 85, 78
Am. St. Rep. 431, 46 L. R. A. 388,
45 Atl. 23; Steelman v. Atchley,
98 Ark. 294, 32 L. R. A. (N. S.)
1060, 135 S. W. 902.
In an action by a receiver of an
insolvent bank on a note, a defen-
dant attempting to set-off a cer-
tificate of deposit must show that
he received it before the filing of
the bill which impounded the as-
sets of the bank for its creditors.
Smith V. Mosby, 9 Heisk. (Tenn.)
Depositors are entitled to set-off
their deposits against their in-
debtedness on notes even though
the bank is a state depositary
and the state will lose thereby
part of its deposits since the lien
of the state only applies to the
balance due after the set-off.
State v. Brobston, 94 Ga. 95, 47
Am. St. Rep. 138, 21 S. E. 146.
2 Walker v. J. B. McCrary Co.,
197 Ala. 638, 73 So. 342.
3 Skud V. Tillinghast, 195 Fed.
1, 115 C. C. A. 83.
BANKS AND BANKING MATTERS. 1425
§ 482. Right of Set-Off by Indorser Who Is a Depositor.
A question has sometimes arisen as to whether the
right of set-off is available to an indorser of a note who
is a depositor, in a suit on the note by the receiver of the
bank. It has sometimes been thought that he must show
that the maker is insolvent, but such is not the rule. The
Court of Appeals of New York recently passed upon the
question^ and held that the right of set-off was available
to the depositor when sued by the receiver upon his in-
dorsement. The court, through Justice Seabury, said :
''AVhen sued, the indorser stands for the purpose of that
action in the same position as the maker, except that he
is obsolutely liable upon his contract of indorsement,
while the maker is absolutely liable upon the note. In
such an action against him he may set off against his
obligation as indorser an}^ debt which the holder of the
note may owe to him. In this respect the maker and in-
dorser stand in the same position. The allowance of
such a set-off is not i direct preference, because, where
there are mutual demands the amount of the debt due
from one to the other is the difference between these
mutual demands. The fact that the indorser may, if the
maker is solvent, be indemnified by him in addition to
being allowed to set off the amount of his deposit against
the insolvent holder, does not preclude the indorser 's
right of set-off. The possibility of a preference thus
resulting to the indorser is speculative and uncertain.
In order to defeat the indorser 's right of set-off, it must
appear that lie has more than a speculative or uncertain
chance of indemnity from the maker. When the indorser
seeks equitable relief, and proceeds affirmatively against
the holder of the note to have the indebtedness of the
holder to him set off against his obligation to the holder,
it may be that a court of equity would require that he
1 Curtis V. Davidson, 215 N. Y. 395, 109 N. E. 481.
n Rec— ej
1426 LAW OF RECEIVERS.
give some satisfactory assurance that he will not be in-
demnified by the maker. Where the indorser is himself
sued, he may plead as a set-off the indebtedness of the
holder to him, and the fact that the holder is insolvent
does not deprive the indorser of his right of self-defense.
In the presence of mutual demands existing between the
holder of the note and the indorser, the debt due is the
balance that remains after one has been set off against
''The party claiming that the debt due is more than the
balance, which is the prima facie amount of the debt, has
resting upon him the burden of proving the fact upon
which his claim rests. In the case under consideration,
upon the pleadings as they stand, the defendant was en-
titled to set off the amount due him from the bank. The
authorities in this state, as well as in other jurisdictions,
sustain the view expressed above. In Matter of Receiver
of Middle District Bank (1829), 1 Paige 585, 19 Am. Dec.
452, a receiver of an insolvent bank applied to Chancellor
Walworth for instructions, and in answer to the question
propounded the chancellor said that, if the real debtor
was unable to pay, the indorser could offset his deposit
with the bank, and added :
'* 'But no such off-set should be allowed to an indorser,
where he is indemnified by the real debtor, or where the
latter can be compelled to pay. '
' ' This statement by Chancellor Walworth has been ex-
tensively commented upon and followed, and we think
that it states the rule which still prevails in cases of equi-
table set-off, or in cases where a depositor proceeds
against the bank in order to have the amount of his de-
posit set off against the amount due from him. In such
a case the burden is upon the depositor seeking equitable
relief to establish that equitably such relief may be given
him. It has been repeatedly held that statutory provi-
sions against according a preference to those having
BANKS AND BANKING MATTERS.
claims against an insolvent estate do not prohibit the
allowance of a set-off, whether legal of equitable, which
a debtor may have against the obligations due from him
to the bank at the time of its insolvency."^
The fact that the note has matured after the appoint-
ment of the receiver will not affect the right of an in-
dorser w^ho is a depositor, from a right to set off his
deposit against Ms liability upon the note.^
2 The court here cited and dis-
cussed the following cases:
"Armstrong v. Warner, 49 Ohio
St. 376, 390, 391, 17 L. R. A. 466
31 N. E. 877; Van Wagoner v. Pat
erson Gaslight Co., 23 N. J. Law,
283; County National Bank v. Mas
sey (N. Y.), 192 U. S. 138, 48 L. Ed
380, 24 Sup. Ct. 199; Scott v. Arm
strong, 146 U. S. 499, 510, 512, 36
L. Ed. 1059, 13 Sup. Ct. 148; Yard-
ley V. Clothier (C. C), 49 Fed. 337;
affirmed 51 Fed. 506, 2 C. C. A.
349, 17 L. R. A. 462.
"In Hughitt V. Hayes, 136 N. Y.
163, 167, 32 N. E. 706, this court
said: 'While it is the general rule,
in the administration of the estate
of an insolvent, that equality
among creditors is equity, it has
never been decided, either under
the statute of set-off or by courts
of equity in applying the doctrine
of equitable set-off, that the rule
of equality among creditors re-
quires courts to ignore the prin-
ciple that only the balance, in
case of mutual debts, is the real
sum owing by or to the Insolvent.'
"In Scott V. Armstrong, supra, it
was said that: 'Where a set-off is
otherwise valid, it is not per-
ceived how its allowance can be
considered 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 divi-
dends is to make them from what
belongs to the bank, and that
which at the time of the insol-
vency belongs of right to the
debtor does not belong to the
"In Building & Engineering Co.
v. Northern Bank of N. Y., 206
N. Y. 400, 99 N. E. 1044, which was
an action in equity, the plaintiff,
as accommodation indorser upon a
promissory note, was liable to an
insolvent bank, and at the same
time had a deposit to its credit
in the bank, and it was held that
the plaintiff could elect to have
such note become due at once, and
require the bank to set off the
same against the deposit in the
bank to his credit."
3 Carnegie Trust Co. v. Kistler,
89 Misc. Rep. 404, 152 N. Y. Supp.
In New York the state courts
in construing the state banking
law follow with approval the rule
of set-off laid down in Scott v.
Armstrong, 146 U. S. 499, 36 L. Ed.
1059, 13 Sup. Ct. 148, which holds:
"Where a set-off is otherwise valid,
it is not perceived how its allow-
ance can be considered a prefer-
ence, and it is clear that it is only
LAW OF RECEIVERS.
Where it appears that the maker of the note is solvent,
a signer who is a surety on the note, which is held by an
insolvent bank, is not entitled to off-set his deposit in the
bank when the bank is not suing.^ The confusion which
sometimes arises in these chisses of cases generally
occurs in connection with equitable set-offs and attempts
instituted by the depositor to procure the allowance of an
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 belongs of right
to the debtor does not belong to
See, also, Bldg. & Engineering
Co. V. Northern Bank, 206 N. Y.
400, 99 N. E. 1044.
In Stephens v. Schuchmann, 32
Mo. App. 333, a suit was brought
by the receiver of an insolvent na-
tional bank against the indorser
of a promissory note and it was
held that the defendant could not
defend by a c4aim of off-set for
moneys deposited by him in the
bank. The receiver in such case
succeeds to the rights of the bank
existing at the time it goes into
liquidation. A claim in favor of
the bank which first matures in
the hands of the receiver can not
be subjected by way of set-off to
a claim which existed against it
before the receiver's rights ac-
In Yardley v. Clothier, 49 Fed.
S37, it was held that a depositor
in an insolvent bank, who had in-
dorsed a note that was subse-
quently discounted by the bank,
in a suit by the bank to recover
the amount of the note, could set
off his deposit against this amount
when the note matured after the
insolvency of the bank. This case
is at variance with Armstrong v.
Scott, 36 Fed. 63, and Stephens v.
Schuchmann, 32 Mo. App. 333, 338.
On the general subject see:
Jordan v. National Shoe & L.
Bank, 74 N. Y. 467, 30 Am. Rep.
319; American Bank v. Wall, 56
Me. 167; Miller v. Franklin Bank,
1 Paige (N. Y.) 444; Colt v. Brown,
12 Gray (Mass.) 233; Hade v. Mc-
Vay, 31 Ohio St. 231; Fry v. Evans,
8 Wend. (N. Y.) 530; Merritt v.
Seaman, 6 N. Y. 168; Jordan v.
Sharlock, 84 Pa. 366, 24 Am. Rep.
198; Skiles v. Houston, 110 Pa. 254,
2 Atl. 30; Balbach v. Frelinghuy-
sen, 15 Fed. 675; Scammon v. Kim-
ball, 92 U. S. 362, 23 L. Ed. 483;
Blount V. Windley, 95 U. S. 173,
24 L. Ed. 424; Carr v. Hamilton,
129 U. S. 252, 32 L. Ed. 669, 9 Sup.
4 Knaffle v. Knoxville, etc.. Trust
Co., 128 Tenn. 181, 50 L. R. A.
(N. S.) 167, 159 S. W. 838.
In Borough Bank of Brooklyn
V. Mulqueen, 70 Misc. Rep. 137,
125 N. Y. Supp. 1034, it was con-
ceded that the maker of the note
BANKS AND BANKING MATTERS, 1429
equitable set-off. The rule in this respect was stated by
Justice Shearn as follows :^
*'It is one thing to resort to equity to procure a set-off
in proceedings against the receiver of an insolvent bank,
and quite another, when attacked by the bank, to defend
one's self by interposing a legal set-off. In the former
case, the applicant for equity must show that he is en-
titled to equity, and this makes it incumbent upon him to
show that he has no adequate remedy at law against a
primary obligor. In the latter case, being attacked by
the bank or its receiver, the party claiming the right of
set-off merely interposes as a defense authorized by
statute an existing indebtedness of the bank to him.
''Furthermore, the ordinary rule as to the burden of
proof shows that in the latter case the burden of proving
the financial condition of the primary obligor should be
upon the party resisting the set-off. The burden of proof
is upon the party having the affirmative of any given
proposition. Here the statute allows the set-off, but the
plaintiff seeks to overcome the statutory defense because
of the financial condition of the primary obligor. In
other words, the plaintiff has the affirmative in attempt-
ing to resist or overthrow the statutory defense, and the
burden of proof on this issue naturally and properly
goes with the affirmative,"
If a receiver of a national bank sues the maker and
indorser of a note and the indorser claims the right to
set oft' his deposit against his liability, the receiver can
not thereafter discontinue the action as to the indorser,
as a matter of course, but only upon terms and payment
5 Carnegie Trust Co, v. Kistler, fi Williams v. Frank i^evy Inc.
supra. (City Ct. N. Y.), 152 N. Y. Supp.
1430 LAW OF RECEIVERS.
§ 483. Right of Sel^OfiF by Stockholders.
The right of a bank stockholder to set off the indebted-
ness of the bank to himself in a suit by the receiver de-
pends upon the nature of the cause of action against the
stockholder. Any apparent confusion on the subject will
be easily removed by a consideration of whether the
cause of action is one belonging to the corporation or one
in fact belonging solely to the creditors, but which is be-
ing enforced for their benefit by the receiver. The nature
of the liability, if created by statutory, depends upon the
phraseology of the statute. The general nature of stat-
utes creating a double liability on the part of stockhold-
ers of banks is one in favor of all who are creditors at
the date of the bank's failure.
Under such statutes, the fund collected from an assess-
ment upon the stock is held in trust for a ratable distribu-
tion among all the creditors, and its character is such
as to preclude the idea that a stockholder may have his
creditor's claim set off against his stockholder's liability.
The two claims do not arise in the same right. His claim
is in fact against the bank, while his liability is in fact to
the creditors.^ Under exceptional circumstances, set-offs
have been allowed. Thus w^iere a stockholder turned
1 Barth v. Pock, 51 Mont. 418, operate. Nor can he set off an
155 Pac. 2S2; Van Tuyl v. Schwab amount of money which, subse-
(Lewis), 165 App. Div. 412, 150 quently to the insolvency and
N. Y. Supp. 786. closing of the bank, but prior to
In a suit brought by the receiv- the commencement of such suit
ers of an insolvent bank, char- against him, he voluntarily paid
tered under the laws of Georgia to other depositors of the bank to
since the act of 1893 (Acts 1893, reimburse them for the loss of
p. 70), against a stockholder their deposits. Swicord v. Craw-
thereof upon his statutory indi- ford, 148 Ga. 719, 98 S. E. 343.
vidual liability to depositors of In Hobart v. Gould, 8 Fed. 57, it
the bank (Civil Code 1910, § 2270), was held that a stockholder of an
the defendant can not set off the insolvent bank who happened to
amount of his individual deposits be one of the creditors could not
which he had in the bank when it cancel or diminish the assessment
became insolvent and ceased to made under the provisions of
BANKS AND BANKING MATTERS. 1431
over notes, not payable to the bank, to the receiver under
an agreement that they should be used, if necessary, in
liquidating the bank's indebtedness, in such an event
their value to be credited on any stock assessment sub-
sequently levied upon defendant's stock; that the receiver
has refused to credit defendant with the proceeds of the
notes, but has converted them to the use and benefit of
the bank's creditors; that the assets of the bank were
sufficient to pay all of its indebtedness ; it was held that