83 W. Va. 593 | W. Va. | 1919
This appeal by W. E. McClung and Reída McClung, his wife, from a decree made on the 14th of September, 1917, in the suit of A. E. Johnson’s Executors against A. E. Johnson’s Heirs and others for the purpose of having the testator’s debts judicially determined and the lands devised by him sold to pay the same, presents the following questions, viz.:
■ (1) Can a debtor of an insolvent estate set off a debt owing by the estate for which he is liable as surety?
(2) Where the deceased, in his lifetime, accepted money from another to be invested.for the latter’s benefit and lent it to a third person, taking his note therefor payable to himself, which, after his death is listed and appraised as an asset of his estate, is the person advancing the money entitled to the proceeds of such note as against the general creditors of the estate?
(3) The borrower of such fund being also surety for the deceased on a note made in his lifetime, and ignorant of the trust, is his right of equitable set-off superior to the right of the cestui qui trust?
All these questions must be answered in the affirmative. In order to understand their relevancy it is necessary to state the facts to which the principles are applicable. Miss May Irons, a niece of A. E. Johnson, deceased, mailed to him her unfilled cheek, about the 1st of April, 1913, and on the 2nd of April he wrote her as follows:
“Your letter with Check received — I filled it for $1000.00. I am going to let McClung have about $1500.00 and will take Trust deed for $2500.00 and will let you hold note when I get it and will send you Check for Commission along with Note. This will be your receipt for Check until the matter is adjusted.”
“I received your letter some days ago, I have Mr. Mc-Clung’s Note for $2000.00 two thousand dollars secured by Deed of Trust and the trust deed recorded, one half of-the note is yours and one half is mine. There is still in my hands something over $100.00 belonging to Mr. McClung. I have waited for him to call for it but he does not seem to need it badly. The Note is in the Farmers Bank of Union and I will arrange it to suit you. Either give you my note for $1000.00 and let you hold the McClung note as collateral or fix you a paper and pin it to the note to show that 1/2 of it is yours.”
Mr. McClung was surety for said Johnson on a note for $2,000.00 payable to Jesse F. Bright. But whether he became surety before or after he borrowed the $2,000 from Johnson does not appear, nor do we think the time is material. On the face of the note to Bright, McClung appears to be maker and Johnson endorser, but McClung proved by competent witnesses that Johnson was the principal debtor and that he was accommodation maker, and his suretyship is not now questioned. It is admitted that McClung’s note should be credited with the following partial payments made to Johnson in his lifetime, viz.: $1,200 as of April 1, 1914, and $50 as of April 5, 1915. There is no evidence that McClung ever knew Miss Irons had furnished part of the money he borrowed from Johnson, until after the latter’s death.
A. E. Johnson died testate, and by his will disposed of a considerable amount of property, real and personal, and his estate is insolvent. His executors brought this suit to settle his estate, and the cause was referred to a commissioner for the purpose of convening the creditors, taking an account of
That Miss Irons was the equitable owner of one-half the McClung debt is fully established by Mr. Johnson’s letters to her abo ce-quoted; and that she has a right to her portion of the fund, provided so much remains unpaid, as against the. general creditors of Johnson’s- estate, is well settled by our decisions. Hogg v. McGuffin, 72 W. Va. 86. Her situation is similar to that of a principal who furnishes money to an agent with which to buy land for him, and the agent invests it in land and takes title to himself. There a constructive trust arises in favor of the principal. The same rule is applicable here, and, while Johnson appears on the face of the note to be the owner of the whole of the fund, he was in fact absolute owner of one-half only and trustee for Miss Irons for the other half, which gives her an equity in the particular fund, which is superior to the claims of general creditors.
Not having paid the debt to Bright on which he is surety, McClung would not be entitled to set it off against his debt to the estate, in an action at law, it is still his mere liability. Minor v. Minor’s Admr., 8 Grat. 1; Mercein v. Smith, Admr., 2 Hill, (N. Y.), 210; and Granger’s Admr. v. Granger, 6 Ohio 35. The right of set-off in actions at law was not recognized by the common law, and it is only by virtue of statutes that the right exists in actions in courts of law. But a different rule has always obtained in equity. The doctrine is derived from the civil law, and is generally applicable whenever the party seeking its benefit can show some equitable ground entitling him to protection against the demand of his adversary. 3 Story’s Eq. Jur., (14th ed.), Sec. 1872.
The insolvency of Johnson’s estate, in this instance, supplies the necessary equitable grounds, entitling McClung, who is only surety for the estate, to protection, so far as he can be protected, against the debt due to Mr. Bright. The amount McClung may have to pay Bright on account of his suretyship is not known, as the record does not disclose what per centum of its indebtedness the estate will be able to pay; and McClung has a right to stay collection of his note until
Washington v. Castleman, 31 W. Va. 832, in which the court denied a creditor of an insolvent estate the right of set-off, is distinguishable from the cases above cited. There it appears that the decedent had, in his lifetime, leased his farm to his son for a term of five years, reserving rent payable annually in a certain portion of the crops. The decedent owed the lessee at the time of his death, which amount the lessee sought to set off against the rents accruing subsequently, and was not permitted to do so, apparently on the ground that rents, accruing subsequently to the death of the lessor, passed with the land to the heirs, and was, therefore, not a debt due to the estate. Moreover, in that ease the rents had been sequestered by the appointment of a receiver who had collected them.
It is a condition of the right of equitable set-off against an, ■insolvent debtor’s estate, that the liability must have existed at the time of decedent’s death, and that is the case here. As between MeClung and Johnson, the latter acted for himself and an undisclosed principal, and took McClung’s note .payable to himself. H'ence, payment to Johnson without knowledge of the secret trust in favor of Miss Irons would have discharged the debt. MeClung did in fact pay a little more than half of it. which Miss Irons’ counsel admits. We ■perceive no reason, why his right of equitable set-off is not of equal dignity with payments made to Johnson, the liability to be set off having been contracted before he learned of Miss Irons’ latent equity, and we think this rule furnishes a correct solution of the controversy. McClung’s situation is amal-
Miss Irons has a right also to participate in the funds be-longing to Johnson’s estate as a'general creditor only. Johnson having taken-the note for the whole sum of money lent to MeClung in his own name, one-half 'of which was hers, he thereby became her trustee, and she has a right to participate in the distribution of the assets among the general creditors, on the whole amount of her trust debt, without abandoning her right to pursue the particular fund in McClung’s: hands, and thereby obtain whatever portion of the fund, if any, that remains in his hands after the set-off has been applied in his favor, provided such sum is not more than sufficient to pay her claim. Williams et al v. Overholt, 46 W. Va. 339; and cases cited at page 340. But her claim against the estate is in no sense a preferred one. While it is true her debt is a trust obligation upon the estate, it is not favored any more than general unsecured debts. Sec. 25, Ch. 85, Barnes’ Code, providing for the administration of an insolvent estate, does not prefer debts owing by the deceased in the capacity of trustee. Such debts are not embraced in the terms of clause three of said statute. Price’s Ex’ors. v. Harrison’s Exors., 31 Grat. 114; and Brown v. Lambert’s Admr., 33 Grat. 256. The statute in Virginia has been amended since 1860, so as to include among preferred' claims of the
So much of the decree appealed from as dissolved the injunction and denied appellant W. E. MeClung the right to set off his liability to Bright against the balance due on his note to the estate of A. E. Johnson, deceased, and decreed Miss Irons a recovery against MeClung for $1,061.54 will be reversed, and in other respects it will be .'affirmed, with costs to appellant, and the cause remanded for further proceedings therein according to the principles herein announced, and further according to the rules and principles governing courts of equity.
Reversed in pari. Affirmed.in part. Remanded.