DRUMMOND, Circuit Judge.
The only point not decided in the previous case is as to the claim assigned to the plaintiff. It is admitted that the plaintiff, at the time of the assignment, knew that the company was insolvent, and that proceedings in insolvency or bankruptcy were imminent
There are two questions which we may consider in this case, as they have both been argued, and exist either together or separately in several of the cases which were taken up at the same time. 1st Can the claims assigned be allowed as a set-off? And, 2d. Does the knowledge which a person had of the pecuniary condition of the company, and the probable consequences growing out of the same, affect the right of set-off?
As to the first question: If the debt of the plaintiff were due, and no assignment had been made, in a suit brought against the plaintiff, he could not set-off the claim due on the policy to him and his two partners, because that would make the partners liable for the individual debt of each member of the firm. Dehon v. Stetson, 9 Metc. [Mass.] 341; Wat. Set-off, § 222, and the authorities there cited. If the case were reversed, and suit were brought by the plaintiff and his partners on the policy against the company, the latter could not set-off the debt due from the plaintiff. In each instance there is want-ingthat mutuality which the statute requires, and the debts exist in different rights. If the joint claim had become vested in the plaintiff, so that he could have brought suit in his own name, it might be different. Columbian Ins. Co. v. Black, 18 Johns. 149; Parker v. Beasley, 2 Maule & S. 423.
The case of Tucker v. Oxley, 5 Cranch [9 U. S.] 34, was cited and relied on at the argument. A firm had been dissolved and the partnership assets had passed to one- of the firm, who had become bankrupt. The as-signee brought suit against two persons on a debt due the bankrupt: They were allowed by a majority of the court to set-off a debt previously due to them from the firm. This was the ruling under the peculiar wording of the bankrupt law of 1800 [supra], and seems to be an exceptional case.
It is very doubtful whether that would be proper, under the present bankrupt law, which contains provisions as to the distribution of the joint and separate estate of partners, not in the law of 1800.
An assignee of a firm brought an action on a debt due the firm. It was held, by the supreme court of Massachusetts, that the defendant could not set-off a debt from one of the partners. Williams v. Brimhall, 13 Gray, 462.
Courts of equity follow the law in allowing or refusing set-offs, qualified by the rule that special circumstances may control the equity.. .2 Story, Eq. Jur. 1437.
What are the special equities of the plaintiff? He alleges that the debt owed by him-is not yet due; that the company is insolvent and in bankruptcy, and that the firm claims against the company were assigned to him with knowledge of the insolvency. If we concede that an assignment by the other partners might give the plaintiff the right to-a set-off, we think it is incumbent on him, when he comes into a court of equity and seeks to have the assigned claims allowed as a set-off, to show that he is more than the nominal owner. In other words, his equitable grounds for relief should be clearly established. From all that appears in this case, the fair inference is that these claims were merely transferred to enable the holders of the fifteen hundred dollar policy to realize their claim in full out of an insolvent corporation. No special equities within the true meaning of the rule are shown.
As to the second and more important question — the words “mutual debts.” and “mutual credits,” used in the 20th section of the present bankrupt law are not essentially different from those to be found in most of the previous bankrupt laws of England and of this country, subject to various conditions and limitations. And the argument is that the court cannot go outside of the language of the section, and that if it is a mutual debt, or a mutual credit, it can in all cases be set-off, except when it is a claim in its nature not provable against the estate, or one purchased by or transferred to the bankrupt’s debtor after the petition in bankruptcy is filed, those only being excluded by the terms of the law. And in support of this position, the case of Hawkins v. Whitten, 10 Barn. & C. 217, decided under the English bankrupt law of ft Geo. IT., was relied on. The question there was, whether the defendant had the right to set-off notes of the bankrupts obtained by him after he knew that the bankrupts, [236] •who were bankers, had stopped payment, but before he knew that an act of bankruptcy had been committed? And the court decided ■that he had such right, although he might have reason to believe them to be insolvent.
But the case was decided under a statute which had omitted the words of a previous .statute, which declared that the set-off should not be allowed where the party had obtained the claims against the bankrupt after he .stopped payment. The omission of such words where the law had been substantially re-enacted, with that exception, was an argument well nigh irresistible in favor of the construction given by the court, notwithstanding Lord Tenterden significantly asked whether it would not be a fraud on the bankrupt law.
It is said that in view of such a decision -as this and of the English bankrupt laws, the twentieth section of our bankrupt law in making only two exceptions to the right of .set-off in the case of mutual debits or credits —one a claim not provable against the estate, and the other a claim obtained after the filing of the petition — intended to allow all •others. That principle goes very far, and we .are not prepared to admit it to that extent We believe many cases may be imagined where a court of equity would not permit a .set-off, although not within the exceptions. For example: a person might have borrowed the whole capital of the insurance company, .and be on the way to its treasurer to pay it, .and meet a creditor who informed him he had a petition in his hands ready to be filed in the district court, and alleging the undoubted fact of the bankruptcy and insolvency of the company. In such case, if he had taken the money to buy up claims .against the company at ten cents on the dollar, would equity allow the set-off because the petition was not then actually filed?
The case supposed is within neither of the •exceptions of the twentieth section, and yet we cannot doubt that it would be the duty of a court of equity to disallow a claim of set-off which would thus permit a debtor to absorb the whole capital of the company by credits so purchased, for the reason that it would be unjust, and a substantial fraud on the bankrupt law.
The object of all general rules applicable to the rights of persons should be to promote the greatest good. It is upon that principle that the bankrupt law rests — the equal division among all creditors of the property of .an insolvent company or individual.
Free access — add to your briefcase to read the full text and ask questions with AI
DRUMMOND, Circuit Judge.
The only point not decided in the previous case is as to the claim assigned to the plaintiff. It is admitted that the plaintiff, at the time of the assignment, knew that the company was insolvent, and that proceedings in insolvency or bankruptcy were imminent
There are two questions which we may consider in this case, as they have both been argued, and exist either together or separately in several of the cases which were taken up at the same time. 1st Can the claims assigned be allowed as a set-off? And, 2d. Does the knowledge which a person had of the pecuniary condition of the company, and the probable consequences growing out of the same, affect the right of set-off?
As to the first question: If the debt of the plaintiff were due, and no assignment had been made, in a suit brought against the plaintiff, he could not set-off the claim due on the policy to him and his two partners, because that would make the partners liable for the individual debt of each member of the firm. Dehon v. Stetson, 9 Metc. [Mass.] 341; Wat. Set-off, § 222, and the authorities there cited. If the case were reversed, and suit were brought by the plaintiff and his partners on the policy against the company, the latter could not set-off the debt due from the plaintiff. In each instance there is want-ingthat mutuality which the statute requires, and the debts exist in different rights. If the joint claim had become vested in the plaintiff, so that he could have brought suit in his own name, it might be different. Columbian Ins. Co. v. Black, 18 Johns. 149; Parker v. Beasley, 2 Maule & S. 423.
The case of Tucker v. Oxley, 5 Cranch [9 U. S.] 34, was cited and relied on at the argument. A firm had been dissolved and the partnership assets had passed to one- of the firm, who had become bankrupt. The as-signee brought suit against two persons on a debt due the bankrupt: They were allowed by a majority of the court to set-off a debt previously due to them from the firm. This was the ruling under the peculiar wording of the bankrupt law of 1800 [supra], and seems to be an exceptional case.
It is very doubtful whether that would be proper, under the present bankrupt law, which contains provisions as to the distribution of the joint and separate estate of partners, not in the law of 1800.
An assignee of a firm brought an action on a debt due the firm. It was held, by the supreme court of Massachusetts, that the defendant could not set-off a debt from one of the partners. Williams v. Brimhall, 13 Gray, 462.
Courts of equity follow the law in allowing or refusing set-offs, qualified by the rule that special circumstances may control the equity.. .2 Story, Eq. Jur. 1437.
What are the special equities of the plaintiff? He alleges that the debt owed by him-is not yet due; that the company is insolvent and in bankruptcy, and that the firm claims against the company were assigned to him with knowledge of the insolvency. If we concede that an assignment by the other partners might give the plaintiff the right to-a set-off, we think it is incumbent on him, when he comes into a court of equity and seeks to have the assigned claims allowed as a set-off, to show that he is more than the nominal owner. In other words, his equitable grounds for relief should be clearly established. From all that appears in this case, the fair inference is that these claims were merely transferred to enable the holders of the fifteen hundred dollar policy to realize their claim in full out of an insolvent corporation. No special equities within the true meaning of the rule are shown.
As to the second and more important question — the words “mutual debts.” and “mutual credits,” used in the 20th section of the present bankrupt law are not essentially different from those to be found in most of the previous bankrupt laws of England and of this country, subject to various conditions and limitations. And the argument is that the court cannot go outside of the language of the section, and that if it is a mutual debt, or a mutual credit, it can in all cases be set-off, except when it is a claim in its nature not provable against the estate, or one purchased by or transferred to the bankrupt’s debtor after the petition in bankruptcy is filed, those only being excluded by the terms of the law. And in support of this position, the case of Hawkins v. Whitten, 10 Barn. & C. 217, decided under the English bankrupt law of ft Geo. IT., was relied on. The question there was, whether the defendant had the right to set-off notes of the bankrupts obtained by him after he knew that the bankrupts, [236] •who were bankers, had stopped payment, but before he knew that an act of bankruptcy had been committed? And the court decided ■that he had such right, although he might have reason to believe them to be insolvent.
But the case was decided under a statute which had omitted the words of a previous .statute, which declared that the set-off should not be allowed where the party had obtained the claims against the bankrupt after he .stopped payment. The omission of such words where the law had been substantially re-enacted, with that exception, was an argument well nigh irresistible in favor of the construction given by the court, notwithstanding Lord Tenterden significantly asked whether it would not be a fraud on the bankrupt law.
It is said that in view of such a decision -as this and of the English bankrupt laws, the twentieth section of our bankrupt law in making only two exceptions to the right of .set-off in the case of mutual debits or credits —one a claim not provable against the estate, and the other a claim obtained after the filing of the petition — intended to allow all •others. That principle goes very far, and we .are not prepared to admit it to that extent We believe many cases may be imagined where a court of equity would not permit a .set-off, although not within the exceptions. For example: a person might have borrowed the whole capital of the insurance company, .and be on the way to its treasurer to pay it, .and meet a creditor who informed him he had a petition in his hands ready to be filed in the district court, and alleging the undoubted fact of the bankruptcy and insolvency of the company. In such case, if he had taken the money to buy up claims .against the company at ten cents on the dollar, would equity allow the set-off because the petition was not then actually filed?
The case supposed is within neither of the •exceptions of the twentieth section, and yet we cannot doubt that it would be the duty of a court of equity to disallow a claim of set-off which would thus permit a debtor to absorb the whole capital of the company by credits so purchased, for the reason that it would be unjust, and a substantial fraud on the bankrupt law.
The object of all general rules applicable to the rights of persons should be to promote the greatest good. It is upon that principle that the bankrupt law rests — the equal division among all creditors of the property of .an insolvent company or individual.
We are called on to make the application ■of principles — not in a solitary case here and there, but under circumstances calculated to bring to a crucial test the soundness of rules —the insolvency and bankruptcy of numberless insurance companies whelmed in a common ruin, and where, if the doctrine contended for by the plaintiff is maintained, a comparatively few persons holding all their .assets, amounting to millions, can retain them by going into the market and purchasing, with full knowledge of all the facts, claims against them for a nominal sum.
But one decision under the bankrupt law of 1867 [supra], was cited on the argument having a bearing on the point now under consideration,—In re City Bank of Savings [Case No. 2,742], by the district judge of California. It was held in that case that the fact that the creditor of the bankrupt at the time he assigned his claim to a debtor, had reason to believe the bankrupt to be insolvent, did not prevent the debtor from setting off against the debt the claim thus assigned. The report of the case does not state explicitly whether the debtor, at the time of the assignment, knew of the insolvency of the bankrupt, but perhaps it may be an inference that such was the fact.
The court overruled the objection that the effect of allowing the set-off would be a fraud on the law, and seemed inclined to give an absolutely literal construction to the twentieth section, while admitting that the result would be to enable one creditor to obtain full satisfaction of his claim to the prejudice of other creditors.
We admit that this may be so, if there is good faith. We do not doubt that a debtor can purchase a claim against the creditor, at any time before the filing of the petition in bankruptcy, and set it off, provided the purchase is made without notice of insolvency, for value, fairly, and not in fraud of the law; and we thus give full effect to the statute.
If the case decided in California intended to sanction a set-off such as is claimed here, we do not feel inclined to adopt the rule there stated. We hold it to be the duty of a court of equity so to construe the twentieth section as not to suffer it to defeat ihe main purpose of the bankrupt law, or to permit one creditor in this way to obtain the payment of his claim in full, to the sacrifice of the claims of other creditors.
It is said that there must be some time fixed within which doubtful transactions can no longer be questioned. It is for a court of equity, or the bankrupt court in the exercise of its equitable powers, to decide, looking at all the circumstances of the case, under what limitations the right shall be placed.
Our attention has been directed to a case not cited on the . argument,—Smith v. Hill, 8 Gray, 572. In that case the defendant purchased claims against a person, knowing him to be insolvent, and having reason to believe that he was about to be put into insolvency; and then, in a suit by the assignee, proposed to set off these claims against a debt he owed the insolvent. Under the statute mutual debts and demands could be set off; but the court held that the effect of allowing the set-off would be to interfere with the proper distribution of the estate of the insolvent, and would be contrary to the spirit of the insolvent laws; that it would enable a debt- or to give a preference to such of the cred[237] itors as he might favor, and -would allow debtors to pay their debts by purchasing claims against the insolvent at a discount.
NOTE. Consult Drake v. Rollo [Cáse No. 4,066]; Sawyer v. Hoag [Id. 12,400]; and for a full discussion of the right of set-off as against liability on. stock subscription, ■ and money received as treasurer, see Scammon v. Kimball [Id. 12,435], Sept., 1873. For the general question of liability on stock subscriptions, after • bankruptcy of the company, consult Upton v. Hansbrough [Id. 16,801]; Upton v. Burnham [Id: 16,799], and cases there cited. For opinion of supreme court in the. set-off cases, affirming decree of the court below, consult Sawyer v. Hoag [17 Wall, (84 U. S.) 610.]
And that decision was not made /under amendments which had expressly prohibited such set-off, but independently of them, and on the general ground that it would be inequitable to permit the set-off. We think the principles of that case are applicable to this, and that they constitute a true test to determine whether the set-off claimed here should be allowed. See Hill. Bankr. 224, who adopts the principle of Smith v. Hill; Avery & H. Bankr. 157; Wat Set-off, 141.
We are of the opinion, therefore, on both of the grounds, stated, that a set-off is not allowable. In construing our bankrupt law we have to regard it as.a whole system-framed, doubtless, at that time ■ in view of previous laws, both English and American; but where it was impossible to include all the various circumstances and contingencies which had given occasion to the numerous aiterations and modifications of previous laws, and this is especially true of the twentieth section in relation to set-off.'
Notwithstanding the language there is general, and only two exceptions are named, we must still think that it did not intend, outside of these exceptions, to foreclose a court of equity .from disallowing a set-off when it would on the whole work injustice.
We think, therefore, we are at liberty to place such construction on our bankrupt law as is in-harmony with the common sense of equity; and that such a set-off as-the one claimed here ought not to be permitted, • is abundantly manifest from the whole tenor of recent legislation, both English .and - Amer-. lean. W.e confess we think we go quite far enough, which we do in obedience to. authority, when we admit that a man may -borrow a part,- or- even the whole, of the capital of an insurance company, and then take out policies of insurance, it may be because of the loan, and in case of loss and insolvency of the company, set off the loan against the loss on the policy, even though it may leave other creditors with nothing. There may be instances where this can be done, when it would be difficult to reconcile it with ‘our notions of a sound morality, or with that rule which requires us to do to others as we would have them do to us.
But we d§ not feel inclined to go further, and adopt a rule which would permit the debtors of a bankrupt company thus to realize, for a nominal sum, the full amount of their claims on the company, .while other creditors thereby go empty-handed.
As to the assigned claims the set-off will not be allowed.