No. 88-528 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1989 

VICTOR WERLHOF AVIATION INSURANCE, 

Plaintiff and Respondent, 

-vsRONALD GARLICK, d/b/a GARLICK HELICOPTERS, 

Defendant. 

-vsFARMERS STATE BANK, a Montana Banking corp., 

Garnishee-Appellant. 

APPEAL FROM: District Court of the Fourth Judicial District, 

In and for the County of Ravalli, 

The Honorable Jack L. Green, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Jeffrey H. Langton, Hamilton, Montana 

For Respondent: 

Charles J. Tornabene; Patterson, Marsillo, Tornabene 

and Schuyler, Missoula, Montana 

For Amicus Curiae: 

George T. Bennett, Montana Bankers Assoc., Helena, 

Montana 

Filed: 

Submitted on Briefs: Jan. 12, 1989 

~~~id~d: April 6, 1989 

..' - -- 

f ' ,I. 

" Clerk 

W ?-- 

- .. ,.- 

0 

.< - - 
Mr. Justice John C. Sheehy delivered the Opinion of the 

Court. 

The principal issue in this case is whether a bank, 

otherwise lawfully entitled to a setoff, may exercise its 

right of setoff against a depositor's account at the same 

moment it is presented with a writ of execution which seeks 

to levy on the same depositor's account. We uphold the right 

of the Rank to the setoff. 

A second issue is whether a bank may set off a matured 

debt against a depositor's account when the debt is secured 

by collateral. Again, we hold that the Rank's right of 

setoff in this case is not barred by the presence of 

collateral. 

A third issue is whether S 30-4-303, MCA, modifies the 

Bank's right of setoff. We hold that 30-A-403 has no 

application in this case. 

Farmers State Rank appeals from an order of the District 

Court, Fourth Judicial District, Ravalli County, which held 

that the Bank holds property of a depositor to which a 

judgment creditor of the depositor Victor Werlhof Aviation 

Insurance, had a right. The order forbade the Bank to 

transfer or otherwise dispose of the depositor's monies until 

the judgment creditor, Victor Werlhof Aviation Insurance, 

could commence and prosecute to judgment an action against 

the Bank for recovery of the monies which the District Court 

held were wrongfully set off by the Bank. The order is in 

the nature of an injunction and is thus appealable under Rule 

1, M.R.App.P. We reverse the District Court and vacate the 

prohibitive order. 

There is no dispute as to the evidentiarv facts. Victor 

Werlhof Aviation Insurance first obtained a judgment against 
Garlick Aviation on April 11, 1996 in Missoula County 

District Court for $10,391.46. The judgment was abstracted 

to Ravalli County District Court on May 19, 1986. That court 

issued a writ of execution on June 4, 1986 directed to 

appellant Farmers State Rank of Victor, Montana, against 

Garlick's account in the Bank. Garlick owed monies on a 

delinquent note to the Bank at the time of the execution of 

the first writ. The return of service of the June 4 

execution indicated that Garlick's account held $3,276.97, 

but the Bank claimed a setoff against the monies for a 

delinquent note of $80,000.00 which Garlick had executed to 

the Bank in 1982. 

On January 15, 1988, on behalf of Victor Werlhof 

Aviation Insurance, a second writ of execution was issued by 

the court. This writ was presented by the sheriff to the 

Rank in the same manner as the first writ. At the time the 

Bank received the writ, Garlick owed the Bank a monthly 

payment of $2,895.10 which was due as of January 1, 1988. 

The overdue payment was a monthly obligation in satisfaction 

of a debt underlying a contract for deed which had been 

assigned to the Bank in a separate bankruptcy by a party not 

involved in these proceedings. The Bank, when the judgment 

creditor's writ was presented, set off Garlick's checking 

account balance toward the January 1, 1988 overdue 

installment. Victor Werlhof Aviation Insurance then sought 

suppl.emental proceedings in aid of execution against the 

Rank. The District Court held against the Bank and it 

appealed to this Court. 

1. May -- the Bank claim -- set off against - a depositor's 

account - at - the moment - it - is presented ---- with a writ of 

execution -- to be levied upon - the -- account? 

The basis of a bank" right to set off its depositor's 

accounts against matured debts owed by the depositor to the 
hank was recently discussed by this Court in Bottrell, Reeve 

and Northern Line Layers, Inc. v. American Bank (f/k/a 

Western State Bank), Jim Reaton and Marty ~errig (NO. 87-209, 

Decided April 5, 1989). There we said, citing Spratt v. 

Security Bank of Buffalo, Wyo. (Wyo. 1982), 654 ~.2d 130, 

We next reach appellant's claim that the bank's 

set-off should fail for lack of mutuality between 

appellee and Gail Fanning. Before going further, 

we need to discuss a bank's right to setoff against 

the general deposits in its possession. The bank's 

right of set-off to secure the payment of its 

depositor's indebtedness is a part of the law 

merchant and well established in commercial 

transactions. (Citing authority.) For a bank to 

establish a right to set off, three conditions must 

be met: "the fund to be setoff must be the 

property of the debtor, the fund must be deposited 

without restrictions, and the existing indebtedness 

must be due and owing." (Citing authority.) The 

bank's right to setoff does not arise until the 

time the depositor's indebtedness to the bank has 

matured. (Citing authority. Addressing 

appellant's point, for set-off to be permissible, 

there must be mutuality of obligation between the 

debtor and his creditor, as well as between the 

debt and the fund on deposit. (Citing authority. 1 

Debts to he used as set-offs must be due to and 

from the same persons in the same capacity. 

(Citing authority.) 

The right of setoff is not limited exclusively to banks. 

Such right exists between any mutual debtors and creditors 

where the debts have matured and the parties mutually are 

debtors and creditors of and to each other. Thus, because 

setoff is a common law right, it exists independently of 

statutes, unless, of course, statutes affecting setoff have 

been enacted. 

The banker's right to setoff is the common law equitable 

right of the bank to apply the general deposits of a 

depositor against the matured debts of the depositor. The 
right grows out of the contractual debtor-creditor 

relationship created between the depositor and the bank at 

the time the account is opened, Security State Bank of 

Comanche, Okl. v. V. FJ. R. Johnston & Co. (1951), 204 Okla. 

160, 228 P.2d 169; and it rests on the principle that it 

would be inequitable to permit the debtor-depositor to carry 

an open account that induces the bank to extend credit, and 

then allow the debtor to apply the funds to other purposes 

because he had not expressly agreed to apply them to the 

debt. Melson v. Rank of New Mexico (N.M. 19581, 332 P.2d 

472; Southwest Natfl Bank v. Evans (1923), 94 Okla. 185, 221 

P. 53. It is a general rule that when a depositor is 

indebted to a bank, and the debts are mutual--that is, 

between the same parties and in the same right--the bank may 

apply the deposit, or such portion thereof as may he 

necessary, to a payment of the debt due it by the depositor, 

provided there is no express agreement to the contrary and 

the deposit is not specifical.ly applicable to some other 

particular purpose. Security State Bank of Melrose, Minn. 17. 

First Natfl Bank of Ismay (1927), 78 Mont. 389, 254 P. 41.7. 

For a hank to establish the right to setoff, the fund to he 

set off must be owed by the Bank to the debtor, the fund must 

be deposited without restrictions, and the existing 

indebtedness must be due and owing. Federal. Deposit Ins. 

Corp. v. Pioneer State Bank (1977), 155 N.J. Super 381, 382, 

281 A.2d 958. 

As to the writ of execution levied against the Bank on 

June 4, 1986, the District Court held that though the Rank 

was not entitled to a setoff, since Victor Werlhof did 

nothing further about it, Victor was barred b~7 laches from 

recovery as to the proceeds of the first writ of execution. 

T7ictor Werlhof has not cross-appealed on this holding, and so 
we do not concern ourselves with the result in the District 

Court as to the levy of the first execution writ. 

As to the second writ of execution, it is undisputed 

that Garlick was delinquent under the contract for deed in 

not making the monthly payment of $2,895.10 due the Bank on 

January 1, 1988. On January 21, 1988, when presented by the 

sheriff with the second writ of execution, the Bank claimed a 

setoff of $1,697.41 from Garlick's checking account against 

the delinquent indebtedness. Victor Werlhof contends that 

since the Bank had taken no action to set off the account 

before the writ was presented, the checking account was 

subject to the writ from the moment of its issuance on 

January 15, 1988, and thus preceded any right of the Bank to 

setoff. The Rank, on the other hand, contends that its 

setoff occurred when the monthly payment was not made--at the 

moment the debt matured in other words. 

Neither contention is correct. The Bank acquired a 

right to setoff when Garlick's pavment became delinquent, but 

the Bank must take positive steps to accomplish the setoff. 

As to a would-he executing judgment creditor, the setoff is 

accomplished. when the Bank takes positive steps to claim its 

right, by entering evidence of the setoff in its own records, 

and then possibly giving other written notice of its action. 

United States v. Citizens and Southern National Bank (5th 

Cir. 1976), 538 F.2d 1101, 1107, cert. denied 430 U.S. 945 

(1977); Studley v. Boylston Bank (1913), 229 U.S. 523, 33 

S.Ct. 806, 57 L.Ed. 1313. Here the Bank recorded the setoff 

in its records on the date the writ was presented, executed a 

response to the sheriff claiming setoff, and later furnished 

an affidavit stating the facts OF its claim of setoff. By 

those actions, the Bank accomplished its setoff. 

The nature of the claim of a judgment creditor against a 

third party holding property of the judgment debtor provides 
a further reason whv the writ of execution does not take 

precedence over the right of setoff. A judgment creditor 

seeking attachment or execution of a judgment debtor's 

property in the possession of a third party stands in the 

shoes of the judgment debtor as far as the rights of the 

third party are concerned. Thus, it is stated in General 

Electric Credit Corporation 17. Tarr (W.D. Pa. 19781, 457 

F.Supp. 935, 938: 

The service of attachment execution has the effect 

of an equitable assignment of the thing attached. 

It puts the garnishee in the relation to the 

attaching creditor which he had sustained to his 

former creditor. He may make the same defense to 

the attachment by evidence of set off or of other 

equities that he might have made if sued by his 

original creditor. 

Here the Rank could have asserted its right of setoff 

against any claim of Garlick to his checking account at the 

time of the presentation of the writ of execution. The 

judgment creditor, Victor Werlhof Aviation Insurance, had no 

greater right against the Bank than did Garlick at that time. 

Therefore, the writ did not take precedence over the right of 

setoff. We hold the setoff here could be asserted by the 

Rank at the time it was presented with the execution writ. 

2. -- Was the Bank's right of setoff - affected the 

contract for ----- deed for real property which secured - Garlick ' s 

---- debt to the Bank? 

Stated another way, we are asked to decide if the Bank 

must first exhaust it.s collateral before it can exercise 

setoff to recover a matured debt secured by the collateral. 

In Montana, the "one-action rule" applying to notes 

secured by mortgages on real property, S 71-1-222, MCA, does 

not apply to contracts for deed. Glacier Campground v. Wild 

Rivers, Inc. (1978), 182 Mont. 389, 597 P.2d 689, 698. 
The Rank's position as a creditor of Garlick appears to 

result from some "creative financing" prevalent in the early 

1980's. The Bank held a first security position on the real 

property to secure two promissory notes totalling 

$392,560.00. The owner of the real property entered into a 

contract for deed with Garlick as buyer to deliver clear 

title upon pavment by installments of $400,000.00. Later the 

owner became bankrupt, and the bankruptcy court segregated 

the contract for deed and assigned it to the Bank, with 

Garlick to keep up the payments and thus retire the 

promissory notes. Under the assignment, Bank has first claim 

to Garlick's payments, and it was the payment due January 1, 

1988 that Garlick had not made. Under the contract for deed, 

if Garlick remained in breach of the contract for more than 

30 days after notice, the Rank could accelerate the debt and 

"take all means to enforce and collect the same." Nothing in 

the law, however, requires the Bank under these circumstances 

to wait until the contract for deed was cancelled before it 

had a right of setoff on the contract debt. Garlick' s 

January 1, 1988 payment was overdue, the debt had matured, 

and the Rank was not limited to or constrained by the 

contract terms. It could pursue any legal means to coll.ect 

its debt, or any part of the debt that had matured. J. M. 

Hamilton Co. v. Battson (1935), 99 Mont. 583, 44 P.2d 1064. 

We hold under these circumstances that the Bank could resort 

to setoff even though other remedies lay open under the 

contract for deed. 

3. Does § 30-4-303, MCA affect Bank's right of setoff? -- - 

Prominent among the conclusions of law adopted by the 

District Court was its determination that S 30-4-303, MCA "in 

the light of the facts" gave the writ of execution priority 

over the setoff rights of the Bank. 

Section 30-4-303, MCA, provides: 
(1) Any knowledge, notice or stop order received 

by, legal process served upon or set-off exercised 

by a payor bank, whether or not effective under 

other rules of law to terminate, suspend or modify 

the bank's right or duty to pay an item or to 

charge its customer's account for the item, comes 

too late to so terminate, suspend or modify such 

right or duty if the knowledge, notice, stop order 

or legal process is received or served and a 

reasonable time for the bank to act thereon expires 

or the setoff is exercised after the bank has done 

any of the following: 

(a) accepted or certified the item; 

(b) paid the item in cash; 

(c) settled for the item without reserving a right 

to revoke the settlement and without having such 

right under statute, clearinghouse rule or 

agreement; 

(d) completed the process of posting the item to 

the indicated account of the drawer, maker or other 

person to be charged therewith or otherwise has 

evidenced by examination of such indicated account 

and by action its decision to pay the item; or 

(el become accountable for the amount of the item 

under subsection (1) (d) of 30-4-213 and 30-4-302 

dealing with the payor hank's responsibility for 

late return of items. 

(2) Subject to the provisions of subsection (1) 

items may be accepted, paid, certified or charged 

to the indicated account of its customer in any 

order convenient to the bank. 

It need only be said that the foregoing statute does not 

apply to the circumstances of this case. If we regard the 

writ of execution as an "item" (likely not), the Bank in no 

wise recognized the writ nor acted upon it so as to indicate 

a reversal of its action to accompl.ish a setoff. If the 

District Court felt that acceptance by the Bank of deposits 

from Garlick after the first attempted lev17 of a writ of 
execution gave the Bank notice of the outstanding judgment 

against Garlick, still, as discussed above, the Rank had not 

lost its right to accomplish the second setoff as against a 

judgment creditor. We hold that S 30-4-303, MCA, is not 

applicable to the circumstances of this case. 

Finally, we find no merit in two other contentions 

raised by Victor Werlhof on this appeal. We hold, as stated 

above, that the Rank's imputed knowledge of the outstanding 

judgment against Garlick did not affect the Rank's right of 

setoff in this case. We also hold that under the 

circumstances here, the Rank did not act against public 

policy in frustrating the attempted levies of execution, 

since it acted legally in accomplishing setoff. 

The judgment and order of the District Court is 

reversed, and the prohibi.tion against the Bank transferring 

or disposing of the funds sought to be executed upon is 

vacated. 

We Co cur: /9 A/