Opinion ID: 1700852
Heading Depth: 1
Heading Rank: 5

Heading: requirements for setoff

Text: Neb.Rev.Stat. § 25-812 (Reissue 1989) provides that a defendant may set forth in his answer as many grounds of defense, counterclaim, and setoff as he may have. Neb.Rev.Stat. § 25-816 (Reissue 1989) also provides that a setoff can only be pleaded in an action founded on contract, and must be a cause of action arising upon contract.... These statutes illustrate the statement in Stephen L. Sepinuck, The Problems With Setoff: A Proposed Legislative Solution, 30 Wm. & Mary L.Rev. 51 (1988), that state statutes do not specify the acts a creditor must take to exercise setoff rights. However, a review of the case law reveals some general rules concerning the right of setoff and how one must exercise the right in order to maintain it against a garnishor. Usually, courts have prohibited setoff when the debt owed is immature, contingent, or unliquidated. Sepinuck, supra. Generally, in order to be available as a setoff, a claim or demand of a garnishee against a judgment debtor must be due and owing the garnishee at the commencement of the action. See, Crocker-Citizens Nat. Bank v. Control Metals Corp., 566 F.2d 631 (9th Cir.1977); American Surety Co. v. City of Akron, 95 F.2d 966 (6th Cir.1938); Termini v. Arthur Exhibitions, 9 Misc.2d 557, 169 N.Y.S.2d 584 (1957), aff'd 5 App.Div.2d 973, 173 N.Y.S.2d 243 (1958); Mattek v. Hoffmann, 272 Wis. 503, 76 N.W.2d 300 (1956); Petition of Keyser, 98 N.H. 198, 96 A.2d 551 (1953); Bagdasarian v. Gragnon, 31 Cal.2d 744, 192 P.2d 935 (1948); Bridgeport-City Trust Co. v. Niles-Bement-Pond Co., 128 Conn. 4, 20 A.2d 91 (1941); Com. Tr. Co. of Pittsburgh's Appeal, 324 Pa. 161, 188 A. 200 (1936); Old First Natl. Bank & Trust Co. v. Snouffer, 99 Ind. App. 325, 192 N.E. 369 (1934); Hayes, Admr. v. Hayes, 2 Del.Ch. 191 (1859). As a general matter, courts prohibit setoff when the debt owed the one effecting setoff is contingent. See, Termini v. Arthur Exhibitions, supra ; Johnson v. Dutch Mill Dairy, Inc., 237 Minn. 117, 54 N.W.2d 1 (1952); Walker v. Carolina Mills Lumber Co., Inc., 429 So.2d 1065 (Ala.Civ.App.1983); Countiss v. Whiting, 306 Ill.App. 548, 29 N.E.2d 277 (1940); Mitchell v. Sears Roebuck & Co., 76 Ohio L.Abs. 178, 145 N.E.2d 570 (1957). Most jurisdictions follow the rule that an unliquidated claim cannot be set off against a liquidated claim. See, McGuire v. Gerstley, 204 U.S. 489, 27 S.Ct. 332, 51 L.Ed. 581 (1907); Webber v. Johnson, 342 Mass. 455, 174 N.E.2d 40 (1961); Johns-Manville v. Connelly, 144 W.Va. 498, 108 S.E.2d 836 (1959); Lehigh Coal Co. v. Keene Coal Company, 89 N.H. 274, 197 A. 410 (1938); Kortz v. Union Cent. Life Ins. Co., 264 Ky. 750, 95 S.W.2d 611 (1936); Kress v. Central Trust Company, 153 Misc. 397, 275 N.Y.S. 14 (1934), aff'd 246 App.Div. 76, 283 N.Y.S. 467 (1935); In re Estate of Nairn, 215 Iowa 920, 247 N.W. 220 (1933); Mack v. Hugger Bros. Const. Co., 153 Tenn. 260, 283 S.W. 448 (1925); Suhs v. Homewood Rice Land Syndicate, 128 Ark. 19, 193 S.W. 271 (1917); Tidewater Quarry Co. v. Scott, 105 Va. 160, 52 S.E. 835 (1906). It is worth noting, however, that the bankruptcy code creates exceptions to the foregoing rules, as it provides for the estimation of immature, contingent, and unliquidated debts. 11 U.S.C. §§ 101(5)(A) and 502(c) (1988 & Supp. V 1993). Nonetheless, our case law is consistent with the general rules recited above. The party who pleads a setoff bears the burden of proving it. Home Fed. Sav. & Loan v. McDermott & Miller, 243 Neb. 136, 497 N.W.2d 678 (1993); Heusser v. McAtee, 151 Neb. 828, 39 N.W.2d 802 (1949); Citizens Nat. Bank v. Rawley, 131 Neb. 10, 267 N.W. 151 (1936). See, also, Carlson v. Nelson, 204 Neb. 765, 285 N.W.2d 505 (1979), modified 205 Neb. 483, 288 N.W.2d 489 (1980). A counterclaim, setoff, or cross-petition, to be available as a matter of affirmative defense or affirmative relief, must be a claim upon which the defendant could, at the date of the commencement of the plaintiff's suit, have maintained an action on the defendant's part against the plaintiff. Weller v. Putnam, 184 Neb. 692, 171 N.W.2d 767 (1969); American Gas Construction Co. v. Lisco, 122 Neb. 607, 241 N.W. 89 (1932); Bank of Crab Orchard v. Myers, 120 Neb. 84, 231 N.W. 513 (1930); Gurske v. Kelpin, 61 Neb. 517, 85 N.W. 557 (1901); Simpson v. Jennings, 15 Neb. 671, 19 N.W. 473 (1884). A setoff is a debt for which an action might be maintained by the defendant against the plaintiff, that is, a debt for a certain specific pecuniary amount, recoverable in an action ex contractu. Simpson v. Jennings, supra . The claim must be such that at the date of the commencement of the plaintiff's suit, the defendant could have maintained an action against the plaintiff. See id. How one exercises the right of setoff is less defined. However, most jurisdictions require some overt or positive act to effect a setoff; the courts have not specified what conduct will suffice. Sepinuck, supra. The U.S. Court of Appeals for the Sixth Circuit is the one exception. That court held in Baker v. National City Bank of Cleveland, 511 F.2d 1016, 1018 (6th Cir.1975), that in the banking context, setoff is not complete until three steps have been taken: (1) the decision to exercise the right, (2) some action which accomplishes the setoff and (3) some record which evidences that the right of setoff has been exercised. We adopted the Sixth Circuit's rule, writing in United Seeds v. Eagle Green Corp., 223 Neb. 360, 363, 389 N.W.2d 571, 574 (1986): There must first be an intent and decision to exercise the right to set off, a subsequent action which completes the setoff, and finally a record which verifies that the action has been taken. In United Seeds, the garnishor had obtained a judgment against the debtor and served a garnishment summons upon the debtor's bank in an attempt to garnish the debtor's account. Following the bank's claim that it was not indebted to the debtor, the garnishor filed an application to determine the bank's liability. Judgment was rendered against the bank, and the bank appealed. The debtor maintained a checking account with a bank that held three promissory notes issued by the debtor. Two of the notes were due and owing, and the debtor had authorized the bank to apply funds from the debtor's checking account in payment for the mature promissory notes; however, the debtor explained that the payment would cause cash-flow problems. The bank agreed to honor outstanding and unpresented checks issued by the debtor, and the debtor continued to make deposits to and draw on the account. On appeal, the bank claimed that its debit against the debtor's checking account constituted a valid setoff against a general deposit of the debtor of the matured debt owed it by the debtor. In affirming the judgment in favor of the garnishor in United Seeds, we observed that the mere retrospective declaration of an intent to exercise a setoff does not establish a setoff. See In re Archer, 34 B.R. 28 (N.D.Tex.1983). We concluded that the bank's bookkeeping entries regarding the debtor's checking account were consistent with an intent to set off, but that the bank's willingness to honor the debtor's overdrafts indicated that the bank was secure about its depositor's ability to repay its outstanding notes. We further reasoned that the trial court must have found that the claimed setoff was precipitated by the imminent garnishment, that the agreement to honor the debtor's overdrafts was an agreement to allow the debtor full use of its deposits while circumventing the garnishment statutes, and that such an agreement was inconsistent with an intent to exercise the right of setoff. Like United Seeds, Baker v. National City Bank of Cleveland, supra, concerned an attempted garnishment of a depositor's checking account to which the bank claimed a setoff for loan indebtedness. In Baker, the trial court ordered the bank to rescind the setoff and credit the depositor's account, and the bank appealed. The Sixth Circuit held that the bank's nonjudicial setoff was ineffective because the bank had taken no affirmative step to assert such a setoff as of the effective time of a court order enjoining such setoffs in a reorganization proceeding. The Baker opinion restricted its analysis to setoffs by banks, framing the issue as: What requirements must a bank meet in order to effect a non-judicial setoff against the account of a customer? 511 F.2d at 1017. It concluded: It would be unrealistic to hold that mere intra-mural declarations between employees of a bank, accompanied by no affirmative acts and no steps to record the transaction, are sufficient to effectuate a setoff. The business of banks is carried on, in the main, by making entries in records rather than by the transfer of money. It is a business of debits and credits. To permit a bank to effect a setoff against a customer's account by means of mere conversations among bank personnel would seriously undermine confidence in the banking system. Further, to permit the consequences of a critical order of a court of competent jurisdiction in reorganization proceedings to be evaded on the basis of the proof in this record would be detrimental to orderly legal processes. 511 F.2d at 1019. But whether in the banking context or otherwise, setoff encourages equitable and economically efficient business transactions and avoids multiplicity of actions. Stephen W. Schwab et al., Onset of An Offset Revolution: The Application of Set-Offs in Insurance Insolvencies, 95 Dick. L.Rev. 449 (1991). It has been recognized as a substantive right designed to avoid the injustice of requiring a debtor to pay the full measure of his obligation while receiving only a portion of the amount owed to him. Id. In the contemporary business world, setoff promotes economy of time and efficiency of method in resolving debt between parties. Id. As a matter of common sense, in no context should one be compelled to pay today what one will be entitled to recover tomorrow. In sum, setoff can be said to further the two public policies that are commonly known as fairness and commercial necessity. Id. Nevertheless, one must recognize that setoff is an extremely powerful toola tool, which even if exercised properly, may injure the other party. The best example of this tendency is in a bank's use of setoff against a depositor. When a bank sets off funds in a depositor's checking account against a debt owed it by that depositor, the bank is likely to dishonor any outstanding checks drawn on that account. If the debtor is a merchant, such dishonor may cause suppliers to cease delivering goods necessary to the depositor's business or may cause utility companies to discontinue essential services. Requiring prior notice of setoff might eliminate these effects.... Requiring the bank to give contemporaneous notice of its action to the depositor cannot eliminate injury. Yet, such notice might reduce the amount of injury while costing the bank (or other party effecting setoff) little or nothing in money, time, and effort. Presumably for this reason, at least one state has statutorily required banks and savings and loan associations to notify depositors of setoff within one day following its exercise. Moreover, article 9 of the Uniform Commercial Code requires notice in an analogous situation. Stephen L. Sepinuck, The Problems With Setoff: A Proposed Legislative Solution, 30 Wm. & Mary L.Rev. 51, 64-65 (1988). Yet, in dealing with when a depositor's account is subject to setoff, neither Neb. U.C.C. § 4-303 (Reissue 1992) nor its counterpart, Uniform Commercial Code § 4-303, 2B U.L.A. 269 (1991), as proposed by the American Law Institute and the National Conference of Commissioners on Uniform State Laws, specifies how a bank exercises a setoff. Thus, the method by which a bank is to exercise its rights of setoff is no more to be found in the Uniform Commercial Code than is it to be found in §§ 25-812 and 25-816. It is instructive to note, as did the court in Baker v. National City Bank of Cleveland, 511 F.2d 1016, 1017 (6th Cir.1975), that the U.S. Supreme Court has characterized a setoff as, broadly speaking, representing `the right which one party has against another to use his claim in full or partial satisfaction of what he owes to the other. That right is constantly exercised by business men in making book entries whereby one mutual debt is applied against another....' (Emphasis in original.) See Studley v. Boylston Bank, 229 U.S. 523, 33 S.Ct. 806, 57 L.Ed. 1313 (1913). The reasoning in both Baker and United Seeds v. Eagle Green Corp., 223 Neb. 360, 389 N.W.2d 571 (1986), regarding the need for affirmative attestation to the exercise of a setoff is equally compelling within the general business community as it is to banks. In essence, a bank and depositor share the same debtor-creditor relationship as any other party indebted to another in other contexts. Moreover, we have neither been cited to, nor do we find, any authority which distinguishes a bank setoff from setoffs in general. Therefore, it is consistent to extend the requirements for maintaining a setoff as announced in Baker and United Seeds to other setoffs, and we hereby so do.