Pugh v. Conklin , 44 Ohio App. 272 ( 1932 )

This is an error proceeding brought into this court by George L. Pugh, who was the defendant in the trial court, seeking a reversal of a judgment entered against him. The cause was tried without the intervention of a jury. The parties will be referred to as they stood in the court below. The error complained of is a question of law developed by the pleading and facts adduced in support thereof. The latter are as follows:

The defendant, Pugh, along with other directors, was a guarantor upon two notes of his company held by a certain bank. In an action thereon brought by the bank against the company, it was found that the paper was past due and that the company was insolvent, and a receiver was appointed to liquidate its assets. The defendant, Pugh, as one of the guarantors, ultimately paid to the bank as his share of the guaranteed obligations mentioned the sum of $1,311.23. Thereafter Pugh and his co-obligators made proof of claim as against the receiver for the amount so by them paid; and Pugh thereafter received as a dividend settlement on his claims the sum of $259.81. The balance due to Pugh from his company was $1,051.42, which he now seeks to set off as against the claim sued upon by the plaintiff, Ashton S. Conklin, which cause of action arises upon the following state of facts:

At and prior to the time of the company's insolvency and the appointment of its receiver Pugh was indebted to it, his company, upon an account in the sum of $279.58. This account Pugh failed to pay. It had not been set off or considered by the receiver at the time Pugh received the dividend settlement, previously mentioned, as a general creditor.

Upon an order of court the receiver advertised and sold Pugh's account, along with others, to the plaintiff, Conklin, who now seeks recovery thereon in this suit, and as a defense thereto Pugh asserts his right to set off the balance of his claim due him from his defunct company. If allowed, the plaintiff's claim is totally satisfied.

The question to be determined, therefore, is whether or not a claim of a guarantor, who has paid his principal's debt after insolvency has intervened and the appointment of a receiver, is in the position of one who has acquired a claim by assignment against his creditor which he cannot assert as against its receiver or his assignee.

It must be kept in mind that this is not a case of a debtor who holds a bona fide claim against an insolvent creditor at the time of insolvency and receivership, unless it be that a future contingent and possible liability existing before insolvency upon which the debtor might become liable is such a bona fide existing demand.

The defendant recognizes the general rule that there is no right of set-off when the debtor has acquired his cross-demand by assignment after insolvency, but denies the rule applied by the trial court, that, where a surety or guarantor pays the debt of his principal after insolvency and receivership, such guarantor is in the position of one who acquires a claim or demand by assignment after the appointment of a receiver and hence cannot assert his acquired right by way of set-off. It is urged that the reason for this rule is unsound, that the authorities are in conflict, as disclosed by the note appearing in 40 A.L.R., 1096, and that the case of E. Granger's Administrator v. H. Granger,6 Ohio, 35, is ill-considered and has been questioned by the lower courts and is now inapplicable by reason of later statutory enactments which destroy it as a precedent and mandate upon this court.

Our attention is directed to four sections of the General Code, 11320, 11321, 10887 and 11137. We shall revert to 11321, General Code, which only seems pertinent after we have drawn attention to Section 11319, General Code. Section 11319 provides, in part:

"A set-off is a cause of action existing in favor of a defendant against a plaintiff between whom a several judgment might be had in the action."

Section 11321, General Code, provides:

"When cross-demands have existed between persons under such circumstances that if one had brought an action against the other a counterclaim or set-off could have been set up, neither can be deprived of the benefit thereof by assignment by the other, or by his death. The two demands must be deemed compensated so far as they equal each other."

The plaintiff maintains that these two sections of the General Code employ the words "existing" and "existed;" and that these sections therefore contemplate a contemporaneous existence of the two demands. He points to the fact that Pugh had no ascertainable demand until long after the appointment of the receiver. And this we believe to be so. Pugh's future liability was problematical. It might never have occurred. He might not have paid the principal's debt. It was never in such form, at least, as would have permitted its assertion as a defense against his company's suit on its account against him. We therefore are of the opinion that the statutes do not change the law as announced in theGranger case, supra, wherein it is held at page 42:

"No cause of action or demand existed against the intestate at his death. A liability only was incurred, upon which, on the contingency of the security being compelled to pay for the intestate, he would have a right of action for his indemnity. A bare possibility, that in a certain future contingent event, he would have a demand, is not a debt due from the intestate, and such claim has not the mutuality required for a set-off. Such a demand, though good against the estate, can only look to the general assets for satisfaction."

It is said in Hade, Receiver, v. McVay, 31 Ohio St. 231, at page 238, approved in Niles, Assignee, v. Olszak, 87 Ohio St. 229, at page 240, 100 N.E. 820, L.R.A., 1918E, 238, Ann. Cas., 1913E, 1020, that "The receiver holds to the bank and its creditors the relation, substantially, of a statutory assignee. A right of set-off, perfect and available against the bank at the time of his appointment as receiver, is not affected by the bank's insolvency."

To our notion these cases support the view, at least inferentially, that the cross-demands must have a contemporaneous existence. Mr. Justice Holmes, in U.S. Fidelity Guaranty Co. v.Wooldridge, Recr., 268 U.S. 234, 45 S. Ct., 489, 69 L. Ed., 932, 40 A.L.R., 1094, pronounces the same reason for the rule, and says if such was permitted the effect would be to prefer such a claimant as a creditor. See, also, U.S. Fidelity Guaranty Co. v. Maxwell, 152 Ark. 64, 237 S.W. 708;Lion Bonding Surety Co. v. Austin, Commr. of Ins. (Tex.Civ.App.), 208 S.W. 542; Richardson v. Anderson, Trustee,109 Md. 641, 72 A. 485, 25 L.R.A. (N.S.), 393, 130 Am. St. Rep., 543;Huse, Assignee, v. Ames, 104 Mo., 91, 15 S.W. 965.

We recognize that there is a conflict in authorities; but we are of one mind, in that the rule applicable is sound in principle and reason, and that the Granger case, supra, is not abrogated by later statutory enactment, but, rather, in the instant situation, is reinforced by these same sections. We further hold the view that the defendant in proving his claim as a general creditor and receiving dividends thereon is unconscionable in his present position. He would be both a general and preferred creditor. If he is preferred, he injures the general creditors with whom he voluntarily aligned himself. His reply that the general fund would sustain but a small loss when prorated among the general creditors is no answer; but is in fact an admission of his unwillingness to do equity. His present insistence controverts the well-known maxim and must cause his plea to fall upon deaf ears, for we are cognizant that the doctrine of set-off, whether legal or equitable, is essentially a doctrine of equity. The judgment is therefore affirmed.

Judgment affirmed.

GARVER, P.J., and LEMERT, J., concur.