November 2, 1927. *Page 5 The opinion of the Court was delivered by On June 25, 1926, the American Bank Trust Company of Columbia (hereinafter referred to as the Columbia Bank), finding itself unable to meet its obligations, closed its doors; and on July 19, 1926, James E. Peurifoy was appointed receiver, and duly qualified as such. At that time the Home Bank of Barnwell (hereinafter referred to as the Barnwell Bank), had on deposit with the Columbia Bank approximately $33,000, and owed it on notes approximately $20,000. After deducting and offsetting the amount of the notes, the Columbia Bank still owed the Barnwell Bank $13,104.14, the balance on the deposit account. Some time after his appointment Mr. Peurifoy, as Receiver, deposited with the Barnwell Bank the sum of $7,000, money collected by him from the assets of the insolvent Columbia Bank; shortly after such deposit was made, the Barnwell Bank itself became insolvent and closed its doors, and the defendant, Gamble, was appointed Receiver of same.
Out of the peculiar situation thus created this action has arisen. The contention of the Receiver of the Columbia Bank is that he is entitled to offset pro rata dividends, declared or to be declared by him, and ordered paid by the Court, on the $13,104.14 deposit claim of the Barnwell Bank, against the $7,000 deposit made by him in the Barnwell Bank to the full extent of such deposit. The purpose of this suit, brought by him against the Receiver of the Barnwell Bank, is to obtain an order of Court allowing him to make such set-off.
The Receiver of the Barnwell Bank does not agree with this contention. He claims that neither the petitioner nor the defendant is entitled to a set-off, as there is a lack of mutuality of claims; but that the correct and just method of payment would be that he, as Receiver of the Barnwell Bank, should be paid the regular dividends, whenever declared and ordered paid, on the deposit of $13,104.14, which constitutes the claim of the Barnwell Bank against the Columbia *Page 6 Bank; and that, likewise, the Receiver of the Columbia Bank should be paid his pro rata dividends on the $7,000 deposit placed by him in the Barnwell Bank, whenever dividends may be declared by the Receiver of that bank and ordered paid by the Court.
Judge Townsend, before whom the matter was heard at the May, 1927, term of the Court of Common Pleas for Richland County, held with the plaintiff, and ordered that the Receiver of the Columbia Bank withhold the payment of any dividends on the claim of the Receiver of the Barnwell Bank for $13,104.14, until the amount of such dividends should equal the $7,000 that had been deposited by the Receiver of the Columbia Bank in the Barnwell Bank, such dividends to be an offset against the deposit.
The defendant, Gamble, as Receiver of the Barnwell Bank, appeals to this Court from the order of Judge Townsend. He makes four exceptions, but, as stated by his counsel in their argument, the law applicable to each exception is applicable to all, as they raise the same question from different angles.
The ground of imputed error may be thus stated: That the presiding Judge erred in refusing to order the Receiver of the Columbia Bank to pay to the Receiver of the Barnwell Bank a pro rata dividend upon the deposit of the Barnwell Bank along with other depositors of the said Columbia Bank.
Judge Townsend, in his decree, says:
"Judge Peurifoy, as Receiver, reduced the assets of the American Bank Trust Company to cash, and deposited the $7,000 part of such assets in the Home Bank of Barnwell belonging equally to all creditors of the American Bank Trust Company, to be distributed amongst them as dividends under the orders of the Court. The Home Bank of Barnwell had no greater rights in the deposit than any other creditor, and could only claim the dividends ordered by the Court to be paid upon its claims as a depositor in the American Bank Trust Company. The Home Bank then owed *Page 7 Judge Peurifoy as Receiver the deposit of $7,000, and Judge Peurifoy as Receiver owed the Home Bank only the dividends ordered by the Court to be paid upon its claim for $13,104.14 against the American Bank Trust Company. When the Home Bank became insolvent, and Mr. Gamble was appointed its Receiver, he had no greater interest in the $7,000 deposit as a creditor of the American Bank Trust Company than the Home Bank had at the time of his appointment."
Counsel for respondent contend that the conclusions arrived at by the learned Circuit Judge may be sustained upon two grounds: (1) Under the general doctrine of legal offset; and (2) upon the principle of equitable set-off.
The assets of an insolvent bank are a trust fund in the hands of the Receiver, to be reduced to money and ratably distributed among all the creditors.Livingstain v. Bank, 77 S.C. 305; 57 S.E., 182; 22 L.R.A. (N.S.), 442; 122 Am. St. Rep., 568.
In the Livingstain case the Court said:
"No rule of equity appeals more to the judicial conscience than that which requires the assets of an insolvent corporation to be distributed ratably among creditors."
In the case of Citizens' Bank v. Bradley, 136 S.C. 514;134 S.E., 510, this language of the Livingstain case is quoted with approval; the Court adding:
"He who claims a departure from this rule must establish his right clearly."
As to the respondent's first proposition, there is no disagreement that, ordinarily, a bank has a right to apply the deposit of an insolvent debtor to the payment of the bank's claim against him, and that one owing an insolvent bank has a right to have his deposit applied as an offset against such debt. Scott v. Armstrong, 146 U.S. 507;13 S.Ct., 148; 36 L.Ed., 1062. But it must be shown that the debts are mutual ones and exist between the same parties in the same right. To illustrate: In the present case, when the Columbia Bank went into the hands of a *Page 8 receiver, the Barnwell Bank had on deposit with it approximately $33,000, and owed it on notes approximately $20,000. These claims were clearly mutual debts between the same parties, and an offset was proper and was made, leaving a balance of the deposit, the sum of $13,104.14, owing the Barnwell Bank by the insolvent Columbia Bank.
Arguing further, the respondent contends that the general doctrine of legal offset is permissible and applicable in this case, because, as he claims, the $7,000 deposited by the Receiver of the Columbia Bank in the Barnwell Bank before its insolvency is a debt owing him in this official capacity as Receiver, and that whatever dividends are declared by him on the $13,104.14, the claim of the Barnwell Bank against the Columbia Bank, are debts owing by him as such Receiver to the Barnwell Bank, and that under this view the claims are mutual, existing between the same parties in the same right.
We do not agree with this contention. A receiver is an officer of the Court through whom the Court takes possession of the assets of the insolvent bank, for the purpose of preventing their waste or destruction and of reducing them to such form as may be necessary for their ratable distribution among those who may be entitled thereto. A receivership is simply a remedial agency created for the purpose of preserving and disbursing the assets of the insolvent estate. The property in the hands of the Receiver is in custodia legis; the possession of the property by him is the possession of the Court which appointed him. It follows that he has no personal interest in the property in his official character, except that which arises out of his responsibility in the faithful and correct discharge of his duties. He is the medium through which the Court acts in the execution of its orders and decrees.
We do not think that, strictly and correctly speaking, it can be successfully maintained that the dividends passing through the hands of the Receiver of an insolvent bank, declared by him in the line of his duties as such receiver and *Page 9 ordered paid by the Court, are debts owing by him as suchReceiver to the creditors of the insolvent concern. Whatever assets come into his hands as such Receiver are held and conserved by him, not as a debtor of such creditors in his official capacity, but as an officer and arm of the Court appointing him. As is seen, he is an instrument or agency through which the Court acts, as it may determine from time to time, in the settlement of the insolvent bank, by the payment of the debts of such insolvent institution, through the method of declaring and payment of pro rata dividends on the claims of creditors filed and allowed.
As said by the Court in American Slicing Machine Co.,In re, 125 S.C. 218; 118 S.E., 303, 304:
"The property becomes a trust fund for the payment of debts, and the receiver simply holds it for the benefit ofthose ultimately entitled, in law or equity, to it." (Italics added.)
It is therefore clear that the Receiver has, in his official capacity, no personal interest in the dividends declared by him and ordered paid by the Court, except to faithfully perform his duty in their payment, as directed. Certainly, he has no interest that would warrant the conclusion that heowed such dividends to the creditors of the insolvent bank.
It is not contended that, at the time the Receiver's deposit of $7,000 was made, the Barnwell Bank could have offset its claim against the insolvent Columbia Bank to any extent whatever against such deposit. Clearly, if such contention were made, it could not be sustained. The making and receiving of the deposit carried with it an implied agreement (see Akin v. Williamson [Tenn. Ch.], 35 S.W. 569), that the Barnwell Bank would not make such application of the deposit, but that, in accepting same, it recognized the Receiver's right to its control. Otherwise it would not have been a deposit, but a payment to the Barnwell Bank, as a preferred creditor, of a part of its claim against the Columbia Bank, which would not be allowed. *Page 10
The circumstances of this case are peculiar, and it appears that the question involved has never been decided by this Court. The cases in other jurisdictions are not in accord.
The Akin case, supra, is directly in point; the facts and the contentions of the parties being similar to those in the present case. That case supports the contention of the appellant, and we are impressed with its logic and persuasiveness.
The Court in the Akin case held that, as there was a lack of mutuality of claims, there could be no legal set-off of same as contended for by the plaintiff; but that, the case being decided on correct principle, the Receiver of each insolvent institution should pay to the other the pro rata dividends declared on the respective claims and ordered paid by the Court. See, also, Rue v. Miller (C.C.A.), 124 F., 208. Upon mature deliberation, we are satisfied that this conclusion is correct.
As to his second proposition, the respondent contends that, even if no such mutuality of claims here exists as would warrant a legal set-off, an equitable set-off should be allowed, under the facts of the case, as held by the Court below.
The judgment of the Circuit Court is supported by the case of Gardner v. Title Trust Co., 261 U.S. 453;43 S.Ct., 424; 67 L.Ed., 741; 29 A.L.R., 623, cited by the Circuit Judge in his decree. That was a case in which the trustee in bankruptcy sought to assert a set-off under the Bankruptcy Act (11 USCA). The United States Supreme Court held that the set-off should be allowed, in the manner contended for by the respondent in the present case, on broad equitable grounds. The cases of State v. Bank,128 Iowa, 597; 105 N.W., 159, and People v. California, etc.,Co., 168 Cal., 241; 141 P., 1181; L.R.A., 1915-A, 299, appear also to support to some extent the judgment of the Circuit Court.
In 23 R.C.L., at p. 57, we find the following: *Page 11
"But the general rule in equity, as well as at law, is that the demands to be set off must be mutual, and that debts accruing in different rights cannot be set off against each other. Thus an individual claim cannot be set off against a trust fund. So where the demand of the Receiver is based, not on a credit earned before the insolvency, but on a credit earned by the Receiver in the management of the estate, it cannot be offset by a claim arising before the insolvency. But when there are peculiar circumstances which make it necessary, as the only way to prevent clear injustice, to allow the set-off of debts not mutual, but accruing in different rights, this may be done by Courts of full equity jurisdiction."
In Carwile, Receiver, v. Metropolitan Life Ins. Co., 136 S.C. 140;134 S.E., 275, 284, the Court said:
"The Courts have uniformly applied the principle of equitable set-off with great liberality to prevent injustice even in cases where elements requisite to legal set-off have been lacking."
And the Court in the Akin case, stating the principle in another form, said:
"It is well to remember that the allowance of an equitable set-off is not a matter of course, even where the ordinary technical requisites are present. A Court of equity will deny its active relief where the interposition of such relief would produce an inequitable result in the particular case."
With the peculiar circumstances of the present case in mind, we ask ourselves the question, would the relief asked for, if granted, produce an inequitable result?
When Mr. Peurifoy, as Receiver, took over the assets of the Columbia Bank, and reduced a great portion of them to money, he decided, as he says, to distribute, as deposits, a part of the money among the several banks of the State, more than 40 in number, to which the Columbia Bank was indebted, in order that these banks might have the use of the money in advance of the payment of the dividends to be *Page 12 declared and paid on their claims, rather than to deposit the money in banks in Columbia or in banks outside of the State — an entirely laudable purpose. At that time the Barnwell Bank knew of the insolvency of the Columbia Bank, and that Mr. Peurifoy was acting as Receiver of its assets; and, when it received the deposit of $7,000, it knew that such deposit was a trust fund, designed to be finally distributed ratably among the creditors of the insolvent Columbia Bank, of which number it was one.
The fact that this deposit was a trust fund, and known to the Barnwell Bank to be such, would not in any way affect its status as a deposit. It was entitled to the same standing and consideration as any ordinary deposit; that it had the earmarks of a trust fund did not give in any special protection. And, too, the fact that the purpose of making the deposit was to benefit the Barnwell Bank, whether or not such purpose was known to that bank, is not material. If such deposit had been made in a bank not indebted to the Columbia Bank, and which afterwards failed, it would have benefited such bank whether made for that purpose or not. Under the circumstances disclosed, the creditors of the Barnwell Bank, when it became insolvent, had such rights under the new status thus created as a Court of equity will not disregard.
All moneys realized from the assets of an insolvent bank go to the creditors ratably through the hands of the Receiver as provided by law. Hence, when the Columbia Bank became insolvent, and its Receiver qualified, all pro rata dividends declared by him and ordered paid by the Court on the claim of the Barnwell Bank were payments on the debt, to the extent of the amount of such dividends; and, when the Barnwell Bank went into the hands of a Receiver, it was proper that these dividends should be paid over to him, as provided by law, for the benefit of the creditors of that defunct institution. So, likewise, when the Barnwell Bank became insolvent and its Receiver qualified, whatever dividends *Page 13 might be declared by him and ordered paid by the Court upon the debt owing the Receiver of the Columbia Bank should be paid into the hands of that Receiver, for distribution among the creditors of such bank. It makes no difference that the debt owing by the insolvent Barnwell Bank is one in favor of the Receiver of the Columbia Bank in his official capacity, as dividends declared upon such debt would be for the benefit of the creditors of the insolvent Columbia Bank, and only pass through the hands of its Receiver for ultimate distribution among them. It appears to us that any other method or plan of settlement would produce an inequitable result. Certainly, the plan contended for by the respondent would work an injustice to the creditors of the insolvent Barnwell Bank, which a Court of equity should not permit.
It is clear, then, that the Receiver of the Columbia Bank should pay over to the Receiver of the Barnwell Bank anypro rata dividends already declared, or that may hereafter be declared upon the claim of $13,104.14, of the Barnwell Bank against the Columbia Bank; and that, on the other hand, the Receiver of the Barnwell Bank should pay over to the Receiver of the Columbia Bank any pro rata dividends that may be now or hereafter declared upon the $7,000 deposit, made by the Receiver of the Columbia Bank.
The decree of the Circuit Court is reversed, and the case remanded, with instructions that the Receiver of the Columbia Bank pay over to the Receiver of the Barnwell Bank allpro rata dividends already declared, or that may hereafter be declared, upon the $13,104.14 claim of the Barnwell Bank against the Columbia Bank.
And it is so ordered as the judgment of this Court.
MR. CHIEF JUSTICE WATTS and MR. JUSTICE CARTER concur.
MR. JUSTICE COTHRAN dissents.
MR. JUSTICE BLEASE disqualified. *Page 14
ON PETITION FOR REHEARING