1. Setoff is enforced in equity only where there are mutual
debts or mutual credits, or where there exists some equitable
consideration or agreement between the parties which would render
it unjust not to allow a setoff.
2. Where a bankrupt owes a debt to two persons jointly, and
holds a joint note given by one of them and a third person, the two
claims are not subject to setoff under the Bankrupt Act, being
neither mutual debts nor (without more) mutual credits.
3. Where one of two joint debtors becomes bankrupt, it seems
that the creditor may setoff the debt against his separate
indebtedness to the bankrupt, because each joint debtor is liable
to him
in solido for the whole debt; but if this be
conceded, it does not follow that if one of two joint creditors
becomes bankrupt, the common debtor may setoff against the debt a
separate claim which he has against the bankrupt, for this would be
unjust to the other joint creditor.
4. A. and B. were joint makers of certain notes which were
transferred to an insurance company. B. and C. held policies in
this company which became due in consequence of loss by fire. The
company being bankrupt, its assignee claimed the full amount of the
notes from A. and B. B. sought to setoff against his half of the
liability the claim due to him and C. on the policies of insurance,
the latter consenting thereto.
Held that this was not a
case for setoff within the Bankrupt Act, the two obligations having
been contracted without any reference to each other.
The Bankrupt Act enacts: [
Footnote 1]
"That in all cases of
mutual debts or
mutual
credits between the parties, the account between them shall be
stated, and one
Page 85 U. S. 630
debt set off against the other, and the balance only shall be
allowed or paid."
And a statute of Illinois [
Footnote 2] enacts that:
"All joint obligations shall be taken and held to be joint and
several obligations."
These statutes being in force, Moses Gray filed a bill in the
court below against William Rollo, assignee in bankruptcy of the
estate of the Merchants' Insurance Company of Chicago, to compel a
setoff of alleged mutual debts. The insurance company had become
bankrupt by the great fire at Chicago, and at that time held two
promissory notes for $5,555 each, made by the complainant, Gray
jointly with one Gaylord, which the company had received from the
payee in the regular course of business. By the fire referred to,
Moses Gray the complainant, and his brother, Franklin Gray doing
business under the firm of Gray Brothers, suffered in the
destruction of buildings, and these being insured by the said
insurance company for $30,000 on three several policies, the
company became indebted to them in the sum named. The complainant
alleged in his bill that his just share of liability on the two
notes was one-half of the amount, and he desired to have that half
extinguished by a setoff of the like amount due on the policies.
The money due on the policies was confessedly not due to him alone,
but to Gray Brothers. But he alleged that his brother assented to
and authorized such appropriation.
The insurance company demurred, and the demurrer being
sustained, the court dismissed the bill. From its action herein
Gray took this appeal.
Mr. J. S. Norton, for the appellant, argued that under the
statute of Illinois the whole debt, under both notes, which Moses
Gray owed to the assignee in bankruptcy, was a several debt; that
while it would be inequitable that Gaylord's debt should be paid by
the application of a policy of insurance
Page 85 U. S. 631
in which he had no interest, the reverse was true in regard to
the share of the notes which Moses Gray owed. The counsel cited
Tucker v. Oxley, [
Footnote
3] in this Court, as much in point and binding, a case which he
observed was supported by
Wrenshall v. Cook, in the
Supreme Court of Pennsylvania, [
Footnote 4] ever more in point, and by other cases in that
tribunal. [
Footnote 5]
MR. JUSTICE BRADLEY delivered the opinion of the Court.
The bill being demurred to, the assent of Franklin Gray to the
appropriation asked by the complainant must be taken as true, and
the question is whether setoff can be allowed in such a case as the
one presented.
The language of the Bankrupt Act on the subject of setoff
is:
"That in all cases of mutual debts or mutual credits between the
parties, the account between them shall be stated and one debt set
off against the other, and the balance only shall be allowed or
paid."
It is clear that these claims are not mutual debts. They are not
between the same parties. The notes exhibit a liability of the
complainant and Gaylord, the policies a claim of the complainant
and his brother. But it is said that by the law of Illinois, all
joint obligations are made joint and several, and therefore that
the complainant is separately liable on the notes, and could be
sued separately upon them. Granting this to be so, the debts would
still not be mutual. If sued alone on the notes, the claim on the
policies, which he might seek to set off
pro tanto against
the notes, is a claim due not to him alone, but to him and his
brother. His brother's consent that he might use the claim for that
purpose would not alter the case. Had his brother's interest been
assigned to him before the bankruptcy of the company, and without
any view to the advantage to be gained by the setoff, the case
would be different.
Page 85 U. S. 632
Nor does the case present one of mutual credit. There was no
connection between the claims whatever, except the accidental one
of the complainant's being concerned in both. The insurance
company, so far as appears, took the notes without any reference to
the policies of insurance, and Gray Brothers insured with the
company without any reference to the notes. Neither transaction was
entered into in consequence of, or in reliance on, the other, and
no agreement was ever made between the parties that the one claim
should stand against the other. There being neither mutual debts
nor mutual credits, the case does not come within the terms of the
Bankrupt law. If it can be maintained at all, it must be upon some
general principle of equity, recognized by courts of equity in
cases of setoff, which, if it exist, may be considered as
applicable under an equitable construction of the act. But we can
find no such principle recognized by the courts of equity in
England or this country, unless in some exceptional cases which
cannot be considered as establishing a general rule. In
Pennsylvania, it is true, setoff is allowed in cases where the
claims are not mutual, and in that state, under the decisions
there, it is probable that setoff 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
setoff. We think the general rule is stated by Justice Story in his
treatise on Equity Jurisprudence, [
Footnote 6] where he says:
"Courts of equity, following the law, will not allow a setoff of
a joint debt against a separate debt, or conversely, of a separate
debt against a joint debt; or, to state the proposition more
generally, they will not allow a setoff of debts accruing in
different rights. But special circumstances may occur creating an
equity, which will justify even such an interposition. Thus, for
example, if a joint creditor fraudulently conducts himself in
relation to the separate property of one of the debtors, and
misapplies it, so that the latter is drawn in to act differently
from what he would if he knew the
Page 85 U. S. 633
facts, that will constitute, in a case of bankruptcy, a
sufficient equity for a setoff of the separate debt created by such
misapplication against the joint debt. So if one of the joint
debtors is only a surety for the other, he may, in equity, set off
the separate debt due to his principal from the creditor, for in
such a case the joint debt is nothing more than a security for the
separate debt of the principal, and, upon equitable considerations,
a creditor who has a joint security for a separate debt, cannot
resort to that security without allowing what he has received on
the separate account for which the other was a security. Indeed it
may be generally stated that a joint debt may, in equity, be set
off against a separate debt where there is a clear series of
transactions establishing that there was a joint credit given on
account of the separate debt."
Other instances are given by way of illustration of the
principle on which a court of equity will deviate from the strict
rule of mutuality, allowing a setoff, all of them based on the idea
that the justice of the particular case requires it, and that
injustice would result from refusing it, but none of them
approaching in likeness to the case before the Court. There is no
rule of justice or equity which requires that Gray Brothers should
be paid in preference to other creditors of the insurance company
out of the specific assets represented by the notes of Gray and
Gaylord. If the complainant instead of the insurance company were
bankrupt, and the notes were valueless, his brother and the
creditors of Gray Brothers would think it very hard if the company
were allowed to pay the insurance
pro tanto with that
worthless paper.
The case of
Tucker v. Oxley, [
Footnote 7] which arose out of the Bankrupt Act of
1800, has been pressed upon our attention by the counsel of the
appellant, on the supposition that it is decisive in his favor. The
clause relating to setoff contained in that act [
Footnote 8] does not materially differ from
the corresponding clause in the Act of 1867. Mutual credits given
and mutual debts existing before the bankruptcy are made
Page 85 U. S. 634
the ground of setoff in both acts. But the case of
Tucker v.
Oxley will be found to differ from the present. There, two
persons by the name of Moore, being partners, became indebted to
Tucker. They afterwards dissolved partnership, and Tucker became
indebted to one of them, who continued the business, and who
afterwards became bankrupt. Oxley, the assignee, sued Tucker for
this debt, but the latter was allowed to set off his claim against
the two. The Court put the decision upon the ground that the debt
due from the two Moores to Tucker could have been collected from
the property of either of them, and was provable under the
bankruptcy proceedings against the estate of him who became
bankrupt, and hence it might be set off against any claim which the
bankrupt had against Tucker. The case therefore was the same as the
case before us would have been if the complainant had been solely
entitled to the insurance money, and if he and not the company had
become bankrupt. In such case, the company, according to the case
of
Tucker v. Oxley, could have set off the notes of the
complainant and Gaylord against the claim for insurance. The
reciprocal form of this rule would have enabled the complainant to
succeed in this case had he been the sole claimant of the money due
for insurance. In other words, the case of
Tucker v. Oxley
decides that a
joint indebtedness may be proved and set
off against the estate of either of the
joint debtors who
may become bankrupt, and the fact that it may be subject to be
marshaled makes no difference. The joint debtors are severally
liable
in solido for the whole debt. But the case does not
decide that a
joint claim -- that is to say, a debt due
to several
joint creditors, can be set off
against a debt due
by one of them. If a debt is due to A.
and B., how can any court compel the appropriation of it to pay the
indebtedness of A. to the common debtor without committing
injustice toward B.? The debtor who owes a debt to several
creditors jointly cannot discharge it by setting up a claim which
he has against one of those creditors, for the others have no
concern with his claim and cannot be affected by it; and no more
can one of several joint creditors, who
Page 85 U. S. 635
is sued by the common debtor for a separate claim, set off the
joint demand in discharge of his own debt, for he has no right thus
to appropriate it. Equity will not allow him to pay his separate
debt out of the joint fund. And if he had the assent of his
co-obligees to do this, it would be unjust to the suing debtor,
because he has no reciprocal right to do the same thing.
The case before us, therefore, is clearly distinguishable from
that of
Tucker v. Oxley, and the ground on which that case
was put is not applicable to this.
Decree affirmed.
[
Footnote 1]
14 Stat. at Large 526, § 20.
[
Footnote 2]
1 Gross' Statutes of Illinois 377.
[
Footnote 3]
9 U. S. 5 Cranch
34.
[
Footnote 4]
7 Watts 464.
[
Footnote 5]
Tustin v. Cameron, 5 Wharton 379;
Craig v.
Henderson, 2 Pa.St. 261.
[
Footnote 6]
Section 1437.
[
Footnote 7]
9 U. S. 5 Cranch
34.
[
Footnote 8]
2 Stat. at. Large 33, § 42.
