The first question is, whether the plaintiff has the right to set off his losses under policies of the company against his subscription to the stock. In one sense, what the plaintiff owes the company on his stock is a debt due the company. What the company owes the plaintiff on his policies of insurance, is a debt due the plaintiff. The debts are mutual, in that they exist from one to the other reciprocally. And if the debt due from the plaintiff were an ordinary debt, then, as we have already decided in the case of Drake v. Rollo [Case No. 4,066], the set-off would be allowed, although the result would be to pay the plaintiff his claim against the company in preference to other creditors. We are to apply the bankrupt law to the law of the state creating the corporation. The charter authorized the company to commence business on the payment of five per cent, of the amount subscribed, provided the payment of the remainder of the stock was secured.
The purpose of this was to accommodate the stockholders, by permitting secured promises to pay to stand in the place of the money. It was still intended as a fund to protect the creditors of the company, and the charter pointed out the special manner in which the fund should be made available in case of necessity, and which has been followed in this case. So long as the company was solvent, there might not be any serious objection to the stockholder insisting that his loss on a policy should be an answer to a call to pay his subscription to the stock, because if he were to pay his subscription, the company would be obliged immediately to refund to the extent of the loss. In that case no .one is injured by the allowance of the set-off. But where the company is bankrupt, it is different. Some one must sustain a loss, and the question is, whether the stockholder who has not paid his stock subscription, and who happens to have a policy on which the company is liable, shall bear his share of the loss, or shall be paid in full to the extent of his subscription. Does the fact of the solvency or bankruptcy make no change in the rule? We think it does, and that there is a difference in principle between the two cases. We have the right to judge of causes from their effects, and to reason accordingly, and certainly we ought not to sanction a rule which produces so much loss to the general creditors of the company, unless by following a different course we trench upon some settled principles of law or equity. Where a party borrows from the capital of the company, takes out a policy, sustains a loss, and in case of insolvency and bankruptcy, claims to set it off, we allow the set-off because he is an ordinary debtor of the company, and therefore comes within the rule that one debt answers another, however hard it may occasionally be, and doubtful on general principles of ethics. But in this case the plaintiff is not an ordinary debtor of the company. The charter has permitted him to retain a part of the capital of the company, and hold it in .trust for the creditors. And. it seems to us, that to allow him, under the circumstances of the case, to pay himself in the way he seeks for his losses under the policies; would enable him to take advantage of his fiduciary relations', and obtain a preference over other creditors, not warranted by the equitable principles of the bankrupt law, and contrary to the manifest intent of the charter of the company.
In a court of equity, as a set-off may be allowed which is not sustainable at law, so we suppose, though generally equity follows the *644law, there may be a set-off, technically good at law, which, owing to the relations of the parties, may not he admissible in equity. In this case the plaintiff comes into a court of equity for relief, and we think he should first do equity by making good his share of the capital stock, on the strength of which the company obtained its credit, and was enabled to start in business. This has become equity, because he is in one sense a trustee of that fund, and because, further, the company is insolvent and in bankruptcy.
Some very late English authorities were cited by the plaintiff’s counsel, which it is insisted, are decisive of this case in favor of the set-off.
The first was In re Duckworth (1866-67) 2 Ch. App. 578. It is difficult to comprehend this case fully without an exam ¡nation of the various statutes referred to. The party had subscribed for certain shares of stock in a company; he was also a creditor. The company was wound up under a special statute. Afterwards the party made an assignment for the benefit of his creditors, which was registered in bankruptcy. The question was between the representative of the company, under the winding-up act, and the trustees, under the bankruptcy registration, as to the right of the latter to set off the debt from the company to the party, against calls for the subscription, and the court held that the set-off was allowable, on the ground apparently that the case was one of ordinary mutual debts, and so within the statute in bankruptcy as to set-off. It was admitted that if the court of chancery, as such, had been adjudicating the ease, the set-off would not be allowed, because the true construction of the winding-up act cut it off. But treating it as a court of bankruptcy, and not as a court of equity, and independent of the differences between that case and this, the reasoning of the court is not very satisfactory. The judge merely says, that it is his opinion that there would be a set-off under a particular section of the statute.
The other case is In re Universal Banking Corp. (1869-70) 5 Ch. App. 492, and is similar to the first and relies upon it. So far as these cases show that a subscriber to the stock of a company may set off a demand due from the company against his subscription, under the circumstances set forth, there may be certain analogies between those eases and this, though the debts are treated throughout as ordinary debts, and no consideration seems to have been given to any relation of trust existing between the parties. And besides, as already intimated, there are various statutes referred to, which may have more or less affected the views of the court. The winding-up act seems to concede that the principle of set-off. in case of contribution, is wrong, as it prohibits it.
These eases were both decided after the passage of our bankrupt law. and therefore could not have entered into the consideration of the law makers. But there are some decisions in this country which do not agree with the principle of those late English cases.
It seemed to be admitted by the counsel for the plaintiff, that in the case of mutual companies, so-called, the rule did not apply of allowing set-off. One case may be referred to —Lawrence v. Nelson, 21 N. Y. 158 — where the party had given what is termed a “premium note,” and had sustained a loss — one a debt due him from the company, the other by him to the company — and he sought to set off his claim on the policy against his premium note, and the court held that this could not be done in that case, because the note constituted a part of the capital of the company, and in case of insolvency to suffer it to be done would be giving one creditor an unfair advantage over another.
The bankrupt in that case was called a mutual company, though technically a stock company, but we are somewhat at a loss to understand the alleged difference between the two-cases; it is true we can call one a joint stock company and the other a mutual company, but names do not change things. In both the “bills payable” constitute a part of the capital of the company, and a trust fund for the benefit of creditors. In both the party owing the bills receivable has met with a loss on a policy of the company. The difference, if any, seems to be in favor of the premium note as claiming a set-off, because that is given for the policy, and by a species of arrangement stands indirectly as a part of the capital, whereas here the bills receivable have to be treated directly as a part of the capital and were given with that special purpose. It seems to us that the argument of the court in the case of Lawrence v. Nelson applies to this case.
It is said that the bankrupt law has not taken away any of the rights of set-off, but has recognized and enforced them. That is so, but the bankrupt law [of 1867 (14 Stat. 517)] was not intended to encourage anything inequitable, or to enable one to take advantage of the bankruptcy of an individual or of a company, to obtain payment in full, while others could only have a pittance, and especially when those seeking the advantage occupied relations of trust.
It follows, from what we have said, that we are of the opinion that the plaintiff has not the right in equity to set off his losses on the policies against his liabilities for the payment of the stock of the company. We think that the obligation of every person who subscribes and owes for stock in such a company as this, is, in case of its insolvency, to pay what he owes for the benefit of the creditors.
The other question is as to the equitable right of set-off of the claims under the policies against the funds which the plaintiff held as the treasurer of the company. Here the position of the plaintiff was unquestionably that of trustee. The only point is. whether that was changed by the contract, or,. *645rather, understanding of the parties. It may be admitted that the fair inference is that the plaintiff had the right to use the money, because the payment of interest implies that; but it is impossible to consider this part of the case fairly, without bearing in mind the peculiar relations of the parties to each other. If the plaintiff had authority to employ the funds, as treasurer, he was obliged to have them always ready to answer the necessities of the company. He was still, as to them, a trustee, and not an ordinary debtor of the company. It was the case of a trastee using trust funds with the consent of the cestui que trust, but always on the condition that they ■were to be so used that he could meet the object of the trust.
[On appeal +o the supreme court, the decree of this court was reversed. 92 II. S. 302.] NOTE. As to the right of set-off in cases where assured of an insolvent insurance company are debtors of the corporation, see Drake v. Rollo [Case No. 4,066]; Hitchcock v. Same [Id. 6,535]: Sawyer v. Hoag rid. 12.400], affirmed by supreme court in 17 Wall. [84 U. S.] 610. This last case is closely allied to the text. Consult Weston, v. Barker, 12 Johns. 276.The evidence shows that at the time of the fire the plaintiff had in his hands the funds of the company. It was as treasurer. Having met with losses on his policies, he claims the right, so to speak, of sequestering the funds in his hands as treasurer to answer his losses as a general creditor of the company. If we concede that this may be permissible in case of an ordinary debtor, we think it would not apply to one occupying the situation of this plaintiff. He would be receiving the obligations of the company upon different terms from an ordinary policy-holder, and he would occupy a vantage ground over others.
There are several difficulties in the way of a set-off on the special facts of the case. The plaintiff was elected treasurer in 1870. Whatever arrangement was made, if at all, was prior to that time. The most that can be said is that after he was elected treasurer, the funds in his hands, while they were, from time to time, reported as cash or capital, drew interest, which was accounted for, and this with the acquiescence of those who may be presumed to represent the company. There was no distinct contract made with him while he was treasurer which would constitute him the debtor, and nothing more, of the company.
The plaintiff was not only the banker of the company, but its treasurer, considered as sustaining those relations to the company pertaining to the office. It is very clear that whatever may have been the view of the plaintiff, the directors and the company did not regard the plaintiff as the mere borrower of the funds in his hands, and before a set-off would be admissible as between tbe company and its treasurer, in ease of the insolvency or bankruptcy of the former, there ought to be satisfactory evidence that be, as to the money, had taken the position of an outside party; in other words, that he had, as to the money, ceased to be the treasurer of the company.
We need not refer to the question, whether if it was a loan to the treasurer by the directors, it was a violation of law, and therefore invalid. We prefer to place it on the ground that under some of the conceded facts of the case, the set-off is not maintainable, unless there is established the simple relation of debtor and creditor. This, we think has not been done, and therefore we overrule the claim of set-off.
The original bill will be dismissed, and a decree will be rendered for the assignee on the cross-bill for $54,145.90, the amount due on both demands.