Opinion
Decided May 8, 1933.
Building and loan associations — Savings account applied to overdue note and mortgage, although depositor a stockholder — Set-off not withdrawal or preference, when.
1. Depositor of savings and loan company held entitled to apply savings account on his past due note and mortgage indebtedness to company without being subject to rules and regulations limiting withdrawals and even though such depositor owned one share of stock in the company.
2. Such set-off does not amount to withdrawal nor does it constitute preference.
APPEAL: Court of Appeals for Cuyahoga county.
Messrs. Christopher Dorer, for plaintiff.
Mr. Thomas J. Long, for defendant.
This case was tried to this court on appeal from the decree of the common pleas court.
For his cause of action plaintiff, Charles Leimons, alleged in his petition that defendant was a savings and loan company organized under the laws of the state of Ohio and that the plaintiff was a depositor in said corporation, having two savings accounts in the defendant company bearing separate numbers. The total amount of deposits on the 1st day of October, 1931, was the sum of $4,067.46.
The plaintiff was a borrower of the defendant corporation, having executed to it his note and mortgage under date of October 13, 1928, in the amount of $5,000, payable in monthly installments of $50 each, the entire principal balance to be due and payable on or before two years after date.
On the 1st day of October, 1931, there was past due and unpaid on said promissory note and mortgage indebtedness the sum of $4,521.74, with interest. The petition further alleges that on said date of October 1, 1931, plaintiff tendered his two pass books to the defendant for cancellation and requested that the amount to his credit in said savings account be applied to the payment and satisfaction of his indebtedness to the corporation as represented by his note and mortgage; that at the same time the plaintiff offered and tendered in cash the sum of $454.28. The purpose of this tender was to effect a cancellation of his indebtedness to defendant company as represented by said note and mortgage. This offer was refused by defendant corporation. The petitioner therefore prays for a cancellation of his note and mortgage so held by defendant corporation; that the court enter an order quieting the title to a certain parcel of real estate located in the village of Euclid, county of Cuyahoga, and state of Ohio, which is the property described in the mortgage executed to secure plaintiff's promissory note.
The amended answer of the defendant admits in substance the allegations set forth in plaintiff's petition. As an excuse for refusing to accept the offer and tender of plaintiff, the answer sets forth certain rules and regulations of defendant company and amendments thereto which were adopted by the board of directors. It also sets forth the failure of plaintiff to comply with a certain by-law of said corporation, which requires sixty days notice in writing by a depositor to effect a withdrawal of his savings account deposit.
By way of further defense, the amended answer alleges that the plaintiff was a stockholder in the defendant company, being the owner of a share of stock.
To meet these allegations set forth in defendant's amended answer, the plaintiff's reply admits the ownership of one share of stock in the defendant company. It admits that certain rules and regulations of the company were in existence on the 1st day of October, 1931, but denies that these rules and regulations were binding upon plaintiff for various reasons, to wit: (1) That the same were unreasonable, arbitrary, illegal and of no effect; (2) that the particular regulation requiring sixty days notice in writing to defendant company, in order to withdraw a deposit, is not binding upon this plaintiff, for the reason that he was not endeavoring to withdraw any part of his deposit, but, instead, was seeking to make an application of the funds due to him from defendant company in order to satisfy the indebtedness which he owed to defendant company.
Evidence was offered by both sides on various issues raised by the pleadings.
Shorn of all the unimportant questions under discussion there is but one vital question before us. Assuming that the rules and regulations relating to the withdrawal of funds of the defendant corporation were of binding effect upon plaintiff, the question still remains whether the request of the plaintiff made upon the defendant corporation to apply the indebtedness due to him from the corporation, as represented by the two pass books, to the payment and satisfaction of an indebtedness which is due from him, amounts in law to a withdrawal of funds. In other words, does his request to make an application of one indebtedness to the satisfaction of another come under the limitations of the rules and regulations limiting the right to withdraw funds?
In Scott v. Armstrong, 146 U.S. 499, 13 S. Ct., 148, 36 L. Ed., 1059, it was held that where a debt is due from a bank to a creditor at the time of its suspension, the creditor can set off a debt due from him to the bank, but not if the debt is not due at the time of its suspension.
The plaintiff's obligation to the defendant company, as evidenced by the note and mortgage executed by him in its favor, was past due and fully matured. The defendant company would be completely within its rights in enforcing payment and also in bringing a foreclosure action upon the mortgage given to secure the note. Had the defendant chosen to take the initiative by instituting suit against the plaintiff to enforce payment of the note and to obtain a decree of foreclosure on the mortgage given to secure said note, the plaintiff would unquestionably have had the right to ask for a set-off of the indebtedness due to him from the corporation as represented by his pass books, as against the obligation sought to be enforced against him by the corporation. We can see no reason why the plaintiff in this case should be obliged to wait until defendant corporation brings an action against him.
There can be no dispute that if defendant corporation were a bank organized under the banking laws of the state of Ohio, instead of a savings and loan association, the depositor indebted to the bank might, if his indebtedness was due, set off his deposit against the indebtedness. It has been held that this right of set-off exists without any previous demand being made for the deposit. Colton v. Drovers' Perpetual Building Loan Assn. of Baltimore, 90 Md. 85, 45 A. 23, 46 L.R.A., 388, 78 Am. St. Rep., 431.
The claim is made that a different rule must obtain in the case of a building and loan association because to entitle plaintiff to the remedy which he prays for would constitute a preference operating injuriously as to other creditors and depositors of the defendant company. This contention, we think, is conclusively answered in the case of Barbour v. Natl. Exchange Bank, 50 Ohio St. 90, 101, 33 N.E. 542, 20 L.R.A., 192: "The argument, that by allowing the judgments to be set off, the fund for the benefit of the creditors of the shoe company will be thereby diminished, resulting in an inequality of distribution among the creditors, does not commend itself to us. * * * `A set-off in such case is not a means of paying one debt in preference to other debts which the bankrupt or insolvent owes; for, to the extent of the demands set off or compensated, there was no debt — from the moment they were contracted, they extinguished each other. Hence, the operation of the set-off is, not to pay, but to ascertain a debt made up of the difference between the amounts of respective debits and credits.'"
Our statutes secure the right of set-off to parties sustaining the relation of debtor and creditor between whom there are cross-demands. The purpose of the statute is evident. Where such cross-demands exist between persons sustaining such relation of debtor and creditor, a set-off is allowed in order to ascertain in whose favor a balance, if any, exists. The relationship between the plaintiff and the defendant was unquestionably that of debtor and creditor. The plaintiff is indebted to the defendant upon a promissory note which has become due, and which is secured by a mortgage on certain real estate. The defendant is indebted to the plaintiff in the sum of $4,067.46, deposited by him in said bank in two savings accounts, and which are evidenced by two separate pass books. This is so, notwithstanding the fact that the plaintiff owns one share of stock. This action does not involve the question of money due on stock subscription contracts. The mere fact that the plaintiff owns one share of stock does not prevent him from becoming a debtor of defendant corporation, and he became such the moment he executed the note and mortgage in favor of defendant. Likewise, it does not prevent him from becoming a creditor of the bank, and he became such when he deposited money in his savings accounts.
In Bank of Marysville v. Brewing Co., 50 Ohio St. 151, 33 N.E. 1054, 40 Am. St. Rep., 660, it is held: "Money received by a bank on general deposit becomes the property of the bank, and its relation to the depositor is that of a debtor, and not of bailee or trustee of the money."
In the conduct of its savings department, defendant occupies the same relation to its depositors as does any other bank. In the case of Niles, Assignee, v. Olszak, 87 Ohio St. 229, 100 N.E. 820, L.R.A., 1918E, 238, Ann. Cas., 1913E, 1020, the court held: "A stockholder in a savings and loan association organized under the laws of this state, is entitled, when the association becomes insolvent, to set off, as against its assignee for the benefit of creditors, a claim for money which he has on deposit with the association, against his liability for the unpaid part of his stock subscription."
In the case of Bayless v. Baird, Recr., 110 Ohio St. 305, 143 N.E. 703, the court held:
"1. The members of a building and loan association, whether borrowers or nonborrowers, have a mutual interest in its affairs; sharing alike its earnings, they must alike bear its losses.
"2. A borrowing member of a building and loan association occupies a twofold relation. As a debtor he must repay his loan with stipulated interest; as a stockholder he may participate in the earnings and must contribute to losses sustained.
"3. In an action by a receiver of an insolvent building and loan association to foreclose a mortgage on real estate given by a borrower who is a member and the owner of unmatured running stock therein pledged as collateral security for said loan, said borrower is not entitled to have credited on his loan the dues theretofore paid on his unmatured running stock."
When we view the last two cases cited it becomes apparent that in the last case the court held that "credits and debits relating solely to the borrower's rights and liabilities as a stockholder, such as dividends, withdrawal value of stock, and charges for losses and expenses, are not made, but are left until the final winding up of the association and the settlement with members — borrowers as well as nonborrowers."
The money which is paid in on a stock subscription, therefore, cannot be set off against an indebtedness due from such stockholder to the building and loan association.
In the case of Niles, Assignee, v. Olszak, supra, there was involved the question of a debt due from the stockholder to the building and loan association for the unpaid part of his stock subscription. This was purely his individual indebtedness to the institution, and as to that we have the decision of the Supreme Court that he is entitled to set-off as against such claim, a claim for money which he has on deposit with the association.
Notwithstanding the limitation contained in the rules and regulations, or by-laws, as to the conditions under which withdrawals may be made by depositors from their savings accounts, which, of course, are binding upon all who had notice thereof, the present case does not involve the question of withdrawal of funds, but, instead, involves the question of the right of such depositors to have application made of the indebtedness due to them from defendant set off as against an indebtedness due from them to defendant. If the plaintiff, instead of seeking to make such application, sought to compel defendant to pay him the amount on deposit to his credit, we would then become deeply concerned with the rules, regulations and by-laws of defendant company and the limitations placed therein upon the right to withdrawal. Plaintiff is not asking for any money from defendant company. All that he is requesting is the right to apply the indebtedness due to him against the indebtedness due from him. There is clearly a mutual relationship of debtor and creditor between the parties and the statutory right of set-off fully applies.
As was said in the case of Bank v. Brewing Co., supra, at page 159: "The funds on general deposit in a bank, are the property of the bank. Properly speaking, the right, in such case, is that of set-off, arising from the existence of mutual demands. The practical effect, however, is the same. The cross demands are satisfied so far as they are equal, leaving whatever balance that may be due on either, as the true amount of the indebtedness from the one party to the other."
Holding these views, we are of the opinion that the plaintiff is entitled to the relief he prays for. A decree will be drawn accordingly.
Decree for plaintiff.
LIEGHLEY, P.J., and McGILL, J., concur.