
    Leo Frank, as Trustee in Bankruptcy of Solomon Ullman, Bankrupt, Respondent, v. The Mercantile National Bank of the City of New York, Appellant.
    
      Trustee in bankruptcy — right of a hank holding notes of the bankrupt, not due at the time of the filing of the petition in bankruptcy, to set them off against its liability for a deposit then due to the bankrupt — an assignee of the bank has the same right.
    
    A bank which, at the time of the filing of an involuntary petition in bankruptcy, has a sum of money on deposit to the credit of the bankrupt and at the same time holds promissory notes of the bankrupt, some of which are then due and some of which are not, is entitled, under subdivision a of section 68 of the Ban^ruptcy Law, to set off, against its liability for the deposit, not only the notes due at the time of the filing of the petition in bankruptcy, but also those which subsequently become due.
    Where, intermediate the filing of the petition in bankruptcy and the adjudication in bankruptcy,. the bank transfers all its assets to another bank which agrees to pay all the liabilities of its assignor, the right of set-off existing in the assignor bank inures to the benefit of the assignee bank.
    Appeal by the defendant, The Mercantile National Bank of the City of New York, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the ■ 8th day of July, 1904, upon the decision of the court, rendered after a trial at the New York Special Term, sustaining the demurrer of the plaintiff to several counterclaims and set-offs interposed in the answer of the defendant.
    
      E. H. Sykes, for the appellant.
    
      Charles Grossman, for the respondent.
   Ingraham, J.:

The plaintiff, as trustee in bankruptcy of Solomon Ullman, commenced this action against the defendant to recover a deposit due to the bankrupt from the National Broadway Bank upon the day that an involuntary bankruptcy was filed in the’ District Court of the United States asking.that the bankrupt be adjudicated an involuntary bankrupt. The complaint alleges that subsequent to the adjudication in bankruptcy the National Broadway Bank duly assigned, transferred and set over to the defendant all the property, assets .and effects of the National Broadway Bank and the defendant agreed to assume the payment of and to pay all the liabilities- of . the said National Broadway'Bank. The defendant does not deny that there was on deposit with the Broadway Bank, upon the date of the" filing of the petition in bankruptcy," the sum of money to recover for which the action was brought, but sets up seven, set-offs and counterclaims as a defense to the plaintiff’s cause of action. These are substantially alike except as to the dates and the amounts of the various promissory notes set forth. The first set-off and counterclaim alleges that on" or about the 1st of December, 1902, Solomon .Ullman, the bankrupt, made his promissory note in writing, dated on said day, whérein and' whereby he promised to pay- to the®order qf himself the sum of $1,250 four months after said date, and. on the •same day indorsed and delivered -said note to the National Broadway Bank for value"; that thereafter and on or about the 21st day of April, 1903, the National Broadway Bank indorsed and delivered ’ said note to this defendant for value; that on or about- the 7th -day of April, 1903, an involuntary petition in bankruptcy was filed in the United States District Court for the southern district of New York-praying that said Solomon Ullman be adjudicated a bankrupt and that thereafter said Ullman was duly adjudicated a bankrupt "and the plaintiff was duly elected and. duly qualified as trustee of the estate of said bankrupt; that no part of said. note has been paid and that the sum of $1,25C with interest thereon from the 1st" day of April, 1903, is "now due and owing to the defendant. It will be noticed that this note Upon which Ullman was- fiable was held 'by the National Broadway Bank which was indebted to Ullman for the amount which the plaintiff’ seeks to recover in this action, and that this note became due prior to the time that the in voluntary petition in bankruptcy was filed. The subsequent counterclaims, or set-offs, however,"set up notes which became due subsequent to-the adjudication in bankruptcy. The demurrer to these several-counterclaims was sustained upon the ground that the set-offs Could only be allowed where the demands sought to be set off were due and payable prior to the filing of the involuntary petition in bankruptcy. -At the time• this involuntary■ petition was "filed the National Broadway Bank had upon deposit to the credit of the bankrupt a sum of money, • and at the same time the National Broadway Bank held these obligations of the bankrupt. Prior to the time of the adjudication of bankruptcy these obligations of the bankrupt had been transferred to the defendant and the defendant had assumed the obligations of the National Broadway Bank to its depositors. If the rights and liabilities of the parties are to relate back to the filing of the involuntary petition, then if the National Broadway Bank .had the right to set off one demand against the other, what passed to the defendant was the Obligation of the bankrupt and a liability for the amount due to the bankrupt, and the devolution of liability was, I think, subject to the right of set-off which existed in the National Broadway Bank. If the right of the parties is to be determined as of the date of the .adjudication of bankruptcy then the defendant, having assumed the payment of the indebtedness to the bankrupt at the same time owned the obliga, tians of the bankrupt and the right of set-off existed. Pending the determination of the involuntary petition in bankruptcy the liability for the deposit was assumed by the defendant, who also acquired the obligations of the bankrupt. ■ The right of the trustee' in bankruptcy to recover the amount due to the bank from the defendant depended upon the assumption by the defendant of the obligation of the Broadway Bank. That obligation was to pay that deposit subject to its right to set off the amount of the notes, and it was that liability that was devolved upon the defendant and not an absolute liability regardless of the light of set-off that existed and to which the obligation of the bankrupt or his trustee in bankruptcy as against the Broadway Bank was subject. It seems to me- clear that under the provisions of the Bankruptcy Law a debtor of a bankrupt is entitled to set off his claim against the bankrupt, whether matured or unmatured at the date. of the adjudication in bankruptcy. Subdivision a of section 68 of the Bankruptcy Law (30 U. S. Stat. at Large, 565) provides that “in all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance .only shall be allowed or paid.” Subdivision b of this section provides that a set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate; or (2) was purchased by or transferred to him after the filing of the petition,, or within four months before such filing, with a view to such úse. and with knowledge or notice that sfich bankrupt- was insolvent,' or had committed an act of bankruptcy.” It is not claimed that this debt "Of the defendant against the bankrupt was not provable against the' estate. Nor is it alleged tliat it was purchased by or transferred to the defendant with knowledge or notice that the bankrupt was insolvent or had committed an act of bankruptcy, These notes were all discounted by the Broadway Bank prior to the filing of the involuntary petition, and at that time, were subsisting obligations of the bank held by the Broadway Bank. They were all provable against the estate of the bankrupt; and in possession "of the Bróadway Bank; the. claim of the bankrupt against the Broadway Bank was subject to the set-off of the existing indebtedness of the bankrupt to the Broadway Bank. - The defendant assumed the indebtedness of the Broadway Bank, which was subject, to this set-óff, and acquired the obligations of the bank which the-Broadway Bank was entitled to set off against this liability, and thus, when called upon by the trustees of the estate of the bankrupt to respond to this obligation to the bank, it was entitled to the same right- that the Broadway Bank had to make the set-off. ,

. I think, therefore, tliat the defendant was-entitled to set off these,, - obligationsof the bankrupt, and that the judgment should be reversed,

, with costs, and the demurrer overruled, with costs,-with leave to the plaintiff to withdraw the demurrer on payment of costs in this - court and in the court below. . .

Van Brunt, P. J., McLaughlin and Laughlin, JJ.j. concurred ; Patterson, J., concurred in -result. ' .

Judgment reversed, with costs, and demurrer overruled, with costs, with leave to plaintiff to withdraw demurrer on payment of costs in this court and in the court below.  