150 N.E. 501 | NY | 1926
Plaintiff Gerseta Corporation brought suit against The Equitable Trust Company of New York, The Raw Silk Trading Co. and others seeking among other things a judgment subrogating plaintiff to the rights of the trust company in shares of stock in its possession to the amount of $36,000 and interest. The Special *421 Term gave judgment in favor of the plaintiff. The trust company has dropped out of the litigation. Trading Company appealed to the Appellate Division which denied the right of subrogation and dismissed the complaint. For convenience, plaintiff will be referred to as Gerseta, defendant Trust Company as the Bank and defendant Raw Silk Trading Company as Trading Co.
The material facts are briefly stated as follows: Both corporations were engaged in the silk business in the city of New York. The Trading Co. was an importer. Each at various times bought silk of the other. Although each delivery was regarded as a separate sale, the actual credit extended was, by the course of dealing, for the balance on the mutual account and not for the full amount owing by one to the other. From about July 15, 1920, Trading Co. was in financial embarrassment. On August 31, 1920, it was in fact insolvent. A committee of creditors took charge of its business, to continue or liquidate as it might seem most desirable. Gerseta then owed Trading Co. about $93,000 but Trading Co. owed Gerseta about $96,000. The balance on mutual accounts was at least $3,000 in favor of Gerseta but the entire indebtedness of Trading Co. to Gerseta had not matured prior to August 31, 1920.
In October, 1919, Gerseta had bought 100 bales of silk of Trading Co. on contract for future delivery. Under the contract settlement was to be made within thirty days by cash or trade acceptance. Deliveries of silk were made in July-August, 1920, amounting to $93,553.98. The Bank had financed the transaction for Trading Co. by issuing letters of credit and held the silk by security title. Trading Co. had also deposited as security various shares of stock including the stock in question, so that the Bank was amply protected. Trading Co. made the deliveries, having received the silk under trust receipts from the Bank. Gerseta had notice of the Bank's claim of ownership at least as to certain deliveries. The Bank *422 demanded trade acceptances which Gerseta refused to give because Trading Co. was indebted to it.
On October 20, 1920, the indebtedness of Trading Co. to Gerseta had fully matured. The Bank sued Gerseta to recover the amount of $93,553.98 above mentioned and obtained judgment for $74,953.75. On June 15, 1923, Gerseta satisfied the judgment by paying $36,000. The Bank assigned the judgment to a designee of Gerseta. Certain shares of stock were set apart subject to the decision of the court. The payment of $36,000 reduced by that amount the balance due from Trading Co. to the Bank.
The Appellate Division held without discussion that Gerseta had no right of set off, citing Fera v. Wickham (
The first question to be considered is whether on October 20, 1920, when the Bank sued Gerseta for the purchase price of the trust receipt silk, Gerseta was entitled to a set off against Trading Co. of the amount due to it. At that time Trading Co. was insolvent and its affairs were in the hands of liquidating trustees but there had been no judicial recognition of the fact, no passing of an estate as to an assignee or receiver or otherwise for the purpose of liquidation. Equity will allow a set off in insolvency, providing the claim of the party asserting the right of set off has matured. It is immaterial that the claim against the party asserting the set off has not *423
matured. (Bradley v. Angel,
The law of this State, when unmodified by statute, is that in insolvency a distinction exists between a debt due to the one who claims the set off and a debt due from him. If the debt is due to the one who claims the set off and it has not matured, he is not at liberty to offset it against the debt which he owes. If, on the other hand, the debt due to him has matured and the question is whether he is to be allowed to claim a dividend, *424 not only on the debt due to him, but to increase the dividend by offsetting the debt which is due from him, the fact that the debt due from him is not yet due will not defeat the set off but he may prove the credit.
The principle upon which the rule rests is that in case of mutual debts it is only the balance which is the real or just sum owing by or to the insolvent. If the claim against the insolvent has matured at the time of an assignment for the benefit of creditors, the assignee gets no greater right than the assignor had. The assignee takes the balance subsequently accruing after deducting the matured claim. But if the debt due from the insolvent subsequently matures, the equities of other creditors will intervene to prevent the depletion of the assets in the hands of the trustee by extinguishing a good debt due to the estate by a bad one due to the creditor from the estate. "In all cases of mutual debts, it is the insolvency of one of the debtors and the rights of the other creditors in the assigned estate that equity takes notice of, and modifies the legal right of set-off accordingly in order to promote equality and justice." (Matterof Hatch, supra, p. 406.) The same rule is applied to insolvent decedents' estates. (Bradley v. Angel, supra.)
In applying the rule the date of insolvency in fact is not the proper date to consider in determining whether the right of set off exists. The date which calls the rule into existence must be fixed in relation to something more definite than the time when the debtor is first unable to meet his obligations as they mature. A debtor might be insolvent for many months or years. He might, as Trading Co. has done, seek to reorganize his business with the forbearance of his creditors and struggle on without being forced into bankruptcy. A long series of mutual credits and debts might cause a fluctuating balance of matured and unmatured demands varying from day to day. Mere insolvency would be no adequate basis for invoking the rule. While the *425
business is a going business, not in the course of liquidation, the rule of legal set off would be applied. (Foreign TradeBanking Corp. v. Gerseta Corp.,
The next question is whether Gerseta may be subrogated to the claim of the Bank against Trading Co. to the extent of its payment thereon.
Subrogation, an equitable doctrine taken from the civil law, is broad enough to include every instance in which one party pays a debt for which another is primarily answerable and which in equity and good conscience should have been discharged by the latter, so long as the payment was made either under compulsion or for *426
the protection of some interest of the party making the payment, and in discharge of an existing liability. (Seldon on Subrogation [2d ed.], pp. 2, 4.) EARL, J., in Cole v. Malcomb (
Gerseta paid its debt to the Bank. It did more. By paying the Bank, under compulsion and to protect itself, it reduced Trading Co.'s indebtedness to the Bank by $36,000. It thereby increased Trading Co.'s assets by the same amount. It was under no obligation to pay Trading Co. anything because Trading Co. was primarily liable to it on balance of accounts. It, therefore, discharged pro tanto the legal liability of Trading Co. to it and furnished the money which Trading Co. owed to it. The rights of the Bank are no longer to be considered. The question arises only between the two companies.
Casting aside the question of Gerseta's legal liability to the Bank, Trading Co. by its transactions with the Bank has accomplished the inequitable result of collecting $36,000 from its own creditor to be applied on its indebtedness. A benevolent equity is powerful enough to restore the balance between the parties which the law has temporarily upset.
The judgment of the Appellate Division should be reversed and that of the Special Term affirmed, with costs in this court and in the Appellate Division.
HISCOCK, Ch. J., CARDOZO, McLAUGHLIN, CRANE, ANDREWS and LEHMAN, JJ., concur.
Judgment accordingly. *427