Wolf v. National City Bank

Scott, J.: It was undoubtedly the law of this State at the time the plaintiffs were appointed receivers of Blum Brothers, Inc., that an unmatured claim held by the creditors of a bankrupt could not be set off against a claim presently due from the creditors to the bankrupt. (Fera v. Wickham, 135 N. Y. 225; Matter of Hatch, 155 id. 401.) The rule has now been changed by statute so as to conform to the rule established by the Bankruptcy Act (Laws of 1914, chap. 360, adding to the Debtor and Creditor Law [Consol. Laws, chap. 12; Laws of 1909, chap. 17], § 13; 30 U. S. Stat. at Large, 562, § 63; Id. 565, § 68). If, therefore, nothing else appeared except that at the date of the appointment of the receivers the defendant was indebted to [569] Blum Brothers, Inc., in the sum of $3,571.51 on open account, and held an unmatured promissory note of said corporation for a much larger sum, we should be obliged to hold that no right of set- off existed, and that plaintiffs were entitled to judgment. Something else does appear, however, and that is, that defendant was induced to discount the note and extend credit for the proceeds to the corporation in reliance upon false and fraudulent representations by the corporation as to its condition. Under these circumstances it is universally held that defendant, upon discovery of the fraud, was entitled to rescind the credit extended in reliance thereon, whereupon the amount advanced became immediately due and payable and available as an offset. The precise question has been passed upon by the Court of Appeals in Rothschild v. Mack (115 N. Y. 1) and Bradley v. Seaboard Nat. Bank (167 id. 427). This follows naturally and logically from the general rule that where money, credit or anything else has been obtained by a person by fraud, he has an immediate right to get it back. (Willson v. Foree, 6 Johns. 110; Weigand v. Sichel, 4 Abb. Ct. App. Cas. 592.) On this subject Judge Peckham said in Rothschild v. Mack (supra, at pp. 7 and 8): “An action in the nature of an action of assumpsit lies against one who has obtained money from another by a fraud, and such a claim is a proper subject of set-off in an action brought by the party against whom it exists. An assignee of such party takes a cause of action subject to such defense. This money thus obtained is, in contemplation of law, money received for the use of the party who is defrauded, and the law implies a promise on the part of the person who thus obtains it to return it to the rightful owner. The tort arising from the manner in which the money was obtained may be waived and the action founded upon the implied contract. * * * In this case the defendant’s assignors having obtained money to the amount of nearly $5,000 from the plaintiffs by means of the fraud above stated, at once became liable to repay the same, and the law will imply a promise to repay it to the plaintiffs. This cause of action (the tort being waived) was on contract, and it existed the moment the assignors obtained the money from the plaintiffs, and, of course, it was in full life when they assigned [570] their property to the defendant, who took it subject to all defenses existing against it while owned by the assignors.” And in Fera v. Wickham, (supra), a leading authority for the rule that an unmatured claim cannot be set off against one presently due, the court said: “In the Rothschild case, neither plaintiffs’ claim on the note, nor the assignee’s claim against them, were due at the time of the assignment, but because of the fraud practiced upon the plaintiffs, in the manner in which the moneys were obtained from them, it was held that a cause of action in assumpsit arose at once in their favor for the recovery back of the moneys. It existed the moment the insolvent assignors obtained the money, and being a proper subject of set-off in any action which might have been brought by the parties against whom it existed, it could properly be off set against the debt due from the plaintiffs to the assignee, pro tanto.” Of course the right of rescission in such a case is subject to the general rule applicable to the rescission of contracts for fraud that the party seeking to rescind must act promptly and must return whatever of value he may have received under the contract. The defendant certainly acted promptly, for it is agreed “ that on July 31st, 1913, the defendant for the first time learned that the said financial statement [upon which it had relied] was false, incorrect and incomplete, and that it thereupon cancelled the said balance of $3,571.51 appearing on its books to the credit of the said Blum Brothers, Incorporated, on that day, and attempted to apply the same to the partial payment of the said note, payment of that amount being credited upon it.” It does not appear that anything of value passed to defendant upon the discount of said note, and there was nothing, therefore, to be returned to the makers of the note or the plaintiffs. Plaintiffs claim, however, that the attempted rescission was not complete and effective because notice thereof was not given at once to plaintiffs. We are cited to no case, however, holding that such notice is necessary in a case like the present where there is nothing to be returned to the party against whom the rescission is claimed. The effect of such rescission where the contract was merely one extending a term of credit [571] for a sum of money, is to cancel the credit, whereupon the debt becomes instantly due. The creditor is not hound to give any notice of the rescission hut may wait, as the defendant apparently did, until a demand is made upon him and then assert his right to a set-off. It follows that defendant is entitled to judgment as prayed for in the submission, with costs. Ingraham, P. J., McLaughlin, Laughlin and Dowling, JJ., concurred. Judgment ordered for defendant, with costs. Order to be settled on notice.