HOWELL., V. C.

Suit by the McManus-Kelly Company against the Pope Manufacturing Company. Heard on motion to set off claims. Set-off denied.

The bill of complaint in this case was filed August 14, 1907, for the administration of the affairs of the defendant corporation as an insolvent corporation. Upon the filing of the bill, and on the same day, receivers were appointed to wind up its affairs. They qualified at once, and entered upon the execution of the trust. On that day the corporation had to its credit with the International Trust Company, a banking institution of the city of Boston, the sum of $9,407.49, and at the same time the trust company held three notes of the Insolvent corporation for $25,000 each, due, respectively, October 15, 1907, November 8, 1907, and February 18, 1908. The notes were signed by the insolvent defendant, and were made payable to the order of the trust company. The trust company held no security for their payment. On September 19, 1907, prior to the maturity of any of the notes, the receivers of the defendant corporation made demand upon the trust company for the payment of the deposit. The trust company refused to pay the same, and claimed the right to hold it as a set-off to the unmatured liabilities of the defendant held by it. The receivers now make application for an order directing them to pay a 25 per cent. dividend on all the claims proved and admitted by them, including the claim of $75,000 held by the trust company. The trust company was notified that incidentally to the payment of the dividend the receivers would claim to deduct the amount of the deposit from the dividend declared on the $75,000 indebtedness, thus utilizing the deposit for the payment of the trust company's dividend pro tanto. On the hearing the dividend was ordered paid, but, as to the trust company, the deposit was directed to be deducted from its dividend, and the set-off claimed by it was disallowed.

Sherrerd Depue, for receivers.

William M. Richardson, for the International Trust Company.

HOWELL., V. C. (after stating the facts as above). The right of set-off in this state may be either legal or equitable. At lawthe right depends upon the statute of March 27, 1874 (Rev. St. 1874-75, p. 794, §§ 1-4), first passed in 1722 (1 Nev. Laws, p. 98), which provided that, if two or more persons be indebted to each other, such debts or demands not being for unliquidated damages may be set off against each other, and that in an action between such debtors the defendant may set off against the plaintiff the debts or demands which may be due or owing, to him. There are at least two requirements which the defendant must meet: One is that his claim must be for liquidated damages and that unliquidated damages cannot be set off (Slaytor-Jennings Co. v. Specialty Paper Box Company, 69 N. J. Law, 214, 54 Atl. 247), and the other is that the demand so attempted to be set off must be due and payable, and must have belonged to the defendant at the time of the beginning of the action (Johnson v. Kaiser, 40 N. J. Law, 286; Russ v. Sadler, 197 Pa. 51, 46 Atl. 903). It is quite apparent, therefore, that in an action at law brought by the receivers against the trust company that company would not have been allowed at law to set off the unmatured obligations which it held. This rule of law must be followed by this court, and in this case, unless the trust company shall have presented to the court some matter of equitable consideration which takes the case out of the legal rule.

In the case of Camden National Bank v. Green, 45 N. J. Eq. 546, 17 Atl. 689, affirmed 46 N. J. Eq. 607, 22 Atl. 56, an equitable set-off was allowed upon the presentation to the court of special circumstances which were thought to be sufficient to raise an equity in favor of the bank, and thus allow the set-off. These circumstances were (1) that the deposit was part of the proceeds of the discounted note, and was part and parcel of the same fund and arose out of one transaction which the parties had engaged in; and (2) that, in addition thereto, the estate of the maker of the note was insolvent, and that the fund on deposit was still actually in the custody and possession of the holder of the obligation. There are no special circumstances shown to the court touching the transaction in hand. It does not appear that the deposit is part of the proceeds of the notes which were discounted or that there was any mutuality in the cross-claims; nor are any facts adduced which raise an equity in favor of the trust company to refuse compliance with the legal demand made upon it by the receivers for the amount of the deposit. It is true that the defendant corporation was insolvent, but I do not see bow mere insolvency, without other circumstances, can justify a claim for equitable set-off. There should be other facts and circumstances. Insolvency merely furnishes the occasion for taking advantage of the other facts to raise an equity for the protection of the bank. Hannon v. Williams (Court of Errors) 34 N. J. Eq. 255, 38 Am. Rep. 378; 2 Story, Eq. Jur. § 1435ff. In Rawson v. Samuel, Cr. & Ph. 161, Lord Cottenham in deciding against an attempt at equitable set-off says: "We speak familiarly of equitable set-off as distinguished from the set-off at law, but it will be found that this equitable set-off exists in cases where the party seeking the benefit of it can show some equitable ground for being protected against his adversary's demand. The mere existence of cross-demands is not sufficient. Whyte v. O'Brien, 1 S. & S. 551. * * * What equity have the plaintiffs in the suit for an account to be protected against the damages awarded against them. If they have no such equity, there can be no good ground for the injunction." This opinion is cited with approval by our Court of Appeals in the case of Trotter v. Heckscher, 40 N. J. Eq. 612-658, 4 Atl. 83. Its doctrine had been previously announced by Vice Chancellor Van Fleet in the case of Jackson v. Bell, 31 N. J. Eq. 554. He there says: "The remedy by setoff as enforced in equity is undoubtedly somewhat broader and more liberal than that given by statute, but it has its limits. The mere existence of a cross-demand is not enough to establish a right to it, nor will the existence of an unsettled account out of which a cross-demand may arise be sufficient. * * * And, even where the cross-demands are debts of fixed and certain amount, but had their origin in distinct and independent transactions, equity will not set off one against the other, unless such course is made necessary by some peculiar equitable consideration, as, for example, where there has been a mutual credit given by each upon the footing of the debt of the other, so that a just presumption arises that the one is understood by the parties to go in liquidation or set-off of the other."

The appointment of a receiver for the defendant corporation under our statute creates additional reasons why the trust company may not have its set-off. In the first place, the creditors by operation of law have fastened their claims upon all the property of the corporation as of the date of the receiver's appointment. Receiver of Graham Button Company v. Spielmann, 50 N. J. Eq. 120, 24 Atl. 571, affirmed 50 N. J. Eq. 796, 27 Atl. 1033. By the statute (P. L. 1896, p. 299, § 68), all the property of the defendant corporation wheresoever situated, and all its franchises, rights, privileges, and effects upon the appointment of a receiver forthwith vested in him, and the corporation was divested of title thereto. The receivers thereupon became entitled to the possession of the fund, and after the demand which they made, if there is any intendment in the case at all, it is in favor of giving to the receiver the legal title to the deposit, or, at the very least, an equity superior to any equity which the trust company might have for a set-off. The statutory transfer of the title to the deposit is a complete severance of the depositfrom the unmatured obligations, if it could be said that there ever had been a relationship between them. The two debts are not substantially the same. They are not in the same right. They are not mutual. They do not arise out of the same transaction. The title has shifted to a trustee who holds under the trust fund doctrine for creditors. Williams v. Traphagen, 38 N. J. Eq. 57, a case presenting the converse of the one now before the court. The cases in Massachusetts seem to be adverse to the trust company's claim on all grounds. In Spaulding v. Backus, 122 Mass. 553, 23 Am. Rep. 301, it was held that a note given by A. to B. and not yet due could not in equity be set off against a note given by B. to A. upon which A. had brought an action for the benefit of C, to whom he had assigned it, notwithstanding A.'s insolvency and C.'s knowledge of it. The court said: "We are clearly of opinion that a party whose debt is not due has no equitable claim whatever to set-off against a debt of his own already due in the hands of a party who is Insolvent" In Wiley v. Bunker Hill National Bank, 183 Mass. 495, 67 N. E. 655, the same ruling was made on the authority of Spaulding v. Backus. Counsel have furnished a large collection of cases which seem to affirm the rule touching equitable set-off which is here announced, showing that it is a rule of very wide if not universal application. Among the cases are Bradley v. Angel, 3 N. Y. 475; Myers v. Davis, 22 N. Y. 489; Mechanics' Bank v. Stone, 115 Mich. 648, 74 N. W. 204; Chipman v. National Bank, 120 Pa. 86, 13 Atl. 707. And they call attention to the distinction between the line of cases above cited and another class in which the debt owed by the insolvent is due but the debt owed to the insolvent is not due, of which class the following is an example: Richards v. La Tourette, 119 N. Y. 54, 23 N. E. 531. In this latter class the courts have held that the debtor may waive the time of credit to which he is entitled and pay the debt in money or by way of set-off.

It is therefore quite manifest that the trust company had no authority to appropriate to its own use by way of set-off the deposit which lay in its bank to the credit of the defendant corporation, and that the amount thereof must be deducted from the dividend which is payable to the trust company on its $75,000 claim.

I have therefore advised a decree in accordance with these conclusions.