Court Opinion

ID: 3229042
Source: CourtListenerOpinion
Date Created: 2016-07-05 16:05:03.066569+00
Date Added: 2024-06-11T13:56:39.972994
License: Public Domain

Upon reconsideration I am firmly of opinion we have misapplied the doctrine of set-off in favor of a depositor of an insolvent bank in liquidation, and by so doing given preference over others with like equities in the distribution of trust funds.
The pertinent facts, briefly stated, are these:
Woodlawn Savings Bank failed and went into liquidation July 6, 1929. Among the assets coming into the hands of the liquidating agents were notes of one Richards evidencing his indebtedness to the bank. These notes were not then due. This indebtedness was secured by building and loan stock owned by Richards and pledged as collateral.
Failing to collect this indebtedness from the debtor, the liquidating agent, in 1932, foreclosed its lien on this collateral, becoming the purchaser and owner of the stock as part of the trust estate.
Certain litigation arose between the liquidating agent and a third party touching the ownership of this stock, resulting in a decision in favor of the trust estate. Richards v. Montgomery, Sup't of Banks, 230 Ala. 307, 160 So. 706.
After this decision, the liquidating agent undertook to assert the withdrawal rights, or repurchase provisions in favor of the owner of such stock. This was denied upon the ground, among others, that the Building and Loan Association was a depositor in the failing bank at the time it went into liquidation, and claimed the right to set-off the withdrawal value of this stock against its deposit, still unpaid.
This bill was then filed to enforce the collection of this withdrawal value of the stock as part of the trust estate to be shared by creditors of the failed bank.
The question is: Has the Building and Loan Association a right to set-off its deposit in the bank against this demand?
Such principles are well settled and not questioned. Among these, a debtor to a bank at the time it fails may set-off his deposit in the bank against his indebtedness, whether such indebtedness be past due or not at the time of the failure of the bank.
In other words, if his indebtedness to the bank exceeds his deposit, he is entitled to have his deposit credited on his debt. Only the balance of the debt becomes assets held in trust by the liquidating agent, and his deposit is satisfied so that he does not share in the trust estate. If the deposit exceeds his indebtedness, the indebtedness is satisfied and he becomes creditor only as to the residue of his deposit. The indebtedness, in such event, does not become assets available as part of the trust estate.
Another equally well settled principle is this:
When a bank fails, closes its doors, and is put into liquidation, its assets become a trust fund for the benefit of its creditors. Its assets are determinable as of that date, and the equities of all beneficiaries of the trust are fixed as of that date. No subsequent act of the liquidating agent in course of his duties as trustee can give one creditor a preference over others of like class.
Applying this principle to the case in hand, we observe that outstanding loans, bills receivable, owned by the bank at the date of insolvency are assets of the bank, passing to the liquidating agent as part of the trust funds, to be shared alike by all depositors.
These Richards notes were, therefore, assets of the Bank. They passed into the trust fund. The stock pledged as collateral passed with them but only as security for this indebtedness. Neither the Bank nor the liquidating agent was the owner of this *Page 454 
stock at that time. Indeed, the Richards notes not having matured, the right to foreclose and obtain ownership had not then arisen. But the vital point is that the Bank's relation to this stock before failure and that of the liquidating agent thereafter was one of trust. The pledgor had rights in this collateral. He had the right to pay his debt and reclaim his collateral. The Bank had no right to dispose of it, or any proceeds therefrom, other than in the payment of the debt for which it was collateral. If, on foreclosure, this stock had been purchased by a third person, the proceeds certainly would have become trust funds, representing payment on the indebtedness for which the stock was pledged as collateral. Certainly, if the pledgor had paid his debt and redeemed his stock, or if a third party had bought at foreclosure sale no right of set-off here asserted could have arisen.
But, in the bona fide effort to realize the most on the assets, a duty demanded of a trustee acting for beneficiaries of such funds, the liquidating agent bought in the stock. Bought it in not for the Bank as a going concern, but bought it in as a means of collecting assets beneficially owned by all depositors alike. It was this act of taking over the stock as a means of collecting assets constituting part of the trust funds, which placed title in the liquidating agent and carried the right to demand the withdrawal value as an incident to ownership. To the writer it seems obvious that this stock represents the proceeds of the notes to which it was collateral; that like the notes it is part of the assets held in trust for all depositors alike. To allow this off-set is clearly and simply to give preference to one depositor over all others as regards assets which at the time of insolvency became the property of all alike. It is not a question of inchoate rights ripening into perfected rights; nor of equity treating that as done which ought to have been done. But in my opinion, it is an effort to alter a status after equities of others have intervened, thus defeating such equities, and working a preference among those of equal equities. Equality is equity.
The question is of importance not only as between these parties, but involves the whole question of proper liquidation of the affairs of insolvent banks.
Without elaborating we may say the whole question of assets, part of the trust fund, and of liabilities, claims of creditors, to share therein would turn on the character of collateral security held by the bank when insolvency intervenes.
If the doctrine asserted by appellant prevails the quantum of assets constituting the trust fund and the quantum of liabilities payable pro tanto therefrom would vary from time to time dependant on the manner in which collateral was made available under contractual obligations obtaining when the Bank closed.
It results that the application for rehearing is granted: the judgment of reversal is set aside and the cause affirmed.
ANDERSON, C. J., and GARDNER, THOMAS, and BROWN, JJ., concur.
FOSTER and KNIGHT, JJ., dissent, as expressed in the extended opinion by FOSTER, J.