
    ANNE F. DARBY v. THE FREEDMAN’S SAVINGS AND TRUST COMPANY ET AL.
    Equity. —
    No. 4680.
    T. A married woman who mortgages her separate estate for the debt of her husband acquires the rights and privileges of a surety. ■
    Ii. If the principal could claim a right of set-off in a court of equity, the surety is entitled to the same benefit. This principle applied to a cast; where a husband and wife united in executing a trust deed upon his property, and also upon her separate estate, to secure the promissory note of the husband toa trust company which became insolvent, having in its hands at the time of its failure a casli deposit of the wife; and after the death of the husband it was decided that the claim of the wife might be sot off against that of the trust company, and that the latter was entitled only to the difference between the two amounts.
    STATEMENT OE THE CASE.
    The statement is mainly taken from the brief of defendant’s counsel.
    The bill in this cause alleges that the complainant is the owner of lots numbered 317 to 333 inclusive, in TTniontown, county of Washington, District of Columbia, and that she is the sole executrix of the last will aud testament of Ralph H. Darby, deceased, late of said county and District.
    That by a certain deed of trust dated August 23,1872, the said Ralph H. Darby and said complainant, his wife, intended to convey the said lots unto the defendants Alvord and Stickney, in trust, to secure to the defendant the Freedman’s Savings and Trust Company the payment of a certain promissory-note of said Ralph H. Darby of same date, for the sum of $2,000, bearing interest at the rate of ten per centum per annum. The said trust deed contains the ordinary provisions as to sale upon default in payment of said note or interest, and release aud reconveyance upon payment of the said debt. That said note is now held by the defendants Creswell, Purvis, and Leipold.
    That the said Ralph H. Darby at the time of the execution of the said deed of trust was seized in fee-simple of lots 317 to 321 inclusive, and was seized in fee-simple of the residue in trust for said complainant during her life, and after her death in trust for the heirs of said complainant by the said Ralph begotten or to be begotten, in fee-simple, subject to a power of direction and appointment reserved to said complainant.
    That said Ralph H. Darby died on the 9th of March, 1875, and by his will devised and bequeathed to the complainant all his real and personal estate for her own use aud benefit forever, and appointed said complainant to be his sole executrix. That at the time of his death the said Ralph II. Darby was the owner of lots 317 to 321 inclusive, and held the residue, to wit, lots 322 to 333 inclusive, in trust as aforesaid. That said Ralph H. Darby died without issue, and that the said trusts descended upon and vested in one "William J. Darby, the only brother and heir at law of the said Ralph, and that the complainant has fully executed her said power of direction and appointment, and that she has by certain mesne conveyances become the legal and beneficial owner of all the property and estate which devolved upon the said William J. Darby in trust as aforesaid.
    That the Freedman’s Savings and Trust Company is indebted unto the complainant for money loaned to said company from time to time since the execution of the said deed of trust, in the sum of $1,752, with interest from July 11, 1874, and that she has a right to offset said sum against the amount that may be due by reason of the said promissory note, and that at the time of making such loans it was agreed that they should be applied to the payment of said note and interest, and that the complainant did so apply them.
    That the installments of interest -were punctually paid, including that which fell due February 23, 1875; that on August 21, 1875, complainant offered to the defendants Creswell, Purvis, and Leipold payment of the installment of interest then about to fall due, as also the principal amount of said note and interest, subject to the set-off above mentioned, and at the time requested the said Alvord and Stiokney to execute and deliver a release of the said lots, but that .the said defendants refused to accept said tender and to make such release.
    That the Freedman’s Savings and Trust Company has no lawful authority to obtain a lien upon said lots by reason of said trust deed; that against said Ralph H. Darby and those claiming under him, the said deed is null and void, but that the same is a cloud upon complainant’s title and ought to be cleared away.
    The bill prays for an account, release, injunction, and general relief. To the said bill tbe commissioners of the Freedman’s Savings and Trust Company filed an answer, in which they admit the making of the said deed of trust, and that there now stands to the credit of the complainant upon the books of said company the sum of $1,752. But they aver that said complainant has no right to set off the amount of such credit against the promissory note of the said Ralph H. Darby, and that she is entitled to her pro rata share only of the said credit, payable in the same manner as other creditors of the said corporation are required to be paid by law; and they deny that there was any agreement by and between the said company and the complainant that her deposits should be accredited upon said note. They admit the tender of August 21,1875, and the request of complaiuaut for the execution of a release, and their refusal to accept said tender and to authorize the execution of said release. They deny that the said Freedman’s Savings and Trust Company has no authority to'obtain a lien under said deed, and also deny that it is null and void as regards those claiming under the said Ralph H. Darby.
    The commissioners of the Freedman’s Savings and Trust Company filed a cross-bill, setting forth substantially the same facts mentioned in their answer to the original bill of complaint, and praying for a sale of the said property and for general relief; to which cross-bill the complainant filed an answer of the same tenor as her original bill of complaint.
    The facts appear in the testimony to be as follows:
    On the 23d day of August, 1872, one Ralph H. Darby, now deceased, borrowed from the Freedman’s Savings and Trust Company the sum of $2,000, for which sum he executed and delivered to the company his promissory note, bearing date on that day, payable to the company one year after date, with interest at the rate of ten per centum per annum until paid. To secure the payment of this note the borrower and the plaintiff', who was his wife, executed, duly acknowledged, and delivered to the company a deed of trust whereby they conveyed to the defendants Alvord and Stickney the ..premises mentioned in the proceedings. This deed contains the powers of sale and the trusts usual in deeds of trust in this District given to secure the payment of money.
    Part of the property conveyed to Alvord and Stickney as security for this note, was vested in Ralph H. Darby in trust for the use of his wife, the complainant, during her life, and subject to her disposition by will or otherwise. The residue was owned absolutely by Darby.
    On. the 20th day of February, 1873, the complainant deposited upon interest with the Freedman’s Savings aud Trust Company the sum of $2,500 on her own account, upon which the company allowed interest from the date of the deposit according to their regulations. This money so deposited was her individual and separate property, and had been sent to her from England. A deposit book containing the regulations of the institution and an entry of each item of her account was given to her as her voucher for the money. On the 26th day of March, 1873, she deposited $50 additional, and in the following months of July and January she was credited upon this book for interest on her deposit the sum of $125.
    On the 28th day of April, 1874, being desirous of obtaining the sum of $2,000 out of this amount, she, with her husband, went to the officers of the company and requested them to pay her that sum; the officers declined to comply with this request, because the rules of the concern required sixty days’ previous notice of the intention to withdraw funds, but they agreed to and did open a “ business account” with her, and placed therein to her credit the sum of $1,000, subject to her check. This sum of $1,000, in conformity with the understanding of the parties, was drawn from her interest-bearing deposit. She drew checks from time to time, between that date and June 19, 1874, upon this “ business account,” amounting to $903, and they were all paid.
    On the 29th day of June, 1874, the Freedman’s Savings aud Trust Company closed its doors, and on the 11th day of July, 1874, the commissioners (defendants) took possession of the books, assets, &c., of this corporation.
    
      There appears to be no sufficient evidence of the alleged agreement to appropriate the deposit in Mrs. Darby’s name to the payment of the note, and the court did not gave it much weight.
    On the hearing of the cause at special term the court passed a decree ordering the Freedman’s Savings and Trust Company to credit the complainant with said sum of $1,752 and interest from July 11, 1874, upon said promissory note, for the execution of a release upon payment of the balance by September 22,1877, and enjoining the defendants from making sale of the said property under said deed of trust, and from instituting any proceedings for the purpose of enforcing the payment of the demand represented by the said promissory note.
    From said decree the defendant the Freedman’s Savings and Trust Company appealed to the court in general term.
    
      C. Ingle, for complainant.
    The defendant the Freedman’s Savings and Trust Company is insolvent, having gone into liquidation nine days after the passage of the act of Congress of June 20,1874, to amend its charter. Apart from the appropriation of the plaintiff’s deposits intended and made by Darby and the plaintiff' and the plaintiff’s trustee, to say nothiug of the company’s assent thereto, it would be inequitable to compel the plaintiff to receive only a dividend of twenty cents on the dollar, and at the same time to pay the commissioners, for the benefit of the other creditors, the whole of what was due the company. For the doctrine of mutual credit in equity, see 2 Story Eq. Jur., sec. 1435; Waterman on Set-off', 2d ed., pp. 175, 176, note; Simson v. Hart, 14 Johns. R., 63, 75, 76. All the bankrupt acts, English and American, and the statutes of set-off', apply this rule in case of the distribution of a bankrupt’s effects, or the eslate of a decedent, at law. Courts of equity were in possession of the doctrine before the law interfered: per Lord Elden in ex-parte Stephens, 11 Ves., 27. (See, also, Montague on Set-off, 2, 3, 4, 5; 5 Yes., 108; 12 Yes., 343; By les on Bills, 358.)
    
      Enoch Totten, for defendants.
    The only question here is whether or not Mrs. Darby, by the devise of her husband to her of this property, has obtained a right to set off her own account against the debt secured upon the land thus devised to her. This court has so often decided that the debtors of an insolvent banking institution cannot obtain an advantage over other creditors, by purchasing outstanding claims against the institution, that it is needless to discuss the question further.
    There is no real distinction between such a case aud this. In both cases a creditor and a debtor of the insolvent concern come together, and one sells to the other*. In this case the debtor sold (or devised) to the creditor. In the cases formerly before the court the creditor sold to the debtor. Here there are found none of the elements of a claim for a set-off whatsoever. Mrs. Darby is not personally bound for the payment of the note made by her husband; no action could be maintained upon the note against her, and hence she could not plead a set-off.
    The equitable view of the case gives her still less advantage. To give her the whole of her debt due from the corporation in this way, whilst other less lucky creditors, whose equities are just as strong as hers, must be content with fifty per centum, would be glaring injustice. Equality is equity. The fact that Mrs. Darby has had the good fortune to receive a large legacy, constitutes no reason why she should collect the whole of her debt from the insolvent corporation at the expense of the other creditors. Whatever sum she obtains more than her pro rata share, reduces by just so much the small pittance, by way of a dividend, going to the other creditors.
    The decree of the court below should be reversed, and a decree passed appointing a trustee to sell the property, in pursuance of the prayer of the cross-bill.
   Mr. Justice Wylie

delivered tbe opiniou of the court, in substance as follow's:

We think the decree below should be affirmed. It is admitted that Mrs. Darby proposed to pay the debt of her husband to the assignees of the company, provided they would allow her to set off the amount of $1,752 which stood in her own name and exclusive credit on the books of the company. They refused that offer and insisted upon selling the property embraced in the trust deed to pay the whole of it out of the estate of her husband.

The company is insolvent, and the defendants, who are its assignees, contend that she can only be allowed the dividends upon her deposit, like the other creditors of the institution. She files her bill for an account and to restrain the threatened sale, and claims the right in equity to set off the amount of her said deposit against the sum due upon the promissory note of her husband. On the other hand, the assignees filed a cross-bill to obtain a decree for the sale of the property. The court below enjoined the sale and decreed the assignees to credit her with the whole amount the company owed her separately upon the debt, and that she should pay the balance, or the property should be sold. From this decree they have taken an appeal, and insist with great earnestness that they are entitled to collect all the money due upon the note, and that she is only entitled to the dividend of a general creditor.

The rule in a court of equity, where the wife executes a security for the indebtedness of the husband, is explained to some extent in the case of Huntington v. Huntington, 2 Brown’s P. C., 110, and is still more fully stated in the American notes to this case in White and Tudor’s Leading Cases in Equity, beginning at page 1938, where it is said: “A wife who mortgages her estate for the benefit of her husband is a surety, and as such is entitled to an indemnity from him, and his assets will, if the circumstances admit, be taken in the first instance to satisfy the mortgage.” It is also said, in a subsequent part of the same note, that “ the equitable principles relating to sureties apply equally to a wife mortgaging her estate for her husband’s benefit; and it is well settled that a valid agreement between the creditor and husband, by which the time of payment is extended, will, if unauthorized by the wife, discharge her mortgage.” The wife in this instance having mortgaged her owu property for the debt of her husband, is entitled to the rights that belong to any other surety, and the fact that she did not join in the note cannot deprive her of this privilege. This court has already decided that a debtor to this company at the time of its failure will uot be allowed to set oft' debts which he has subsequently bought up from other parties. The creditors of the institution all stand upon an equal footing, and a party will not be permitted to gain an advantage in that way. But that is not the question here. Mrs. Darby had funds to her credit in the hands of the company at the time of the failure. Her husband is now dead, and the company have advertised the property for sale. We have seen that she occupies the position of a surety on her husband’s debt, and the question is, whether, as such surety, she shall be allowed to set oft' her own claim against the indebtedness of the husband. If the principal was entitled to a credit in the company’s books at the time of its failure, he could undoubtedly set it off against his $2,000 note. The surety is not in a worse condition than the principal in a court of equity. And surely if the principal, upon being sued by the creditor, could claim in equity a set-off, the surety is entitled to the same benefit.

There is a very learned note in 2 Smith’s Leading Cases, marginal paging 320, sixth American edition, from which I feel at liberty, in view of the importance of the question, to extract one or two passages. After stating the general doctrine in regard to set-off, the author says:

“ It follows from these principles that when a cause of action is transferred by an assignment which passes the legal title, a debt due by the assignor cannot be pleaded as a defense to a suit brought by the assignee, because the mutuality which is essential to a set-off is gone in form, and the court cannot look outside of the record to see whether it exists in substance. (Spencer v. Babcock, 22 Barb., 326; Beckwith v. The Union Bank, 5 Seld., 211.) But the injustice which this rule is calculated to produce has been remedied in some instances by statute, and in others by the judicial introduction of a more equitable principle; and it is now.well settled, in general, that when the assignees or personal representatives of a bankrupt or insolvent are plaintiffs or defendants, the right of set-off will extend to all demands that could be proved by or against the estate, without regard to the period when they become due, or the person in whom the right of action is nominally vested. (Clark v. Hawkins, 5 R. I., 219; Aldrich v. Campbell, 4 Gray, 284; Fennell v. Nesbit, 16 B. Monroe, 551; Morrow v. Bright, 20 Miss., 298.) Thus, in Marks v. Baker, 1 W. C. R., 178, a liability incurred by endorsing the bills of a bankrupt was allowed' to be set off against a suit brought by his assignee, on the ground that although it would not have been provable as a debt, it was clearly a case of mutual credit; and a similar view was taken in Jones v. Robinson, 26 Bark., 310, of the relation between a bank and one of its depositors, whose acceptance it had discounted. Dealings between an insurance company and its customers have also been held to have a character of mutuality which entitles the latter to set off’ the amount due for losses, although not yet definitely ascertained or liquidated in a suit brought for premiums by the assignees or receiver’s who are charged with the task of winding up the affairs of the company. (Holbrook v. Receiver, 6 Paige, 220.) For as an assignee in bankruptcy or insolvency is not a purchaser, he will take subject to any equity that could have been made available against the assignor. (Mess v. Goodman, 2 Hilton, 275.) In Tucker v. Oxley, 5 Cranch, 24, a debt due by a partnership was held to be a defense brought by the assignees of an insolvent member of the firm, thqre being special circumstances which gave both demands the character of mutual credits. And it is well settled in Massachusetts that unliquidated demands, and demands growing out of a partial failure of consideration, may be set off’ in an action brought by the assignee of an insolvent during Ms life, or by his executors after his decease.”

The doctrine is illustrated in the numerous cases cited, but I will only refer to that of Aldrich v. Campbell. The opinion of the court was delivered by Thomas, J., in which he says:

“This case is not to be determined upon the technical rules of set-off, but upon the principles regulating the settlement of insolvent estates, whether of persons living or deceased. The settlements with such estates are final, and all mutual demands are to be balanced; claims not liquidated and debts absolutely due, though payable in future, are to be included. In the case of an insolvent estate of one deceased, all claims existing at the time of the death are to be set off; in the case of an insolvent estate of a person living, all claims existing at the time of the first publication of the notice of the issuing of the warrant. The rules are the same in whatever form the question is to be settled.”

And to support these reviews he cites many cases. The same note contains a great variety of decisions showing when a set-off will be allowed and when refused. But it is plain from the authorities already referred to, that if Darby himself had been alive at the time of the failure of the company, with a credit on its books of $1,750 and owing it $2,000, the company could only claim the difference between these two sums. His wife, who occupies the position of a surety, has a much stronger equity to set off against the claim the money which she is entitled to as a depositor in the bank. For these reasons a majority of the justices who heard the argument are of opinion that the decree of the court below ought to be affirmed.

MacArthur, J.,

dissenting, said:

That he did not think the claim of Mrs. Darby could be set off' in this case, for the reason that the demands were not mutual debts, as that term is understood in a court of equity. It is undoubtedly true, that if Darby, in his life-time, could have claimed to set off the indebtedness to his wife against Ills own note, sho would now he entitled to the same benefit. But I suppose it will not be pretended that this set-oii' would be allowed the husband if he were alive and the assignees were suing him upon his note. IIow, then, can the wife have a benefit which would be denied the husband ? Simply not for the reason that the debts are not mutual, aud the wife is therefore in the same plight and condition as her husband. It is said she is a surety. But the liability of the surety arises only upon the default of the principal, and upon satisfying the debt she is entitled to be subrogated to all the securities in the hands of the creditor. Now, what is the case here ? The defendants are assignees or trustees of an insolvent corporation. They take its assets just in the condition they were at the time of the failure; and the rights of the creditors of the corporation from that moment become vested, and cannot be impaired by any subsequently acquired claims of other persons. It is true that the debtors do not lose any of their rights of set-off which they had at the time the corporation became insolvent. But the assignees or trustees take the assets subject to this and other existing liens in trust for equal distribution among all the general creditors, and no one can obtain any advantage over them by means of anything that may happen afterwards. This doctrine is fully sustained by the cases cited in the note referred to in 2 Smith’s Leading Cases, 6th Am. ed., 320. And this court has decided, with reference to this institution, that a debtor could not set off a claim purchased after notice of the failure of the bank. This is upon the principle that no one can obtain an unfair advantage to the injury of the other creditors. Now, Mrs. Darby acquired her title absolute to the property in question long after the corporation had closed its doors. The note was made by Darby in August, 1872, payable in one year. On June 29, 1874, after the note was overdue, the bank suspended and the trustees took possession of all its hooks and assets. Afterwards, in March, 1875, Darby died, leaving a will giving all his property to his wife. Before this event the corporation creditors had become entitled to an equal distribution of its assets, just as they were in the month of June of the previous year. Among those assets was Darby’s note for $2,000, which had been overdue for nearly a year. When the bank stopped, clearly Darby, who was then alive, could not have availed himself of the offset now claimed; and the whole amount of the note therefore became vested in the trustees for the benefit of the creditors. The subsequently acquired title of Mrs. Darby.could not affect this vested interest. At the time she joined in the trust deed, she was only entitled to a life estate in a portion of the property, and I am unable to see how the subsequent death of her husband, leaving a will whereby he devised her all his property, can-divest to any extent the equities already acquired by the trustees for the benefit of other creditors. If it be admitted that she is in the situation of a surety in respect of her life estate in a portion of the property, which was the only interest she could convey, it cannot, I think, be pretended that she is also a surety in respect of the land belonging in fee-simple to her husband, or the title to the rest of the property of which he was seized in fee in right of his wife. With reference to these she could acquire no rights of suretyship which could affect the interest of the creditors, for she did not and could not mortgage them. . In my judgment she should not, therefore, be permitted to take all the real-estate securities without this incumbrance, simply upon paying the difference between her husband’s debt and her own claim.

I have not found a decision which sustains the doctrine that a surety can seize upon all the collateral securities and set off at the same time a personal claim against the indebtedness of the principal. Perhaps it would be indecorous in me to say there are no authorities to that effect, since a fuller examination than I have had an opportunity to bestow might discover that I was in error. But for the reasons stated I am of opinion that the deci’ee below ought to be reversed.  