The trial court in this case directed a verdict against the plaintiff on the theory that the defendant bank was entitled to set-off against the plaintiff's funds on deposit in the bank, the amount of two unpaid notes on which the plaintiff was an endorser, without notice to the endorser that the negotiable instruments had been dishonored by their makers. The record discloses that the plaintiff, a corporation of this state, had discounted at the defendant bank two notes which had been given plaintiff by its customers. The notes had been renewed from time to time. The due date of both instruments was July 13th, 1939. A month previous to the due date the cashier of the bank, by letter, informed the plaintiff that the notes (listing them) "held by us and endorsed by you" must be paid in full at maturity. *Page 548 They were not paid on the date due and at the close of business on that day the bank debited the account of the plaintiff with the bank and later that evening mailed the notes to the plaintiff, writing plaintiff as follows: "We charge your account and return herewith, for reasons stated below. Note of A. Alberts due to-day, endorsed by you." Like notice accompanied the second note. At the trial the defendant bank stated that the note and letter in each instance was put in the mail on that day before four-forty-five in the afternoon, and that the items were charged against plaintiff's account before the notes were put into the mail.
It is entirely settled in this state that as between a bank and a depositor the money deposited by the latter with the former creates the relationship of creditor and debtor between the depositor and the bank. It is also settled that the right of set-off does not exist unless each of the parties owes a stated sum to the other. "Set-off, both at law and in equity, must be understood as that right which exists between two parties each of whom under an independent contract owes an ascertained amount to the other to set-off his respective debts by way of mutual deduction so that in any action brought for the larger debt, the residue only, after such deduction, shall be recovered." 24R.C.L. 792. In this case there were no mutual debts; consequently there was no right to a set-off.
The plaintiff admittedly was an endorser and notice of dishonor of the paper in question was not waived expressly or by conduct. "Except in so far as it is excused, dispensed with, or waived, the rule under the Negotiable Instruments act, as at common law, is that each endorser of a negotiable instrument dishonored by non-acceptance or non-payment must be given notice of dishonor and any endorser to whom such notice is not given is discharged from liability thereon. Such notice is a condition precedent to the endorser's liability; it is for his benefit and is the second essential step which must be taken in order to charge him with liability on the instrument." 10 C.J.S. 898, § 384.
The right to set-off is regulated in this state by statute,R.S. 2:26-190; and the liability of an endorser is likewise regulated by statute, R.S. 7:2-66. An endorser warrants *Page 549 that if the paper be dishonored and the necessary proceedings on dishonor duly taken, he will pay the amount due to the holder or to any subsequent endorser who might be compelled to pay it. This court, in Corn Exchange National Bank and Trust Co. v.Taubel, 113 N.J.L. 605, speaking through Mr. Justice Heher, had occasion to say that "An endorser without qualification engages that, on due presentment, the negotiable instrument shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent endorser who may be compelled to pay it. * * * The contract of an endorser is separate and distinct from the contract contained in the note. It imposes a liability independent of that assumed by the maker. The endorser without qualification of the ordinary promissory note undertakes to pay the holder the amount thereof only if the maker fails to do so upon due presentment to him for payment, and due notice of non-payment is given the endorser. The endorser's liability is therefore contingent on the default of the maker and the taking on dishonor of the requisite statutory proceedings. It is a conditional liability, and substantial compliance with the provisions of the Negotiable Instrument act relating to presentment, demand for payment, and notice in the event of dishonor, is an indispensable requisite to absolute liability."
Adverting to the facts in this case, it is conceded by the bank that the plaintiff's account was debited by the amount of the notes, prior to the time that notice of their non-payment was deposited in the post office. R.S. 7:2-105 provides: "Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails." See Simon v.Peoples Bank and Trust Company of Passaic, 116 N.J.L. 390;184 Atl. Rep. 793. Obviously a writing giving notice of dishonor is utterly without effect until it has been mailed,i.e., deposited in the post office or in any letter box under the control of the post office department. Since the notices in this case had not yet been deposited in the mails at the time the plaintiff's account was charged with the *Page 550 amounts of the notes, and since an endorser is not liable on a note of another until notice has been given (R.S. 7:2-66; CornExchange National Bank and Trust Co. v. Taubel, supra), there was no debt due the bank from the plaintiff at the time the latter's account was charged, and such debit or set-off was unauthorized (R.S. 2:26-190).
It appears that the notice to the plaintiff that its account had been debited or charged with the amount of the notes, was dated July 13th, and that on the previous day plaintiff had issued a check in the amount of $1,700, which check was presented about two weeks later. The plaintiff's account, having been depleted by the amount of the notes charged against it, was not sufficient to clear the check although otherwise it would have been. The bank refused payment and the check was returned with the notation "insufficient funds." The plaintiff then, on August 15th, 1939, drew a check to its own order for the total amount of its deposit, without regard to the amount that had been deducted from or charged against its account for the notes on which it was endorser. That check, too, was dishonored and returned by the bank, marked "insufficient funds."
The grounds of appeal relied upon and argued by the appellant are that the trial court erred in directing a verdict in favor of the defendant and against the plaintiff, and that it was error to deny plaintiff's motion for a directed verdict in its behalf. The legal principle involved here already has been discussed. On the facts of this case, we conclude that the court erred in directing a verdict against the plaintiff and in favor of the defendant because at the time plaintiff's account was debited no right of set-off existed in favor of the defendant bank. The relationship of the bank to the plaintiff was not that of creditor. The plaintiff was not in its debt. Under the circumstances, the debiting of the account being legally without justification, it was error to refuse plaintiff's motion for a directed verdict in its favor.
The judgment is accordingly reversed. Prior to the trial the bank had returned to the plaintiff the amount on deposit less the amount of the deductions mentioned. A judgment should now be entered in favor of the plaintiff in the sum of $1,152.87 which is the amount of the attempted set-off. *Page 551