This is a reservation seeking advice as to certain questions which have arisen in receivership proceedings brought against the defendant bank. On January 2d 1932, before the hour of the opening of the bank for business, the bank commissioner of the State, acting pursuant to § 3870 of the General Statutes, issued an order restraining the defendant *Page 6 from paying out funds or receiving deposits. On January 7th, 1932, upon the application of the commissioner, a temporary receiver of the defendant was appointed by the Superior Court, and on the same day he duly qualified as such and has been acting in that capacity ever since. The bank had, in addition to its commercial department, a savings and a trust department. The stipulation for the reservation presents four distinct situations and the facts and questions as to each are stated in a separate division. We shall follow that method of dealing with them.
A One group of questions concerns the right of the makers of certain notes held in the savings department and carried on its books as assets of that department to set off against their indebtedness upon them deposits they had in the bank. The specific question we are asked is this: "Are the makers of any of such notes entitled to set off their deposits in either the commercial department or the savings department of the defendant corporation against their indebtedness to the defendant corporation on said notes?" The facts stipulated present three different situations with reference to these notes. In the first situation the loans for which the notes were given were in fact made out of the funds of the savings department and the notes have always been carried on the books of the bank as assets of that department, both facts being without the actual knowledge of the makers of them. The right of the makers of these notes to set off against them their deposits in either the commercial or the savings department is effectively answered by our ruling in Lippitt v. Thames Loan Trust Co., 88 Conn. 185,90 A. 369, where we held that, in the case of a bank having similar departments, commercial and savings, *Page 7 a depositor in the savings department who was also a borrower from it could not set off his deposit in it against his debt to it, nor could a borrower from that department set off against his indebtedness to it his deposit in the commercial department. When a borrower obtains a loan from a bank having both commercial and savings departments, without specifying or even inquiring as to the department from the funds of which it is to be made, he submits the disposition of the loan as between the departments to the will of the officers of the bank and must abide by the disposition they see fit to make of it. See Kelly v. Commissionerof Banks, 239 Mass. 298, 131 N.E. 855. When funds of the savings department representing the deposits in it are taken to make the loan, the note becomes a part of the investments of that department which must, under the provisions of General Statutes, § 3908, be segregated and set apart for the protection of the depositors in it. Whether or not it was such an investment as was authorized by the statute for the funds of the department is not material as regards the depositor's right to a set-off; nor would the expectation of the borrower that the loan was to be made from the funds of the commercial department and to remain as an obligation due to that department, increase his right. The reason why a right of set-off of deposits in a savings department against a loan made from its funds is not permitted, is stated in theLippitt case. After pointing out that the depositors have an equitable interest in the assets set apart in the department, that each has an equal right to a proportional share to the extent of his deposit, and that any debt he owes to the department is owed to all its depositors, we said (p. 193): "Upon dissolution or insolvency he was entitled to share in its assets ratably with other depositors. If a depositor who was *Page 8 a borrower could set off his deposit at its face value against his debt, he might secure full payment of his deposit and a greater share of the assets than his fellow depositors. This would destroy the rule of equality, and give a greater share of the assets to the borrowing than to the nonborrowing depositor." When the assets of the savings department were used to make the loan, the right of depositors in it to an equitable share in its proceeds attached. A borrower of the bank whose loan has been taken from the funds of the savings department cannot set off against it any deposit he may have in either department of the bank.
The second situation presented by the stipulation concerns notes representing loans originally made from the funds of the commercial department where the notes were thereafter but before maturity transferred to the savings department for cash or other assets of equivalent value. We cannot regard the commercial and savings departments as separate institutions or corporations; we said of a similar situation in the Lippitt case (p. 197): "If these departments constituted separate institutions, the savings depositors would be confined to the assets of their own department. We do not think the charter creates, or the law providing for the setting apart of savings funds and investing them in savings bank investments intended to make of these departments, independent institutions." The question cannot be approached from the standpoint of an indorsement or assignment of the notes from one party to another, and the statutes governing the right of set-off in such situations are not applicable. The notes were merely shifted from the commercial department to the savings department in return for assets of the latter. That the bank having a note in its commercial department representing a loan made from its funds had the right to transfer it, for an equivalent *Page 9 value in cash or securities, to its savings department, does not admit of question. Ordinarily the shifting of a note from one department of a bank to another would not destroy any right of set-off which the borrower might have. But when these notes were transferred, they took the place of the cash or securities turned over to the commercial department in return for them and became an investment in which funds of the savings department were made.
A claim by the borrower to a right of set-off cannot rest upon the fact that the savings department took the note subject to an independent equity in his favor. The situation is not like that which might occur where funds of the department were invested in a security which was subject to a lien, so that it took the investment, not free and unincumbered, but only in subordination to the rights of the lienor. In the first place, such a right, if it existed, as to any of these notes, would extend only to a deposit the borrower might have in the commercial department and could not be enlarged to include any deposit in the savings department. But that aside, the right to a set-off is not an incident to a debt but to the remedy to secure payment of it. "The right of set-off, in short, does not depend upon the mutuality of debts in their origin, as an inherent quality attaching itself to such debts, but upon the situation and rights of the parties, between whom it is sought to be enforced; and whether the suit be at law or in equity, there must be personal debts existing between them, and not merely between either of them, and third persons. As has been very properly remarked at the bar, it is a privilege or right attaching to the remedy only; which in some States may be allowed by their laws, and in others, denied. But it touches not any obligation of contract or vested right." Story, J., in Greene v. Darling, 5 Mason *Page 10 (U.S.C.C.) 201, 215; Wolcott v. Sullivan, 1 Edw. Ch. (N.Y.) 399, 403. There must be, at the time an action by one party or the other is brought, or when a settlement is made in lieu of an action, mutual debts which can then be set off one against the other. There are circumstances where rights in third parties will arise and prevail over a set-off which might otherwise exist. The most usual example is that of the negotiation of a negotiable instrument representing the debt before maturity to a bona fide purchaser for value. A similar situation exists where a bank transfers a note from its commercial to its savings department in return for funds of that department and by virtue of the statute the rights of the other depositors in that department to share equally in its investment has attached. The makers of the notes which, before maturity, were transferred to the savings department in return for cash or assets of that department of equivalent value, cannot set off against the debt represented by the note any deposit they may have in the savings department. Nor can they, under the decision in theLippitt case, set off against them any deposit they may have in the commercial department. See CosmopolitanTrust Co. v. Rosenbush, 239 Mass. 305,131 N.E. 858; Bieringer-Hanauer Co. v. CosmopolitanTrust Co., 247 Mass. 73, 141 N.E. 566; Dole v. Chattabriga,82 N. H. 396, 134 A. 347; CosmopolitanTrust Co. v. Leonard Watch Co., 249 Mass. 14,143 N.E. 827.
The third situation presented by the stipulation involves notes which represent loans made from the funds of the commercial department but which were transferred before maturity to the savings department while the defendant was entirely solvent, as an addition to the investments in that department, in order to compensate for depreciation in the market value *Page 11 of the securities held in it. These notes present a very different situation. In the absence of statute, it is not enough to defeat a set-off of deposits in a bank that its allowance will create a certain inequality among the depositors because thereby one indebted to it may be enabled to secure the benefit of the full amount of his deposit while others will obtain only a proportionate share. Thus, in the Lippitt case (p. 195), we held that a borrower from the commercial department might set off against his loan any deposit he had in the savings department. As we have stated, the reason why set-offs may not be allowed as against notes representing investments of funds of depositors in the savings department is that, by virtue of the provisions of § 3908 of the General Statutes, each depositor in that department has a special interest and the right to a proportionate share in all those investments. But that statute requires the investment of the deposits in the savings bank in a certain way and it is those investments which are required to be segregated for the exclusive protection of depositors. Assets such as the notes now in question are not within the purview of the statute because they do not represent the investment of deposits in the department. There does not exist as to them the countervailing rights which depositors in that department have in the investments made of their deposits and no reason appears why the usual rule as to set-off should not apply. That this is the effect of the statute becomes clear when we consider that in the Lippitt case a considerable balance between the amount of assets set aside for the savings department and the amount of its deposits, uninvested and in the general funds of the bank, was held not to be within the statute. If the right of set-off was an incident to the debt, it might be that the set-off would be limited to deposits in the commercial department *Page 12 from the funds of which the loan was made, but, as we have seen, it is a right incident to the remedy and must then apply at the time when the right accrues, that is, at the time of the order of the bank commissioner requiring the defendant to discontinue its business. It must therefore include any deposit in the savings department as well as any in the commercial department.
B