#### R. L. COBURN, Receiver of Martin County Savings and Trust Company, v. C. D. CARSTARPHEN.

(Filed 12 October, 1927.)

Equity — Set-Off — Banks and Banking — Mutuality of Debts — County Funds — Debtor and Creditor.

While ordinarily the right of equitable set-off does not exist where there is a want of mutuality or the one claiming it has no right of action against the other in his own name, this principle is not applicable to-county funds officially deposited in a bank since in a receiver’s hands, and for which the depositor officially remains liable to the county, and he may offset his personal liability to the bank with the amount he may receive as a depositor of the county funds.

Appeal by defendant from *Nunn, J.,*at June Term, 1927, of Mab-TiN.

Affirmed in part and remanded.

From judgment on facts agreed defendant appealed to tbe Supreme Court.

*B. A. Oritcher and A. B. Dunning for plaintiff.*

*Wheeler Martin for defendant.*

CONNOR, J.

Tbis action was beard upon a statement of facts agreed. They are as follows:

1. Plaintiff is tbe receiver of Martin County Savings and Trust Company, an insolvent corporation, wbicb prior to bis appointment as sucb receiver was engaged in tbe banking business at "Williamston, Martin County, N. C. He bas brought tbis action to recover of defendant tbe amount of bis indebtedness to said corporation, as evidenced by two promissory notes.

2. Defendant, prior to its insolvency, executed and delivered to said corporation bis two promissory notes, one in tbe sum of $300, and tbe other in tbe sum of $2,100. Both said notes came into tbe bands of tbe receiver as assets of said corporation. No payment bas been made by defendant on said notes, or either of them, and both are now due.

3. On tbe date of its insolvency defendant bad on deposit with said corporation, subject to bis personal check, tbe sum of $50.23. Tbe said sum is now due to defendant by said corporation.

4. Defendant is now, and was prior to tbe insolvency of said corporation, tbe treasurer of Martin County. As sucb treasurer be bas executed and filed with said county a bond conditioned as required by statute. He is-personally liable to tbe county for all moneys wbicb have come into bis bands belonging to said county, and wbicb have not been lawfully paid out by him.

*369On the date of its adjudication as insolvent, defendant had on deposit with said corporation as treasurer the sum of $2,801.91. This deposit was made with moneys received by defendant as treasurer, belonging to Martin County. Defendant is personally liable to the county for said moneys. He is solvent. This sum is now due to defendant as treasurer by said corporation.

Hpon the foregoing facts the court was of opinion that defendant was entitled to have the deposit in the sum of $50.23 applied as a credit upon his indebtedness to the corporation, as evidenced by his notes, but that he was not entitled to offset said indebtedness by the deposit in the sum of $2,801.91 standing on the books of the corporation to his credit as treasurer. From judgment in accordance with this opinion, defendant appealed to this Court. His only assignment of error is based upon his exception to the judgment.

It is conceded that there is no error in the judgment, applying the deposit in the sum of $50.23, as a payment on defendant’s indebtedness to the bank. The judgment in that respect is in accord with well settled principles and is sustained by authoritative decisions of this Court. *Trust Co. v. Spencer,*193 N. C., 745; *Graham v. Warehouse,*189 N. C., 533; *Trust Co. v. Trust Co.,*188 N. C., 766; *Moore v. Trust Co.,*178 N. C., 128; *Moore v. Bank,*173 N. C., 180; *Hodgin v. Bank,*124 N. C., 540. Where a depositor is indebted to a bank and the debt is due, the bank has the right to apply the deposit as a payment, *pro tanto,*on the indebtedness. This right of set-off or counterclaim is mutual, and where the bank has become insolvent, and is in the hands-of a receiver, the depositor is entitled to have his deposit applied as a payment on his indebtedness to the bank.

In *Dameron v. Carpenter,*190 N. C., 595, *Varser, J.,*whose service as a member of this Court, although brief, was of great value both to his associates and to the people of this State, writing for the Court, says, with full citations supporting his statement of the law: *“A*set-off is in the nature of a payment or credit when the debts are mutual. Set-off exists in mutual debts, independent of the statute of set-off. Its flexible character is used in equity to prevent injustice.” See *Williams v. Coleman,*190 N. C., 368.

Defendant contends that there is error in the judgment with respect to the deposit in the sum of $2,801.91, standing on the books of the bank, at the date of its insolvency, to his credit as treasurer. The court was of opinion that defendant was not entitled to have his personal indebtedness to the bank deducted from the amount due by the bank to him as treasurer. The judgment was in accordance with this opinion. In this respect defendant contends that the judgment is erroneous.

*370As a general rule a bank may apply tbe amount due by tbe bank to its depositor as a payment on a debt o£ tbe depositor to tbe bank, at any time after tbe debt becomes due; tbis rule, however, applies only wben tbe amount due as a deposit belongs to tbe depositor. It does not apply where tbe bank has knowledge that tbe money deposited belongs, not to tbe depositor, but to another, and was deposited in trust for tbe owner. 7 C. J., 653 and 658. Tbe right of set-off arises and can be enforced only where there are mutual debts between tbe parties. Tbe party invoking tbe right cannot maintain it, unless be could also maintain an action against tbe other party to recover tbe amount which be seeks to have allowed as a set-off or counterclaim. Thus in *Battle v. Thompson,*65 N. C., 407, it was held that where defendant was indebted to tbe State of North Carolina, be could not in an action brought by tbe State Treasurer to recover upon such indebtedness, offer as a set-off or counterclaim tbe indebtedness of tbe State to him arising out of coupons of tbe State, which tbe State legally owed, for tbe reason that be could not maintain an action against tbe State.

Tbe rule is not strictly applied, however, wben either tbe bank or tbe depositor has become insolvent. Thus in *Davis v. Mfg. Co.,*114 N. C., 321, it was held that an endorser on a note held by an insolvent bank against an insolvent principal, upon which tbe receiver bad brought suit is entitled to avail himself of bis claim against tbe bank, upon a certificate of deposit issued by tbe bank, and held by him at tbe date of tbe bank’s insolvency. In *Trust Co. v. Spencer,*193 N. C., 745, it was held by tbis Court that a bank, notwithstanding that it bad taken a-note signed by tbe directors of a corporation which bad become insolvent, in payment of tbe corporation’s note to it, retaining, however, tbe corporation’s note as collateral security for tbe note of tbe directors, bad a right to apply a deposit to tbe credit of tbe insolvent corporation as a payment on tbe indebtedness for which tbe bank held tbe directors’ note.

In tbe instant case, although tbe deposit in tbe sum of $2,801.91 was made by defendant with moneys belonging to Martin County, and stands on tbe books of tbe bank in bis name as treasurer, be is personally liable to tbe county for tbe moneys received by him as treasurer. He is solvent, and must account to tbe county for tbe amount of tbe deposit. As between tbe bank and tbe defendant, tbe bank is liable primarily to tbe defendant, and not to tbe county. His contention that upon tbe facts agreed be is entitled to have tbe amount of bis indebtedness to tbe bank deducted from tbe amount due him by tbe bank must be sustained, not only upon principles of justice and equity, but also upon well supported authority.

*371In *Funk v. Young, Trustee*(Ark.), 210 S. W., 5 A. L. R., 79, it was held tbat tbe maker of a note to a bank, wbicb thereafter became insolvent, may offset bis indebtedness to tbe bank npon said note by a deposit in bis name as trustee, where be was personally liable to bis *cestui que trust*for tbe amount of tbe deposit. Tbe facts in tbat case are almost identical with those in tbe instant case. Tbe decision is well supported by authorities. In tbe opinion of tbe Court it is said: “Tbe trend of all modern decisions is toward liberality in tbe allowance of set-offs in tbe case of insolvency of tbe party against whom tbe set-off is claimed to tbe end tbat only tbe true balance may be required to be paid by tbe representative of tbe estate of tbe insolvent.” Many cases are cited in tbe note sustaining tbe decision. Tbe just and equitable principles upon which tbe right of offset or counterclaim is enforced should be liberally applied to tbe end tbat a debtor to an insolvent corporation should not be required to pay bis debt to tbe corporation, and also to pay tbe indebtedness of tbe corporation for wbicb be is personally liable. Tbe mutual liability should be so adjusted tbat tbe true balance may be ascertained and judgment rendered accordingly.

Tbat tbe want of mutuality is not always permitted to defeat tbe right of set-off, see *People v. California Safe and Deposit Co.,*141 Pac., 1181.

There is error in tbe judgment with respect to tbe deposit in tbe sum of $2,801.91. Defendant, because of bis personal liability to tbe county for tbe amount of this deposit, is entitled to have bis indebtedness to tbe bank, on bis personal notes, deducted from tbe amount of tbe deposit. This will result in a judgment in favor of tbe defendant and against tbe receiver for tbe difference. Tbe action is remanded in order tbat judgment may be entered in tbe Superior Court of Martin County in accordance with this opinion.

Affirmed in part and remanded.