Opinion ID: 522905
Heading Depth: 1
Heading Rank: 3

Heading: The Setoff of the Subordinated Debentures

Text: 21 The district court found that TNB could setoff its ten subordinated capital debentures of GBSB in the total face amount of $100,000. 6 The court found that the FDIC had given prior consent; that the debentures were due and owing as a result of the insolvency; and that there was a mutuality of obligations between GBSB and TNB. The district court's findings are clearly erroneous as to these debentures for at least two reasons regardless of consent by the FDIC. 7 Equity generally prevents a subordinated creditor from enhancing its claim at the expense of other creditors, and these debentures, as a matter of law, do not have mutuality of obligations with the debts owed by TNB to GBSB. We consider these two controlling principles in turn.
22 It is undisputed that an equitable right to setoff can arise when there are mutual debts, or that insolvency of one party may justify setoff by the other. Because this right is an equitable right, however, equitable considerations must come into play to limit the right where necessary. Scott v. Armstrong, 146 U.S. 499, 507, 13 S.Ct. 148, 150, 36 L.Ed. 1059 (1892). In cases such as this, where a party voluntarily agrees to a claim subordinate to those of other creditors, equity is better served by preventing a setoff which would enhance the claims of that creditor at the expense of other creditors with a higher priority. Interfirst Bank Abilene v. FDIC, 777 F.2d 1092, 1096 (5th Cir.1985). To allow setoff would defeat the priority protections afforded depositors and other creditors, defeating their expectations as well.
23 Also, as a matter of law, the subordinated debentures do not meet the test of mutuality of obligations to make setoff proper. Setoff is justified only if the two claims or demands mutually exist between the same parties. Dallas/Ft. Worth Airport Bank v. Dallas Bank & Trust Co., 667 S.W.2d 572, 575 (Tex.App.--Dallas 1984, no writ). 24 In FDIC v. de Jesus Velez, 678 F.2d 371, 376 (1st Cir.1982), the court held that promissory notes executed by two individuals and payable to an insolvent bank and debentures of that bank purchased by the two individuals were not mutually extinguishable because the debentures were specifically made subordinate to the claims of all other depositors and creditors of the bank. Consequently, no setoff could be allowed. Similarly, in this case, the debentures cannot be made mutually extinguishable with the obligations of TNB to GBSB because of their subordinate quality. 25 TNB purchased these notes with full knowledge and notice of the terms thereof. It should not now be able to rely on an equitable remedy to place itself in a preferred position vis-a-vis other creditors and depositors of GBSB. We hold that the district court was in error in giving priority, whatever the claimed reason, to these subordinate obligations.