Colton v. Drovers' Perpetual Building & Loan Ass'n

Boyd, J., delivered the opinion of the Court. A bill was filed in the court below against the South Baltimore Bank, a corporation of this State, on the 24th day of February, 1898, asking for-the appointment of a receiver and that the bank be declared insolvent. An answer was filed the same day, admitting that the bank was insolvent and consenting to the appointment of a receiver. One of the appellants was appointed on that day and afterward the other was appointed co-receiver. ' On the first day of June, 1898, a decree was passed adjudicating the bank insolvent and determining it was so when this bill was filed.

The receivers proceeded with the discharge of their duties, and in due course the case was referred to the auditor to state an account distributing the assets of the bank. When the bill was filed, the bank held a promissory note of the appellee for one thousand dollars, which ⁸⁹ became due on March 2, 1898, and the appellee had a deposit with the bank of $357,25. At the maturity of the note the appellee tendered the receiver, then in office, the sum of $642.75 in payment of said note, claiming the amount of the deposit as a set-off, and demanded the note, but the receiver refused to accept that amonnt. Subsequently that sum was accepted under an agreement that it should be credited on the note without prejudice to the receiver’s claim for the balance and that no suit should be instituted until it was determined whether the appellee was entitled to set off the deposit against the balance due on the note.

The auditor refused to allow the set-off, but distributed to the appellee its proportionate dividend as a creditor. Exceptions were filed to the audit, which were sustained, and a decretal order was passed directing the receivers to allow the association the deposit as a set-off against the balance due on the note. From that order this appeal was taken by the receivers with the permission of the Court, it being represented that there were a number of other claims that would be affected by the decision. The question therefore to be determined by us is, whether the appellee is entitled to set off the amount of its deposit with the bank, at the time of its failure, against the balance due on the note, under the circumstances we have stated.

Several reasons have been assigned by the appellants in support of the position that the appellee is only entitled to receive a distribution on the amount of the deposit, as other creditors are : I. One ground relied on at the argument was that a depositor in a bank cannot maintain a suit for his deposit unless he has previously made a demand for it an ci that no demand was made in this case. “ It is now perfectly well settled that the relation between banker and customer, who pays money into the bank, or to whose credit money is received there on deposit, is the ordinary relation of debtor and creditor.” Hardy v. Chesapeake, Bank, 51 Md. 585 . And it is equally well settled that a depositor cannot, as a general rule, maintain an action to recover his deposit ⁹⁰ until he has first made a demand for its payment. 3 Ency. of Law (2nd ed. ) 838. But while that is true, there may be circumstances under which no demand is necessary prior to bringing suit, and on page 839, of the volume of the Encyclopedia of Law, above referred to, it is said that, “where the bank has suspended, or where for any other reason it would be manifestly futile to make demand, none need be made.” In the case of Planters' Bank v. Farmers' and Mechanics' Bank, 8 G. & J. 449 , it was held that the necessity for a demand would be dispensed with by the suspension of specie payments and discontinuance of banking operations, by the bank, provided those acts were known to the plaintiff and from the time of such knowledge the statute of limitations would begin to run. It would have been “ manifestly futile to make demand ” on the bank, or the receiver, for the amount of deposit and if the appellee had sued, the fact that a demand was not previously made would not have defeated-the action.

If the bank had not failed and had sued the appellee for the amount of the note it would not have been necessary for the latter to have proven a demand for the deposit, prior to the time suit was instituted by the bank. A defendant can set off against a plaintiff’s demand a note of the plaintiff which matured after the commencement of the action. Clarke v. Magruder, 2 H. & J. 77 . As early as Whittington v. Farmers' Bank, 5 H. & J. 489 , our predecessors held that the defendant in an action by a bank on a promissory note against him may set off against the claim of the bank any money he has in bank, and it is not intimated that a previous demand was necessary in order to enable him to do so.

The bank being a debtor to the depositor the right to set off such deposit is within the very terms of our statute and hence in a suit by the bank the claim for the deposit can be set off, although no previous demand for it had been made. That being so, it would seem to be clear that no demand would be necessary in order to enable the defendant to set off the amount of the deposit against a claim made by the receiver of the bank, ⁹¹ if there be no other reason for not allowing it. In Morse on Banks and Banking it is said “ where the bank itself stops payment and becomes insolvent, the customer may avail himself in set-off against his indebedness to the bank of any indebtedness of the bank to himself, as, for example, the balance due him on his deposit account. So also even though the debt to him has not matured at the time of the insolvency.” This may be done whether a demand had or had not been previously made.

Fort v. McCully, 59 Barb. 87 ; Seymour v. Dunham, 24 Hun. 93 . 2. We come then to the main question in the case. It is argued that to allow the set-off would be, in effect, to give the appellee a preference over the other creditors of the bank and that it is the duty of the receivers to distribute the assets pro rata and not to pay in full any one creditor. If the appellee was merely a creditor that argument might prevail, but that was not the relation that existed between the two.

The appellee was not only a creditor to the amount of its deposit, but it was a debtor to the amount of the note held by the bank. Its debit was larger than its credit and if the bank had not failed, it could only have recovered the difference between the two. Do the receivers occupy any better position ? The general rule undoubtedly is that a receiver takes subject to set-offs which the defendant might have set up against the original owner.

See 22 Ency. of Law, 308, and note to Merrill v. Cape Ann Granite Company, 23 L. R. An, 313, where many authorities are collected. There are some exceptions to the rule, one of which may be mentioned, although not directly involved in the case, as some of the authorities cited by the. appellants are to that point, and that is that a claim obtained after the commencement of the proceedings, which resulted in the appointment of a receiver, should not be allowed as a set-off unless there be some statute authorizing it to be done. In this case, however, the debt was due by the bank to the appellee before the proceedings under which the appellants were appointed were instituted. As we have seen, the rela ⁹² tion of debtor and creditor existed, and the question discussed above as to whether demand must be made before suit can be brought, does not in any wise reflect upon the' question of indebtedness, but only on the right to sue for the indebtedness before demand is made.

But it is said on behalf of the appellants that inasmuch as the note fell due after the appointment of the first receiver, he took it free from all equities—just as a bona fide purchaser for value would have done, and that a claim in favor of the bank wthich did not mature until in the hands of the receiver is not subject to a set-off by a claim which existed against the bank before the receiver’s rights accrued. In short, that in one case the debt is due by the bank to the customer, and in the other by the customer to the receiver. If that were strictly correct there would be some ground for the contention, for if, for example, the appellee had purchased some property from the receiver, it would not be permitted to set-off its claim against such indebtedness to the receiver, for it would thereby not only obtain an unwarranted preference over other creditors, but it would prevent a proper settlement of the insolvent estate, and moreover, they would not be mutual claims. But when the receiver was appointed he took the assets of the bank, and amongst those assets was this note.