Case Name: T. L. STELLING v. WACHOVIA BANK & TRUST COMPANY
Court: Supreme Court of North Carolina
Jurisdiction: North Carolina
Decision Date: 1938-04-13
Citations: 213 N.C. 324
Docket Number: 
Parties: T. L. STELLING v. WACHOVIA BANK & TRUST COMPANY.
Judges: DeviN, J., took no part in the consideration or decision of this ease.
Reporter: North Carolina Reports
Volume: 213
Pages: 324–329

Head Matter:
T. L. STELLING v. WACHOVIA BANK & TRUST COMPANY.
(Filed 13 April, 1938.)
1. Set-off and Counterclaim § 2—
The statutory right of counterclaim and set-off does not authorize a bank to apply a deposit to a debt due the bank by the depositor.
2. Set-off and Counterclaim § 1 — Equitable set-off may not be asserted by party unless his conduct has been equitable.
The equitable right of set-off and counterclaim may not be invoked by a party unless his conduct has been equitable, fair and aboveboard, since “he who comes into equity must come with clean hand,” and misconduct which will bar the assertion of the right need not necessarily be fraudulent.
3. Same — Conduct of defendant held to preclude it from asserting equitable right of set-off.
Plaintiff purchased a lot in a subdivision in reliance upon promissory representations as to improvements to be made therein within a year. The promoters failed to make the improvements as promised, and later transferred the capital stock of the corporation and the purchase money notes of the several purchasers to an individual. Suit by some of the purchasers of lots to set aside this transfer for fraud was settled by the appointment of defendant bank as trustee to collect the notes, pay off certain obligations, and to undertake to make the improvements. Before completing the improvements defendant terminated the trust, and retained certain purchase money notes in the sum of several hundred thousand dollars as collateral security for advancements made by it. It obtained judgment for the advancements, sold the collateral notes, including plaintiff’s notes, and purchased same at the sale for $10,000. Plaintiff repeatedly repudiated and refused to pay the notes executed by him. Thereafter plaintiff started making deposits in a savings account in defendant bank, and the bank instructed its employees not to permit withdrawals therefrom, and when plaintiff attempted to withdraw funds informed plaintiff for the first time of its intention to apply same to the payment of plaintiff’s notes. Held: Defendant bank made the advancements on the notes with full knowledge of the facts, and failed to inform plaintiff when the savings deposits were made that it intended to apply same to plaintiff’s notes, and defendant may not assert the equitable right of set-off in plaintiff’s action for the wrongful conversion of his savings account.
4. Bills and Notes § 24 — Judgment fox- holder upon admissions in the pleadings held ex’ror when answer alleges affirmative defenses.
It is error for the court to render judgment in favor of the holder upon defendant’s admission of the execution of the notes and nonpayment when the pleadings raise the defenses of breach of the contract for which the notes were given and partial failure of consideration, the availability of these defenses as against the holder being dependent upon the jury’s finding as to whether he is a holder in due course.
5. Bills and Notes § 22 — Pleadings held to raise defenses of breach of contract for which notes were given and failure of consideration.
Defendant in this action for a money recovery set up certain notes executed by plaintiff, and demanded judgment for the balance due on the notes after credits. Plaintiff admitted the execution of the notes and nonpayment, but alleged that the notes represented the balance due on the purchase price of a certain lot which he had bought in reliance upon promissory representations as to improvements to be made in the subdivision, that the improvements had not been made, and that defendant holder took the notes with knowledge of all the facts. Melé: The pleadings raise the defenses of breach of contract for which the notes were given and failure of consideration, in whole or in part, and plaintiff is entitled to have both defenses submitted to the jury, the availability of the defenses as against the holder being dependent upon the jury’s finding as to whether the defendant is a holder in due course.
6. Set-off and Counterclaim § 2—
The fact that a party is precluded from asserting the equitable remedy of set-off does not affect his statutory right of set-off.
7. Fraud § 11—
Evidence helé insufficient to establish fraud in the procurement of the execution of notes for the balance of the purchase price of a lot in a real estate subdivision.
Devist, J., took no part in the consideration or decision of this ease.
Appeal by plaintiff from Johnsion, J., at December Civil Term, 1937, of BuNcojmbe. Reversed.
Tbis is an action instituted by tbe plaintiff to recover damages for tbe wrongful confiscation and appropriation to its own use by tbe defendant of a deposit of tbe plaintiff in tbe defendant’s banking institution at Asheville, N. C., in tbe total sum of $250.00. Tbe defendant admits that it appropriated said deposit account and alleges that it bad a right to do so for tbe purpose of applying same as a credit upon notes of tbe plaintiff then held by tbe defendant bank. Tbe defendant also sets up a counterclaim to recover tbe balance due on said notes.
In 1925 William I. Phillips Company subdivided a tract of land in a suburban area of Asheville, near Skyland, N. 0., designated as Royal Pines. In connection therewith many promissory representations as to tbe future development and improvement of said subdivision were made verbally and by press publication. Among other things it was represented that tbe development would- be completed in one year along tbe most modern lines; that there would be fine administration buildings with stores and offices to be erected in Royal Pines business section; that there would be all modern conveniences without extra cost or future assessment; that there would be one mile of white-way in tbe park near tbe tea room; that there would be water, lights and telephone supplied to every lot; that there would be long paved avenues seventy feet wide, and cement walks, electric lights, sewerage, and planted shrubbery; and that Royal Pines would be developed into the show place of America. The plaintiff, relying upon said promissory representations, purchased a lot for the price of $600.00, paying $150.00 cash and giving his three notes in the sum of $150.00 each, secured by trust deed upon the premises. The promoters of said development never made the improvements promised, but within a year thereafter substantially abandoned any effort to develop the property. Thereupon the plaintiff, having paid the first semiannual installment of interest, repudiated said notes and refused to make any further payment thereon.
The holders of the purchase money notes given for the purchase of lots in the development assigned the capital stock of the corporation and approximately $900,000 worth of said notes to L. B. Jackson for the sum of $250,000. Certain of the purchasers of the lots thereupon instituted an action against W. I. Phillips Company and L. B. Jackson to avoid said transfer as a fraud upon the purchasers of said lots. In settlement of said suit the defendant was appointed trustee to take charge of said purchase money notes, collect the same, pay certain fixed obligations, including approximately $200,000 due the Continental Mortgage Company, and to undertake to make the promised improvements.
The defendant made certain collections on said notes and disbursed the same in paying the stipulated amounts and making certain improvements upon the premises. Before completing the improvements as stipulated in the original contract the defendant terminated said trust, retaining the notes as collateral security for amounts advanced to L. B. Jackson.
Judgment was secured by the defendant against L. B. Jackson and the collateral security was sold and purchased by the defendant for $10,000. This collateral included the notes of the plaintiff.
The defendant made frequent demands upon the plaintiff for the payment of his notes and in each instance he positively and definitely refused to pay the same.
Thereafter, to wit, on 30 January, 1934, the plaintiff, began to make deposits in the savings department of the defendant bank, receiving a passbook in evidence of said account, upon which, each time a deposit was made, the date and amount of said deposit was entered by the defendant. The plaintiff continued to make deposits through 12 May, 1934, at which time, including the deposit made on that date, his balance was $250.00.
Shortly after the plaintiff made his first deposit the defendant “put a latch on” his account, thereby prohibiting any withdrawals therefrom. This was done without any notice to the plaintiff and was for the pur pose and with tbe intent on tbe part of tbe defendant to eventually appropriate said account to tbe payment of plaintiff’s notes. Subsequently, in tbe month of May, tbe plaintiff presented bis passbook to tbe defendant bank and sought to withdraw bis deposit. Tbe defendant refused to honor bis check or draft thereon and declined to pay tbe plaintiff tbe amount due him, then, for tbe first time, informing tbe plaintiff that be could not withdraw any part of bis deposit. Later, on 5 June, 1934, an officer of tbe defendant bank issued a debit slip against tbe account of tbe plaintiff in tbe sum of $250.00 and charged tbe same to plaintiff’s account, thereby withdrawing tbe money represented thereby. Said amount was credited on plaintiff’s notes.
At tbe conclusion of all tbe evidence tbe defendant renewed its motion for judgment as of nonsuit, first made at tbe conclusion of plaintiff’s evidence. Tbe motion was allowed and tbe plaintiff excepted. Thereupon tbe court entered judgment dismissing tbe plaintiff’s cause of action and rendered judgment for tbe defendant against tbe plaintiff for tbe balance due on bis notes after crediting tbe $250.00 deposited by plaintiff in tbe defendant bank. Tbe plaintiff excepted and appealed.
Frank Garter and H. Kenneth Lee for plaintiff, appellant.
Alfred S. Barnard for defendant, appellee.

Opinion:
Barnhill, J.
While there is a statutory right of counterclaim and set-off in certain instances, tbe statutory provisions are not such as would authorize a bank to appropriate a deposit to tbe payment of a debt due tbe bank by tbe depositor. This is permitted under tbe principles of equity, to do justly between tbe parties. When, however, a party seeks to invoke an equitable remedy or to assert an equitable right, or to rely upon an equitable defense, bis conduct must have been equitable, fair and aboveboard. It is a familiar and oft-quoted maxim of equity that "be who comes into equity must come with clean band," or, as it is frequently expressed, "be who has not done equity, cannot have equity." A right cannot arise to anyone out of bis own wrong and tbe misconduct need not necessarily be fraudulent.
Tbe defendant knew that tbe promissory representations made to tbe plaintiff when be gave tbe purchase money notes described in tbe pleadings bad not been complied with. It knew that the. promoters bad abandoned all effort to make such improvements and bad assigned tbe notes to another party. It knew that there was litigation attacking this transfer on tbe grounds of fraud. It bad accepted a transfer of tbe purchase money notes and tbe capital stock of W. I. Phillips Company as trustee to collect and pay off tbe indebtedness of W. I. Phillips Company and to make tbe promised improvements. It terminated tbe trust at a time when it knew that the property had not been developed to the extent and in the manner promised. It advanced money upon the notes with knowledge of the conditions and at a sale of the collateral purchased notes of the par value of several hundred thousand dollars for $10,000. It was fully advised that the plaintiff had repudiated said notes and had consistently refused to make any payment thereon. With this knowledge it accepted deposits from the plaintiff, issued a passbook therefor, showing that the plaintiff had on deposit in its institution subject to withdrawal by him, the amounts therein noted. In the meantime it had put a latch on this account. In other words, it had issued an order to its employees directing them not to honor any check against this account, of which procedure it did not advise the plaintiff. So that, the account was kept open for deposits but closed for withdrawals so long as the plaintiff would make deposits in said account. This was done by the defendant for the purpose of finally appropriating the account to the payment of the notes it held against the plaintiff. It well knew that so soon as, or in the event that, it should advise the plaintiff that the amounts deposited by him could not be withdrawn he would cease to make deposits. It concealed the true facts in respect to the account from the plaintiff for the purpose of benefiting therefrom. The conduct of the defendant is not such as would appeal favorably to the conscience of a court of equity. In our opinion, the defendant is in no position to successfully assert the right recognized in equity to appropriate the account of the plaintiff to the payment of notes it holds signed by the plaintiff in this cause.
This cause has heretofore been before this Court, Stelling v. Trust Co., 208 N. C., 838. It was there held that the complaint sufficiently alleged a cause of action. As heretofore stated, the evidence offered is amply sufficient to establish an unauthorized application of plaintiff's account to the payment of his alleged indebtedness to the defendant as alleged in the complaint, and the defendant by its conduct is now estopped from setting up the equitable defense relied upon by it. It follows that there was error in the judgment of nonsuit.
The court below rendered judgment against the plaintiff on his notes upon the admissions contained in the pleadings. It is true the plaintiff admits that he signed the notes and that he has paid no part thereof except the first semiannual installment of interest. He alleges, however, a breach of the contract of which the notes were a part, and even if it be conceded that he does not sufficiently allege or prove fraud, he has sufficiently alleged and offered evidence tending to show that there has been a breach of the contract by Phillips & Company, and at least a partial failure of consideration, to the full knowledge of the defendant at the time it acquired title to said notes. As to this, he has a right to be beard and to submit his cause to a jury. His rights under these pleaded defenses, even if established, are dependent upon the findings of the jury on defendant's plea that it is a holder of the notes in due course.
Upon the admitted facts the plaintiff is entitled to judgment for the amount of his deposit, with interest from 5 June, 1934. He is likewise entitled to have a jury determine the validity of his defense to the notes set up in the counterclaim, both as to whether he is relieved from the payment thereof by the breach of the contract by the payees in said notes, and as to whether there has been a failure of consideration either in whole or in part. In this connection it is well to say that defendant's loss of its right in equity to apply plaintiff's account to the payment of the notes held by it does not affect its right of offset under the statute.
We are of the opinion that the evidence is not sufficient to establish actionable fraud in the procurement of the execution of said notes.
Eeversed.
DeviN, J., took no part in the consideration or decision of this ease.