
    FERA v. WICKHAM.
    
      N. Y. Court of Appeals ;
    
    
      October, 1892.
    [Reversing 51 Hun, 343.]
    1. Set-off; ground of suzt.] An action for a decree allowing an equitable set-off to be made against a demand held by an assignee for the benefit of creditors, cannot be maintained where plaintiffs demand had not matured at the time of the assignment, although it subsequently matured before the demand held by the assignee against him matured.
    
    2. The same.] The right of set-off in such case must attach at the time of making the assignment. It cannot arise afterwards, for the reason that the claim in favor of the estate has passed to the assignee, and to allow a set-off of a claim not due at the time of assignment, would be to the prejudice of other creditors. Myers v. Davis, 22 N. Y. 489, followed.
    3. Cases disapproved.] Dicta in Rothschild v. Mack, 42 Hun, 72 (affirmed on other grounds, in 115 N.Y. 1), and Chance v. Isaacs, 5 Paige, 592, overruled.
    Appeal from a final judgment of the Special Term of the Supreme Court, First District, entered after interlocutory judgment overruling a demurrer to the complaint had been affirmed by the General Term of that court.
    The action was brought by Henry Fera against Daniel H. Wickham and others, partners, composing the firm of D. H. Wickham & Co., and Nathan J. Newwitter, as assignee for the benefit of the creditors of such firm, to have a draft payable to plaintiffs order and accepted by the firm of Wickham & Co., offset against a.note given by plaintiff to Wickham & Co. It appeared from the complaint that the accepted draft was payable November 6, 1890, and that plaintiff’s note was payable June 9, 1891; and that the firm of Wickham & Co. made a general •assignment on October 27, 1890.
    Defendants demurred to the complaint on the ground that it did not state facts sufficient to constitute a cause •of action.
    
      The Special Term, following Rothschild v. Mack (42 Hun, 73), held, that a set-off will be allowed in equity as against an assignee, where the debt sought to be set-off was not due at the time of the making of a general assignment by the insolvent debtor; and overruled the demurrer.
    
      The General Term affirmed the judgment of the special term upon the same ground, citing, also, Chenault v. Bush (84 Ky. 528 ; S. C., 2 Southwest Rep. 160); and Schuler v. Israel (120 U. S. 506; S. C., 7 Supm. Ct. Rep. 648). [Reported in 61 Hun, 343.]
    Defendants appealed to this court.
    The further facts are fully stated in the opinion.
    
      Chas A. Hess (Hess, Townsend & McClelland, attorneys) for appellants.
    I. The simple question before the court is: Will a claim of a creditor of the assignor's under a general assignment be allowed as- a set-off against a claim of the assignors against him, the former maturing first, but neither maturing until after the execution and delivery of the general assignment ? The appellants contend for the negative (citing Richards v. La Tourette, 119 N. Y. 54 , Lindsay v. Jackson, 2 Paige, 581 ; Myers v. Davis, 22 N. Y. 489 ; Martin v. Kunzmuller, 37 Id. 396 ; Schieffelin v. Hawkins, 14 Abb. Pr. 112).
    
      Samuel J. Goldsmith (Goldsmith & Doherty, attorneys), for respondent.
    The power of courts of equity to decree set-off of mutual demands in cases of the insolvency of one of the parties, exists irrespective of the statute, and it will be always exercised when justice-requires it, for the reason that it is a natural equity (citing Holbrook v. Receivers of Am. Fire Ins. Co., 6 Paige, 220 ; Richards v. La Tourette, 119 N. Y. 54; 2 Smith's Leading Cases, 9th ed. notes, p. 1588 ; Lindsay v. Jackson, 2 Paige, 581 ; Smith v. Felton, 43 N. Y. 419 ; Davidson v. Alfaro, 80 Id. 660; Bathgate v. Haskin, 59 Id. 533).
    II. It is immaterial that the demand became due after insolvency (citing Fidelity Trust, etc. Co. v. Merchants' Bank, 9 L. R. A. 108 ; Lindsay v. Jackson, 2 Paige, 581 ; Stewart v. Anderson, 6 Cranch, 203 ; Smith v. Felton, 43 N. Y. 419; Merrill v. Souther, 6 Dana, 305; Coates v. Donnell, 48 Super. Ct. 46; aff’d in 94 N. Y. 168; Waterman on Set-off, § 132 ; Chance v. Isaacs, 5 Paige 592 ; Brooks v. Cannon, 9 State Rep. 506).
    III. The assignee for the benefit of creditors does not stand in any better position than his assignor (citing Chance v. Isaacs, 5 Paige, 592 ; Holbrook v. Receivers of Am. Fire Ins. Co., 6 Id. 220; Smith v. Felton, 43 N. Y. 419 ; Littlefield v. Albany County Bank, 97 Id. 581; Amsterdam Sav. Bk. v. Tartter, 54 How. Pr. 385 ; Jones v. Robinson, 26 Barb. 310).
    IV. The case is one of mutual credits and in all such: cases equity decrees a set-off where one of the parties-become insolvent (citing Rose v. Hart, 2 Smith's Leading Cases, 9th ed. 1588; Jones v. Robinson, 26 Barb. 310; Brooks v. Cannon, 9 State Rep. 506).
    V. This is not a case of an indebtedness due to the-insolvent at the time of the assignment against which he is seeking to offset a demand to become due by him. In. such cases, in an action at law on the assigned indebtedness,, equity will not interfere, for the reason that at the time of the assignment no equity existed in favor of the debtor to the assignor (citing, in addition to the above cases, Martin v. Kunzmuller, 37 N. Y. 396; Bradley v. Angel, 3 Id. 
      475 ; Munger v. Albany Bank, 85 Id. 580 ; Myers v. Davis, 22 Id. 489).
    
      
       See note at the end of this case.
    
   Gray, J.

The firm of Wickham & Co., having become insolvent, made a general assignment for the benefit of their creditors. On October 27, 1890, at the time of this, assignment, the plaintiff held their unmatured acceptance of a draft to the amount of $1,390.60, for goods sold.. The assignee became, by the assignment, the holder of a promissory note, made by the plaintiff to Wickham &. Co.’s order for $536.25. The accepted draft was payable November 6, 1890, and the plaintiff’s note was payable on June 9, 1891. The plaintiff has brought the present action to secure an equitable offset of the debt to. him. from the insolvent éstate, as against the debt due by him-Upon the defendants’ demurrer to his complaint, the courts below have held the relief within the power of a court of equity to award and, therefore, gave plaintiff judgment. In the opinions delivered at the Special and General Terms of the supreme court, the learned justices relied upon the decision in Rothschild v. Mack (42 Hun, 72). The opinion of the General Term of the Fifth Department in that case was affirmed by this court, as to-the correctness of the conclusion arrived at (115 N. Y. 1). But the appeal was not decided in this court on the-ground taken by the General Term in their opinion, but solely because a cause of action on contract did exist in-the complainant’s favor against the insolvent assignor at the time of the assignment. The learned justices below, in the present case, have felt themselves constrained, apparently, to follow the decison in the Fifth Department ; inasmuch as in this court, in the Rothschild case, the correctness of the General Term views was not expressly denied.

It must be conceded that the opinion of this court in the Rothschild case seemed to leave open for further-discussion the question passed upon by the General Term, namely, of the right of an equitable offset, where, at the time of the assignment, the party was only contingently liable. It was the opinion there that the general rule in equity should obtain, if the liability of the insolvent estate had become actual prior to the time of the maturity of the demand due to the estate. This view, however, I think to be untenable, if we are to be guided by the authority of previous decisions in this court. In the Rothschild case, neither plaintiff’s claim on the note nor the assignee’s claim against them, were due at the time of the assignment; but, because of the fraud practiced upon the plaintiffs, in the manner in which the moneys were obtained from them, it was held that a cause of action in assumpsit arose at once in their favor for the recovery back of the moneys. It existed the moment the insolvent assignors obtained the money; and being a proper subject of set-off in any action which might have been brought by the parties against whom it existed, it could properly be offset against the debt due f'rom the plaintiffs to the assignee pro tanto.

The subsequent case of Richards v. La Tourette (119 N. Y. 54) was that of an action by the assignee of án insolvent firm to foreclose a mortgage. The defendant -demanded that the assignee, set-off, in reduction of his indebtedness upon the mortgage, the indebtedness due from the assignors to him. The particular and only question presented was whether, as the defendant’s debt upon the mortgage was not due at the time of the assignment, the -debt owing to him from the assignors, and which was •due at that time, could be equitably applied in reduction of the mortgage debt. The right to the offset was upheld because of the immateriality of the fact that the debt owing to the insolvents was not due when the assignment was made. The debtor to the insolvents could elect to treat his debt as presently due and waive any defense on any such ground.

Where this case differs from the Rothschild case is that there was no cause of action in favor of the plaintiff at the time of the assignment. The question here is whether the plaintiff has an equitable right to an offset of his demand against the insolvent estate, which had not matured at the time of the assignment; but which did, subsequently, mature before the demand held by the assignee against him matured. In the solution of this question we might find some embarrassment in endeavoring to reconcile expressions of opinion by the judges in the early cases, and after a very careful consideration, I am disposed to hold that,, by an assignment in trust for the assignor’s creditors, what natural equities previously existed become suspended by an intervention of the rights of other creditors. The natural equity in offsetting cross demands, which had its rise in the rules of the civil law, was soon adopted by the court of chancery, in cases where, from the situation of the parties, cross actions at law were inadequate. Hence, if one of the parties should become insolvent, the insolvency was-recognized as presenting a case for equitable interference-But the rule was limited in its application to cases where the equitable rights of others were not interfered with-Thus, in Lindsay v. Jackson (2 Paige, 581), the bill was-filed to restrain the defendants from negotiating complainant’s notes to others and for a set-off of cross demands,, and the insolvency of the defendants was considered a sufficient reason for permitting an offset of their debt to-complainant as against the complainant’s debt to them.

But in Chance v. Isaacs (5 Paige 592), which was a similar action to that of Lindsay v. Jackson, the relief of set-off was denied by the vice-chancellor, because an. assignment has been made under which the creditors of the insolvent party acquired an interest in the complainant’s, notes before his demand against the defendants had matured. His decree was affirmed. It is true that the chancellor, in that case, thought that the right of set-off would have existed, although the defendant’s note, upon which complainant was liable as indorser, was not due at the time of the assignment, if the complainant had held it. He regarded the fact that complainant did not hold the note at that time as precluding him from demanding a set-off.

The remark referred to in the opinion in Chance v. Isaacs does not seem to me to have been regarded as controlling in later cases. It was unnecessary to the decision there, and I think we must refuse to be guided by it.

In Bradley v. Angel (3 N. Y. 475) the complainants owed defendant’s testator for goods purchased. They held his notes falling due at times subsequent to his decease. A suit was commenced against them for their indebtedness to the estate, and they commenced this action to secure An offset of the testator’s unmatured notes as against their present indebtedness and to restrain the action at law. Judge Gardiner, in holding that a set-off could not be permitted, on the ground that the testator’s contract could not be changed by compelling payment before maturity, Assigned as a reason that it would be to the prejudice of -other creditors. Thus the plaintiffs were obliged to pay their indebtedness to the estate, though holding the testator’s notes, which they were not permitted to have set-off.

In Myers v. Davis (22 N. Y. 489) the action was by an Assignee to recover on a claim against the defendants for goods sold to them by his assignors. At the time of that ■transaction the defendants were manufacturing certain wares upon the assignor’s order, and at the time of the Assignment the order was yet unfilled. When finished, the price exceeded the amount which they owed to the insolvent estate. The demand against them, because of the term •of credit on which the goods had been sold to them, did not become due until some time after they had filled the order of the assignors and had become entitled to be paid. The defendants asked to have allowed, upon what the Assignee claimed from them, the amount of the claim which they held against the estate in his hands. A set-off was refused, and Judge Denio, after remarking that there was no relation between the claims of the respective parties, other than that which always exists between persons having reciprocal demands against each other, stated the rule thus: That when such claims exist in a perfect condition at the same time, either party may insist upon a set-off. So, where the one claiming a set-off has a demand against the other presently payable, and the other party is insolvent, the former may claim to have the set-off made, though the demand of his adversary against him has not become payable. But if, before the demand of the party claiming the set-off becomes mature, the opposite claim has been assigned, whether the assignment carries the legal, or only an equitable title, the right of set-off no longer exists.”

In Martin v. Kunzmuller (37 N. Y. 396) the action was by an assignee to recover for goods sold by the assignors, and the defendants were not permitted to offset the amount of a note of the assignors held by them and which matured after the assignment. DAVIES, Ch. J., in his opinion in the case, held, on the authority of Myers v. Davis, that “ the debt not matured could not be the subject of a set-off against the plaintiff.” Judge Davies, in support of his opinion, refers to Chance v. Isaacs (supra), but only to the vice-chancellor’s decision, regarding the decision of the chancellor on appeal as the mere affirmance of the decree. The point, as I take it, in the vice-chancellor’s opinion, and as J udge. Davies also seemed to consider, was that the creditors, under the assignment, had acquired an interest in the complainant’s notes before he had become liable on the assignor's note. The principle upon which the decisions were based was, as stated in J udge Parker’S opinion in Martin v. Kunzmuller, that the assignee takes the contract assigned to him subject to the right of set-off which the debtor had against it at the time of the assignment. In other words, if there is no right of set-off when an insolvent assignment is made, it cannot arise afterwards in favor of a creditor. Cross-demands, which do not mature until after such assignment, could, not have been the subject of set-off when the assignment was made; for a demand in presentí is necessary to an. allowance by way of set-off.

I think the logical and natural extension of the principle of the decision in Myers v. Davis is authoritative in the decision of the present case. The right of set-off must attach' at the time of making the assignment. It cannot arise afterwards, for the reason that the claim in favor of" the estate has passed to the assignee, and to allow a set-off would be to the prejudice of other creditors. I think the principle to which we should adhere is this : When a: party asks to have set-off against a demand upon him held by an assignee for the benefit of creditors, a claim against, the insolvent estate, it will be allowed, provided his was-a claim upon the estate, due when the assignment was-made, upon the ground that, by reason of the existence of cross-demands at the time of the assignment, which were due (or might have been due at the creditor’s election), an equitable adjustment by set-off is made without interfering with the equities of others. But, after the estate has passed to an assignee, upon a trust to hold for and to-distribute among creditors, the former and natural equity disappears in superior equities vesting in the general body of creditors. They are then interested in having equality of distribution; and if a creditor who, when the assignment was made, had no right to any set-off, may be allowed it afterwards, he gains a preference. By the intervention of the rights of third persons, under the assignment, the equities change, .with the change in the situation of the original parties, to the misfortune of the creditor holding the demand against the insolvent estate, but, nevertheless, in accordance with equitable principles, as I deduce them from the decisions.

The order and judgment below .should be reversed, and judgment should be ordered for the defendants upon the demurrer, dismissing the complaint of the plaintiff, with costs in all the courts.

All the judges concurred.

Note on Set-off by Defense or by Action.

The following outline of the results of recent decisions will afford a useful starting point in the examination of authorities oi^equitable set-off.

At law, set-off depends on the statute.

In Equity, set-off may be allowed beyond the statute (Smith v. Felton, 43 N. Y. 419).

It may, however, be secured by an agreement or stipulation for set-off (Matter of Dunn, 8 N. Y. State Rep. 766).

In a State court, if the necessary parties are present, set-off on equitable grounds may be interposed as an equitable defense or counterclaim in an action of a common law nature (Code Civ. Pro. § 507).

In the U. S. court, it cannot (see Montejo v. Owen, 5 Abb. N. C. 110).

In case of a tort raising an implied contract, the claimant may waive the tort, and set-off the implied liability as a cause of action on contract (Rothschild v. Mack, 115 N. Y. 1).

1. Demand notyet due-, set-off asked by defendant. ] Defendant being sued cannot set up that plaintiff owes him a debt not yet due even though he shows that plaintiff is insolvent (Richards v. La Tourette, 119 N. Y. 54, 58 ; Contra, Nashville Trust Co. v. Fourth Natl. Bk. (Tenn. 1892, 18 South West Rep. 822).

asked by plaintiffs Plaintiff owes defendant a demand not yet due ; defendant owes plaintiff a demand already due. Plaintiff may sue for set-off because he thereby waives his right to credit and consents that what he owes be treated as already due (Rothschild v. Mack, 115 N. Y. 1).

Assignments Although an assignee for the benefit of creditors is a mere volunteer, not a purchaser for value (Warner v. Jaffray, 96 N. Y. 248), yet he represents the creditors for whose benefit the assignment is made, and their equities in the assigned assets are deemed to have attached from the time of making the assignment, so as to preclude a subsequently maturing debt of the assignor from serving to reduce or extinguish an assigned debt. Fera v. Wickham, in the text (29 Abb. N. C. 200).

Time of assignment.] The assignment is deemed to take effect from the time of delivery acknowledged, not merely from the time of record (Nicoll v. Spowers, 105 N. Y. 1.)  