Lawrence v. Lincoln County Trust Co.

' Deasy, J. Walter S. Glidden and W. C. Day, Receivers of the Lincoln County Trust Co., on May 9, 1923, made application for instructions as to “whether they shall allow to the makers, sureties and endorsers upon notes due or payable to said Lincoln County Trust Co., the amount of the respective deposits” of said makers, etc. Certain depositors in the Trust Co.,' who are also liable upon notes held by it, appeared and were heard and are herein referred to as intervenors. Upon hearing, the matter was reported to the Law Court. The relation between a trust company or national bank, and the depositors and borrowers with whom it deals, is ordinarily that of debtor and creditor. The right of set-off applies precisely as it does between individuals'. “As a general rule a depositor who is indebted to the bank is entitled to set off the amount to his credit against his indebtedness even though the bank is insolvent.” 7 Corpus Juris, 652, and 3 R. C. L., Page 588, and cases cited in each. But an important change in this relation is wrought when a trust company proceeding by authority of R. S., Chap. 52, Secs. 90-1-2, as amended, segregates and sets apart certain assets as security for savings depositors. The statute, omitting non-essential'parts, is as follows: “Every trust company soliciting or receiving savings deposits . . . shall segregate and set apart and at all times keep on hand so segregated and set apart assets at least equal to the aggregate amount of such deposits. — 275 — “Such assets so segregated and set apart shall be held for the security and payment of such deposits, and shall not be mingled with the other assets of the company, or be liable for the debts or other obligations thereof until after such deposits have been paid in full..... ‘ ‘Such segregated assets shall be so held and recorded as to identify them as the assets held for the security of such deposits. All notes .... representing such assets shall be plainly stamped ‘Savings Department,’ provided however that in lieu thereof it shall be lawful to record in the investment book a description of assets so held sufficient to identify them.” The theory of the intervenors is that the assets required to be segregated do not include notes of depositors at their full face, but at their face less deposits of the makers and indorsers. For example, a bank has a note for $5,000 given by A, who has a deposit of $2,000. The bank segregates the note as security for savings deposits. The theory of the intervenors is that such segregated note is today security for $3,000 only, though tomorrow if the deposit is withdrawn the security may become $5,000, and the next day if the- maker should deposit $5,000 the security would utterly vanish. In the last analysis our problem is to determine the meaning of the word “assets” as used in the statute above quoted. Doubtless the Legislature might have employed the term as meaning a balance subject to constant fluctuation. It can hardly be presumed that this was the intended meaning. In the frequently published bank statements the term “assets” includes notes, not balances between notes and deposits of makers. All deposits are listed as liabilities. Appended to the printed case, that we are now considering, is a leaf from the daily balance ledger used by the Lincoln County Trust Co., being in form the same commonly used by banks. Under the heading “Assets” there are listed the same loans which are segregated as security. The sum carried out after the word “loans,” and intended so to be carried out, is obviously not the balance after deducting deposits of makers. These and all other deposits are set down as liabilities. The word “assets” as ordinarily used by bankers includes notes at their face less payments, if any, and less depreciation if they have — 276 — been charged down, but without deducting deposits of persons liable on such notes. It is probable that the Legislature used the term “assets” in the sense in which it is commonly used. It is improbable that it intended to have set off as security for savings depositors, balances subject to daily and hourly fluctuations beyond the bank’s control. The true theory is that the bank holds segregated assets for the savings depositors. As a holder of segregated notes it is a trustee. As a debtor to depositors it is not. The corporation is the same; the, capacity is different. Therefore, the principle of set-off does not apply. The eminent counsel for the intervenors relies with confidence upon the statute regulating set-off of demands. R. S., Chap. 87, Sec. 75. The statute, omitting words not germane to the present discussion reads: “A demand originally payable to the defendant in his own right .... may be set off.” If the statute provided that all demands originally payable to the defendant in his own right should be set off absurdity of result would preclude literal construction. “Mutuality is implied in the word set-off.” Collins v. Campbell, 97 Maine, 27. “A cardinal rule in the interpretation of statutes of set-off requires that there be a mutuality of demand both-as to the quality of the right and the identity of the parties.” Hunter v. Henning, 259 Penn., 347; 103 Atl., 61. A demand against the plaintiff individually though “originally payable to the defendant in his own right” cannot be set off if the plaintiff sues as administrator or trustee. In order that a demand may be set off it must be a demand against the plaintiff, or if the plaintiff be merely nominal or representative, then it must be against the real plaintiff. Set-off whether a set-off of demands under the 'statute or a set-off of judgments at common law is a right which the defendant may interpose against the plaintiff in interest. Judgments may be set off “when the parties in interest are the same.” Pierce v. Bent, 69 Maine, 385; Moody v. Towle, 5 Maine, 416. “The defendant in an action by a trustee in his capacity as such has the same rights as regards set off that he would have against the cestuis que trust,” 25 A. & E. Ency., 533, “The relation of — 277 — a trust company to its depositors in the savings department is that of a trustee to his cestuis que trust.” Kelley v. Commissioner, 239 Mass., 298. A trust company holding in trust for the savings depositors a note which has been segregated for the purpose brings suit upon it for the benefit of such depositors. If the theory were true that what is segregated is the fluctuating balance between the amount of the note and the deposits of makers its and indorsers, set-off should be allowed because after such allowance all of the trust fund represented by the note would be recovered. But if as this court hold's, it is the note that is segregated and held in trust, set-off cannot be allowed in a suit brought for the benefit of the savings depositors for several’ cognate reasons: (1.) the demand sought to be set off is not against the plaintiff in tbe capacity in which he sues, (2) the demand is not against the plaintiff in interest, and (3) such allowance would defeat in part the recovery of the trust fund. All this is not important so long as the bank is solvent. In such case the depositor does not need to resort to a plea of set-off. He can draw his deposit and pay his note. And- in case of insolvency, denial of set-off does not injure the savings depositor if the segregated assets are sufficient to secure the payment of all. But insolvency plus deficiency of security make set-off important. To allow it, however, would deplete the trust fund and in part defeat the purpose of the law. Few of the cases cited are pertinent. Indeed, it seems that but few cases directly in point have been decided by courts. Some cited cases have reference to the ordinary relations between banks and their customers when there has been no setting apart or segregation of assets as security. It is conceded that in such cases the right of set-off obtains precisely as between individual debtors and creditors. Other authorities presented relate to savings banks. It is uniformly held that savings bank depositors who are debtors to the bank have no right of set-off. The reason is that savings bank depositors are not creditors of the bank, except in a limited sense. They occupy a position, sui generis, but resembling that of stockholders. Coggswell v. Bank, 59 N. H., 43; Lewis v. Institution for Savings, 148 Mass., 235. — 278 — Trust Company depositors are denied the right of set-off against their segregated notes, but for a different reason. A trust company is a debtor to its depositor. As holder' of its depositor’s notes it is also a creditor. If both debtor and creditor in the same right, in the same capacity, the principle of set-off must apply. But it holds segregated notes in trust. Its liability to depositors is not as trustee. Hence the right of set-off does not apply. Turning to the authorities bearing upon controverted issues in this case: State v. Brobston, 94 Ga., 95, 21 S. E., 146, is confidently relied upon by counsel for the intervenors. The Georgia statute provides in substance that when a bank is a depository of public funds the State shall have "a first lien on all the assets” of the bank. It was held that the lien attaches only to balances due on notes after deducting deposits of makers. This case leinds some support to the theory of the intervenors in the meaning that it ascribes to the word "assets.” If the Georgia statute provided that certain assets should be segregated and set apart as security for public deposits and if the Georgia Court had decided that notes so segregated 'as security were subject to be reduced even to the vanishing point by deposits, upon which the State has no lien, the case would be directly in point. All other authorities that have come to ofir attention deny the right of set off to the commercial depositor as against his note in the savings department. As to whether savings depositors are entitled to set off the authorities are not entirely uniform. Upham v. Bramwell, (Ore.), 210 Pac., 706, 25 A. L. R., 932. This case holds (1) that a depositor having a note in the commercial department is entitled to set off. That this is true goes without saying. (2) that a savings depositor having a note in the savings department"also has the right to setoff, but (3) that a commercial depositor having a note in the savings department has not the right. The Massachusetts cases are opposed to the theory of the intervenors so far as concerns commercial depositors. They do not pass upon the rights of savings depositors. Kelley v. Com’r of Banks, 239 Mass., 298, 131 N. E., 855. Debtor to savings department cannot have commercial deposit set off. Trust Co. v. Rosenbush, 239 Mass., 305, 131 N. E., 858. Same rule applied as in Kelley case notwithstanding depositor’s note was discounted in commercial department and without his knowledge transferred to savings department. — 279 — Tremont Trust Co. v. Baker, (Mass.), 137 N. E., 915. Same rule applied as in Kelley Case notwithstanding agreement by bank to allow set off. The- Massachusetts statute differs from that of Maine in that the former requires savings deposits to be kept distinct from other deposits and invested separately, and in that savings depositors have as security only assets derived from investments of savings deposits. It is not easy to perceive that these differences affect the right of set off. In both states the same corporation is creditor of, and in debt to, the same person at the same time. But as creditor it is a trustee; as debtor it is not. Lippett v. Thames Loan & Trust Co., 88 Conn., 190, 90 Atl,, 369. Debtor to savings department cannot have his deposit in either commercial or savings department set off. The Connecticut statute is much like that of Massachusetts. It segregates savings department investments, and such investments only, as security for savings depositors. The reason for the decision in the Lippett Case is that “The depositors in this (savings) department were the equitable owners of the savings (segregated) assets.” This is but another way of stating that the Trust Company held the notes in trust for the savings depositors. A note held in trust is not subject to have set off against it a debt of the trustee unless it is a debt for which he is liable as trustee. Both reason and authority are opposed to the theory that commercial depositors are entitled to have their deposits set off against their segregated notes. The same rule we think must be applied in case of savings depositors. The savings depositor who is also a debtor must share proportionately with his co-depositor who is not a debtor. As to this, however, as above appears, the authorities are not entirely uniform. But every reason for denying set-off to commercial depositors applies to savings depositors. The solution of the problem harks back to the original question, the meaning of the word “assets” as used in the statute, which aims to provide “security.” Does it include merely the elusive balance, or does it mean the appraisable note? We hold the latter to be the' true meaning. The trust com — 280 — pany held the notes as trustee. It owed its depositors but not in its capacity of trustee. There is no mutuality in ' 'the quality of the right.” Set-off must be denied. ''The relation of a trust company to its depositors in the savings department is that of a trustee to his cestuis que trust, while its relation to its depositors in the commercial department is that of a common law debtor.” Kelley v. Commissioner, (Mass.), supra. ''The depositors in this department were the equitable owners of the savings assets .... Each depositor had an equal right to his proportional share of all the funds of this department.” Lippett v. Trust Co., (Conn.), supra. See note 25 A. L. R., 938. Answering a minor question propounded by the receivers we hold that a depositor’s intention to apply a certain deposit marked “Special” to the payment of his segregated note does not entitle such depositor to the right of set-off, even though such intention is made known to the treasurer, provided the deposit remains under the exclusive control of the depositor and subject to withdrawal by him. The intervenors further contend that the Lincoln County Trust Company failed to legally and effectually segregate and set apart any notes. As before stated, if there were no legal segregation the right of set-off exists as it does between any debtor and creditor. Two votes were passed by the executive committee or directors providing for the segregation of assets to secure savings depositors. One passed in 1919 covered “stocks and bonds, all loans including mortgage and chattel.” The other passed in 1922 covered “all stocks and bonds, mortgage, collateral and time notes.” The segregated notes were not stamped “Savings Department.” No record was made in any so-called investment book. To carry the votes into further effect the bank caused to be stamped on each page of its daily balance ledger under the heading “Assets” the words “Segregated for savings acc’t,” which words were bracketed against the following items of assets . ■. . ... “Stocks and Bonds, U. S. Bonds, Loans on Collateral and Chattels, Loans on Mortgages of R. E., Other Loans.” This method is crude. It cannot be commended. But the act should receive a liberal construction. The savings depositors for whose security it was passed were not responsible for the bank’s loose methods. The purpose to segregate assets plainly appears. The items to be segregated are indicated with reasonable certainty. — 281 — No one of the specific objections nor all combined are fatal: It is objected that a trust company cannot legally set apart all of its assets as security for savings depositors. The Lincoln County Trust Co., did not undertake to do this. Assets having a book value of more than $36,000 were not so set apart. True, it did not record a description of segregated loans. All loans being segregated such specification was not essential for the purpose of identification. It had no investment book, so called. But it adopted the daily balance ledger as an investment book. It is objected that it attempted to segregate non-existing assets. Not so. The weekly entry upon the bank’s improvised investment book as plainly related to existing assets as would a formal record made at the same time in an investment book in the most approved form. In either case the record is made as authorized by votes properly including and relating to assets to be acquired. While we do not approve the procedure adopted we think that it is not so defective as to defeat even in part the purpose of the Legislature and the intention of the bank to provide security for all savings depositors. The receivers are instructed as above.