Opinion ID: 344474
Heading Depth: 2
Heading Rank: 2

Heading: Set-Off Against an Instrument

Text: 17 The Receiver also contends that the claim of the bankrupt's estate upon the cashier's check is immune from set-off because of the Virginia substantive law governing the existence of the claim. 18 Simply stated, the position of the Receiver is that his claim upon the instrument is subject only to those defenses, within the meaning of Va. Code Ann. §§ 8.3-305(2) & 306(c), which Virginia law gives the Bank, depending on whether the Receiver is deemed a holder by endorsement or attribution (subject to the defenses of the Bank under § 8.3-306(b)) or a holder in due course by attribution (subject to the defenses of the Bank as a party with whom its transferor dealt under § 8.3-305(2)). Whichever the case, the Receiver maintains that a set-off (arising from a separate transaction), such as the Bank asserts here, is not an available defense within the meaning of the statute. Bank of Wyandotte v. Woodrow, 394 F.Supp. 550 (W.D.Mo. 1975); cf. Stegel v. Union Bank and Trust Co., 163 Va. 417,416 S.E. 438 (1934). 19 The Bank would limit the Wyandotte case to its facts, since it involves a holder in due course of a cashier's check who had no dealing with the maker. We are inclined to agree with the Receiver, however, that the case stands for more; for we read it as asserting correctly that set-off is also unavailable as a code defense against either a holder or a holder in due course with whom the party has dealt. 5 20 But unavailability of set-off as a defense on the instrument in no way precludes its use as a defense to the recovery sought. Indeed, properly considered, set-off unlike recoupment does not go to the foundation or justice of a plaintiff's claim. Instead, it embodies a counterdemand based on some transaction entirely extrinsic to the plaintiff's cause of action; and as such it constitutes a defense only in the practical sense that it operates to reduce the remedy rather than the debt. See 80 C.J.S. Set-Off and Counterclaim §§ 1-5 (1953). In effect, the Bank must honor its cashier's check and pay the Receiver, but in the course of doing so it may set-off the guaranty obligations of the Receiver's bankrupt against the amount of the cashier's check. 21 It is Section 68 alone that determines whether a set-off of existing obligations may be effected or sustained in bankruptcy . . . . 4 Collier on Bankruptcy, P 68.06 at 886.1 (1975). And a set-off of mutual claims under Section 68 is surely permissive, if it is not compulsory. Cf. Studley v. Boylston Nat'l Bank of Boston, 229 U.S. 523, 528, 33 S.Ct. 806, 57 L.Ed. 1313 (1913) (the trustee must set-off mutual claims). 22 On the other hand, it is true that where a trustee (or receiver), rather than merely succeeding to some claim of the bankrupt, has acquired a claim in his own right against a creditor of the bankrupt, their two claims are not considered mutual for purposes of a Section 68 set-off. 4 Collier on Bankruptcy, PP 67.94(2.7) at 867 & 68.10(1) at 895 (1975). For example, set-off is not allowed where the trustee's claim is founded on his extraordinary power to avoid transactions otherwise binding on the bankrupt himself, e. g., where the creditor seeking set-off was the recipient of a preferential or fraudulent transfer from the bankrupt. Section 60, 11 U.S.C. § 96; Section 70e, 11 U.S.C. § 110e. 23 The trustee's claim in such a case is an original and not a derivative one; therefore, when he asserts it, he is not to be viewed as standing in the shoes of the bankrupt for the purpose of set-off. United States v. Roth, 164 F.2d 575, 578 (2d Cir. 1948). Cf. Hood v. Brownlee, 62 F.2d 675 (4th Cir. 1933). 24 Here the Receiver is merely the bankrupt's successor in interest: the cashier's check was endorsed to his order under the compulsion of Section 70(a), 11 U.S.C. § 110(a), whereby the trustee in bankruptcy is vested by operation of law with the title of the bankrupt as of the date of the filing of the petition. (Emphasis added.) Because he took the cashier's check under § 70(a), and not independently as a bona fide purchaser, he holds it subject to all valid claims, liens and equities. 4A Collier on Bankruptcy, P 70.04 at 55 (1976) (emphasis added). Howard Johnson, Inc. of Fla. v. Tucker, 157 F.2d 959, 962 (5th Cir. 1946); Martin v. N. Y. Life Ins. Co., 104 F.2d 573, 574 (7th Cir. 1939). And set-off, in origin and theory, is a creature of equity. 25 Accordingly, the decision of the district court will be 26 AFFIRMED.