47 P.2d 617 | Utah | 1935
Lead Opinion
This case involves the right of set-off as between a mortgage debt and deposit in a bank. J. Elmer Rouse and his wife, Effie B. Rouse, on May 26, 1933, borrowed $857 from Zion's Savings Bank Trust Co., hereafter referred to as the bank, on their joint and several demand note secured by chattel mortgage. The proceeds of the loan were represented by a cashier's check which was delivered to the *576 Rouses, indorsed by them, and delivered to and left with the bank. Two days later J. Elmer Rouse died. Letters of administration were issued August 11, 1933, to Effie B. Rouse on the estate of her husband. On August 15, 1933, the bank, without notice, offset the $857, proceeds of the loan of May 26, 1933, in part payment of a $13,000 note, secured by a real estate mortgage, which had been executed by Rouse and wife on August 20, 1925, and upon which there was then past due a balance of $10,300. The Rouses had on December 29, 1932, made another loan of $959.90 from the bank secured by a chattel mortgage.
The present suit, on two causes of action, was filed by the bank April 3, 1934, for recovery of the amount due on the notes of December 29, 1932, and May 26, 1933, and for foreclosure of the chattel mortgage given to secure the same. To the second cause of action, that of the loan of May 26, 1933, defendant pleaded a counterclaim against the bank for the $857 and interest, the proceeds of such loan, which had been left with the bank. By reply to the counterclaim the bank alleged it had applied the $857 on the real estate loan referred to above. Both parties filed motions for judgment on the pleadings. It was stipulated by both parties that judgment might be rendered on the pleadings with respect to the complaint, and judgment was entered in favor of the bank on both causes of action and for the foreclosure of the chattel mortgages. It was also stipulated that the court might enter judgment on the pleadings respecting the counterclaim as though it constituted a separate and distinct cause of action without regard to the complaint filed by the bank. The court thereupon made and entered judgment for the defendant on her counterclaim. The bank appeals on the judgment roll.
The single question involved in the appeal is: Did the bank have the right to set off the $857 which it owed the Rouses, against the $13,000 secured note, on which the Rouses still owed $10,300, and did its action in making such application constitute a defense to the counterclaim? *577
We start with two principles or theories, seemingly at war with each other; the one, that composition takes place between two debts by mere operation of law as soon as they exist simultaneously to the amount of the respective sums, where the debts are equally liquidated and demandable, 1 under circumstances that, if one had brought an action against the other, a counterclaim could have been set up.
This is a well-recognized principle of the law, applicable generally unless affected by statute, and finds expression in R.S. Utah 1933, 104-9-4, as follows:
"When cross demands have existed between persons under such circumstances that, if one had brought an action against the other, a counter-claim could have been set up, the two demands shall be deemed compensated so far as they equal each other, and neither can be deprived of the benefit thereof by the assignment or death of the other."
The second is that under a statute providing that there can be but one action for recovery of any debt secured by mortgage the right of the bank to set off a matured indebtedness against the claim of a depositor does not permit of an indebtedness secured by a mortgage being used as an offset. 5 2 Michie, Banks and Banking, 236. In this state there is such a statute, being R.S. Utah 1933, 104-55-1, as follows:
"There can be but one action for the recovery of any debt or the enforcement of any right secured by mortgage upon real estate or personal property, which action must be in accordance with the provisions of this chapter."
The last-mentioned statute has been construed by this court in cases which hold there can be but one action permitted for recovery of a debt secured by mortgage. Bacon v. Raybould,
The right of a bank to apply a depositor's funds, held by it, to payment of his indebtedness, can exist only where each occupies the position of debtor and creditor, and where there exists mutual demands. 5 Michie, Banks and Banking, 218. The debt owing by the depositor must have matured. 5 Michie, Banks and Banking, 216. Both maturity and mutuality are 3 essential to the validity of a set-off.
The status of the mortgage debt under a statute like R.S. Utah 1933, 104-55-1, construed as it has been by this court, is somewhat analogous to one not yet due, or one that lacks mutuality. True the debt is past due but the creditor is not yet in a position to obtain personal judgment 4 against the debtor or to proceed to satisfy the debt *579 out of the debtor's assets other than the mortgaged property. Until the fund set up as security for the debt is exhausted and the deficiency, if any, is ascertained, the debts are on a different footing. They are not mutual personal obligations which may be set off against each other and compensated pro tanto.
In other jurisdictions there are two lines of authority supporting the conclusions we have reached. The Massachusetts rule is that stated in 5 Michie, Banks and Banking, 235:
"It is said that a bank can not apply the deposits of the debtor to the payment of his matured indebtedness if that indebtedness is sufficiently protected by collateral security."
The cases cited in support of this statement do not disclose that the court is influenced by any statutory provision similar to section 104-55-1 of our Code. Prudential Realty Co. v.Allen, Commissioner of Banks,
The following is from 5 Michie, Banks and Banking, 236:
"Under a statute providing that there can be but one action for the recovery of any debt secured by a mortgage, the right of a bank to set off a matured indebtedness against the claim of a depositor or his creditor does not permit of an indebtedness secured by a mortgage being so used as an offset."
The cases cited in support of the statement are from California, which state had identical statutory provisions to ours, in fact our provisions were taken from the California Code.McKean v. German-American Sav. Bank,
In McKean v. German-American Sav. Bank, supra, the holding was that a bank having mortgage security for a *580 debt must first exhaust that security before it can apply in reduction or cancellation of the debt any money on deposit with it belonging to the debtor.
In Moore v. Gould,
"Is this a case of cross-demands which may be mutually compensated under this section? We think not. The plaintiff was suing on an indebtedness secured by mortgage, an indebtedness which could be recovered only by means of the action of foreclosure prescribed by section 726 of the Code of Civil Procedure. In such action the mortgaged premises must first be applied to the satisfaction of the debt, and there is no personal liability on the part of the mortgagor unless the security shall prove insufficient to satisfy the debt. The land is made primarily liable for the payment of the obligation, and the mortgagor can be called on to pay only where the proceeds of a sale of the land are insufficient. Bartlett v. Cottle,
The reason for this rule is that given in 4 Cal. Jur. 270:
"The reason of the rule which gives to banks the right to appropriate deposits for the payment of the depositor's matured indebtedness does not apply where the bank has security for that indebtedness. The ordinary presumption that it is the depositor's intent to have his note discharged from his deposit does not exist where the note is so secured. It has been said to be but reasonable that when the legislature declared that there should be but one action to enforce a debt secured by mortgage, it did not mean that payment could be enforced against the consent of the mortgagor by giving a bank the right to enforce payment under a general banker's lien upon some other property, and that, too, without any legal proceedings whatever. The rule, therefore, is that a mortgagee bank must first look to the mortgaged premises as constituting a primary fund out of which the debt secured by the mortgage must be paid, and that mortgage security must be exhausted before it can apply in reduction or cancellation of the debt any money on deposit with it belonging to the debtor."
See 18 Cal. Jur. 394; also 23 Cal. Jur. 254.
Counsel for appellant in a well-argued brief attempts to destroy the authoritativeness of the California and Massachusetts cases, but we are disposed to rely on these cases notwithstanding the criticism, especially because they support the doctrine we think must follow logically from our previous decisions.
Counsel remind us that the California Legislature in 1927 (St. 1927, p. 1620) amended section 438 (same as our 104-9-2) by adding a proviso that the right to
"maintain a counterclaim shall not be affected * * * by the fact that the action is brought, or the counterclaim maintained, for the foreclosure of such security."
So far as we are informed, there has been no decision by an appellate court in California since the amendment involving the question of set-off. In a recent case, Terry TradingCorporation v. Barsky,
"All of the other limitations were abolished by this amendment, and an intent on the part of the Legislature to avoid multiplicity of *582 suits and to have all conflicting claims between the parties settled in a single action was most clearly manifested. In the instant case, obviously, both the claim for damages and the demand that plaintiff account for sums collected and not credited on defendant's obligation tend to diminish or defeat plaintiff's recovery. Under the amendment it is not necessary that there be any connection between the cause of action set up in the complaint and that which forms the basis of the counterclaim. Indeed, the statute contemplates the pleading of unrelated matters as counterclaims by providing that `the court may, in its discretion, order the counterclaim to be tried separately from the claim of the plaintiff.'"
The New York court held to the view that an offset is permissible under circumstances similar to those here, but its decision is based on the fact that in that state the creditor has the right to sue the debtor on a secured debt without first having recourse to the pledged security. Kress v. CentralTrust Co.,
Mitchell v. Dreher,
Under our statutes the bank was not in a position to apply the amount of defendant's deposit on the mortgage loan until after exhaustion of the security leaving a balance due and unpaid for which deficiency judgment could be entered.
In view of our disposition of this issue, the other questions argued need not be discussed.
The judgment of the district court of Salt Lake county is affirmed, with costs to respondent.
ELIAS HANSEN, C.J., and EPHRAIM HANSON and MOFFAT, JJ., concur.
Concurrence Opinion
I concur. I have questioned the doctrine which has long been the law of this state and upon which the prevailing opinion rests, to the effect that a mortgagee would be compelled to resort first to his security before he could come against general assets of the mortgagor. I questioned whether that doctrine was a necessary or even a logical result of our section 7230, Comp. Laws Utah 1917, now carried as section 104-55-1, R.S. Utah 1933. I had doubt whether that section which provided that there could be but one action for the recovery of any debt or enforcement of any right secured by mortgage on real estate or personal property should be pushed beyond the direct import of its language. That import as I conceived it was that if the holder of the note secured by the mortgage brought an action on the note alone without seeking to foreclose the mortgage, he lost all right to go back and foreclose the mortgage. The statute appears not to preclude a choice. I had thought that that section meant only that a person could either forego the security and bring an action on the note, *584
or bring an action on the note and at the same time foreclose the security, but that he could not have two actions; one to take a chance on the note by executing on a judgment obtained thereon, and, if that did not suffice, then to have the mortgage foreclosed. For that reason, I have, in the study of this case, taken such time as was available to re-examine the principle that a person must first resort to the security before he can come against any of the other assets of the maker of the note. My exploration has been by no means exhaustive, but as far as I can determine by a cursory examination, the doctrine seems to have been first announced in the case of Salt Lake Valley Loan Trust Co. v. Millspaugh,
"The object of the statute doubtless is to compel the mortgagee to exhaust his security before having recourse to the general assets of the debtor. The balance or deficiency, after it has been properly ascertained, whether by sale under a power or by foreclosure in equity constitutes a subsisting indebtedness, as well as did the original debt." *585
We need not be concerned about the holding in the Kessler Case as to permitting another action to be brought for a deficiency. The difference in the laws relating to the foreclosure of mortgages in the compilation of 1888 as compared with the later enactments in that regard which is the ancestor of our present chapter 55, R.S. 1933, may sufficiently account for the holding in the Mallory decision as compared to the later decisions. We are calling attention to the Mallory Case because it did express the thought that the purpose of the statute was to require the mortgagee to first exhaust the security before recourse to the general assets of the debtor. But the first definite holding which could not be said to be dicta was contained in the Millspaugh Case, supra. This case seems to be founded upon the case of Barbieri v. Ramelli et al.,
Since the Millspaugh Case, the doctrine has been reiterated in the case of Boucofski v. Jacobsen,
"Judgment shall be given adjudging the amount due, with costs and disbursements, and the sale of the mortgaged property, orsome part thereof, to satisfy said amount and accruing costs, anddirecting the sheriff to proceed and sell the same according tothe provisions of law relating to sales on execution." (Italics supplied).
Section 7231, Comp. Laws Utah 1917, provides for the return of the sheriff showing the proceeds of the sale and for execution for the balance if the return shows there is not sufficient after the deduction of costs to pay the debt. Consequently, it transpires that not only must there be but one action for the recovery of the debt, but that the judgment obtained in said action must first provide for the sale of the security, unless proper allegation and proof is made that the security has become valueless, and that the only personal judgment that can be obtained is a deficiency judgment. This is a judgment obtained in the one action according to the provisions of that chapter and in no other way.
The consequence is that not only is the law of our state settled in regard to the requirement that the holder of a mortgage on real estate or personal property must first exhaust that security before he can come against the general assets of the debtor, but as I see it there is no escape from the logic of that holding. This being so, it is decisive of the instant case. The principle that one must exhaust the security before coming against the general assets of the debtor results in making the security, for all practical purposes, the primary debtor. This is an apt, if not an accurate, way of expressing the situation. It is therefore the same as if a creditor had one primarily and another secondarily liable to him and he applied a debt that he owed to the one secondarily liable upon the debt which the one primarily liable owed him. Certainly this could not be done under section 104-9-4, R.S. 1933. If the bank could reach out and apply *587 the $857 owed by its depositor Rouse to its secured indebtedness it would, in effect, be coming against the general assets of Rouse before exhausting its security. This is what the law says cannot be done. Of course, Rouse himself could have compelled the bank to apply the credit because nothing can prevent the debtor of a secured debt from making payment when payment is due. He can either give cash or he can apply as payment what the secured creditor owes him. This is by way of payment and not by way of set-off. As I see it, therefore, there is no escape from the logic of the prevailing opinion that a secured creditor cannot control a credit against him belonging to his debtor so as to require it to be offset or offset it himself against his credit, but his unsecured creditor who is also his debtor under the secured debt may, if he desires, offset his unsecured credit as payment as far as it will go to pay off the secured debt.