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MOSES W. GRAY, Appellant, v. WILLIAM E. ROLLO, Assignee in Bank

ruptcy of the Estate of the Merchants' Insurance Company. 1. Set-off is enforced in equity only where there are mutual debts or mutual credits, or where there exists some equitable consideration or agreement between the parties

which would render it unjust not to allow a set-off. 2. Where a bankrupt owes a debt to two persons jointly, and holds a joint note given

by one of them and a third person, the two claims are not subject to set-off under

the bankrupt act, being neither mutual debts nor (without more) mutual credits. 3. Where one of two joint debtors becomes bankrupt, it seems that the creditor may

set off the debt against his separate indebtedness to the bankrupt, because each joint debtor is liable to him in solido for the whole debt ; but, if this be conceded, it does not follow that if one of two joint creditors becomes bankrupt, the common debtor may set off against the debt a separate claim which he has against the bankrupt, for this would be unjust to the other joint creditor. 4. A and B were joint makers of certain notes, which were transferred to an insurance company.

B and C held policies in this company which became due in consequence of loss by fire. The company being bankrupt, its assignee claimed the full amount of the notes from A and B. B sought to set off against his half of the liability the claim due to him and C on the policies of insurance, the latter consenting thereto : Held, that this was not a case for set-off within the bankrupt act, the two obligations having been contracted without any reference to each other.

APPEAL from the circuit court of the United States for the Northern District of Illinois.

Justice BRADLEY delivered the opinion of the court.

The bill in this case was filed to compel a set-off of alleged mutual debts. The Merchants’ Insurance Company, when it became bankrupt by the great fire at Chicago, held two promissory notes for $5,555 each, made by the complainant Gray, jointly with one Gaylord, and which the company had received from the payee in the regular course of business. By the fire referred to, Moses W. Gray, the complainant, and his brother, Franklin D. Gray, doing business under the firm of Gray Brothers, suffered largely in the destruction of buildings, for which they held insurance in the said insurance company, whereby the latter became indebted to them in the sum of $30,000 on three several policies. Now the complainant alleges that his just share of liability on the two notes is one half of the amount, and he desires to have that half extinguished by a set-off of the like amount due on the policies. It is true, the money due on the policies is not due to him alone, but to Gray Brothers. But he states that his brother assents to, and authorizes, such appropriation ; and the bill, being demurred to, must be taken as true. The question is, whether setoff can be allowed in such case? The language of the bankrupt act, on the subject of set-off, is : “ That in all cases of mutual debts or mutual credits between the parties, the account between them shall be stated, and

Vol. I.]

GRAY v. ROLLO.

(No. 5.

one debt set off against the other, and the balance only shall be allowed or paid.” 14 Stat. 526, § 20. It is clear that these claims are not mutual debts. They are not between the same parties. The notes exhibit a liability of the complainant and Gaylord ; the policies, a claim of the complainant and his brother. But it is said that by the law of Illinois all joint obligations are made joint and several ; and, therefore, that the complainant is separately liable on the notes, and could be sued separately upon them. Granting this to be so, the debts would still not be mutual. If sued alone on the notes, the claim on the policies, which he might seek to set-off, pro tanto, against the notes, is a claim due not to him alone, but to him and his brother. His brother's consent that he might use the claim for that purpose

would not alter the case. Had his brother's interest been assigned to him before the bankruptcy of the company, and without any view to the advantage to be gained by the set-off, the case would be different.

Nor does the case present one of mutual credit. There was no connection between the claims whatever, except the accidental one of the complainant's being concerned in both. The insurance company, so far as appears, took the notes without any reference to the policies of insurance ; and Gray Brothers insured with the company without any reference to the notes. Neither transaction was entered into in consequence of, or in reliance on, the other; and no agreement was ever made between the parties that the one claim should stand against the other. There being neither mutual debts nor mutual credits, the case does not come within the terms of the bankrupt law. If it can be maintained at all, it must be upon some general principle of equity, recognized by courts of equity in cases of set-off; which, if it exists, may be considered as applicable under an equitable construction of the act. But we can find no such principle recognized by the courts of equity in England or this country, unless in some exceptional cases which cannot be considered as establishing a general rule. In Pennsylvania, it is true, set-off is allowed in cases where the claims are not mutual, and, in that State, under the decisions there, it is probable that set-off would be allowed in such a case as this. But we do not regard the rule adopted in Pennsylvania as in accord with the general rules of equity which govern cases of set-off. We think the general rule is stated by Justice Story, in his treatise on Equity Jurisprudence, sect. 1437, where he says: “ Courts of equity, following the law, will not allow a set-off of a joint debt against a separate debt, or conversely, of a separate debt against a joint debt; or, to state the proposition more generally, they will not allow a set-off of debts accruing in different rights. But special circumstances may occur creating an equity, which will justify even such an interposition. Thus, for example, if a joint creditor fraudulently conducts himself in relation to the separate property of one of the debtors, and misapplies it so that the latter is drawn in to act differently from what he would if he knew the facts, that will constitute, in a case of bankruptcy, a sufficient equity for a set-off of the separate debt created by such misapplication against the joint debt. So, if one of the joint debtors is only a surety for the other, he may, in equity, set off the separate debt due to his principal from the creditor ; for in such a case the joint debt is nothing more than a security for the separate debt of the principal; and,

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Vol. I.)

GRAY v. ROLLO.

(No. 5.

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upon equitable considerations, a creditor who has a joint security for a separate debt cannot resort to that security without allowing what he has received on the separate account for which the other was a security. Indeed, it may be generally stated that a joint debt may, in equity, be set off against a separate debt, where there is a clear series of transactions, establishing that there was a joint credit given on account of the separate debt.” Other instances are given by way of illustration of the principle on which a court of equity will deviate from the strict rule of mutuality, allowing a set-off ; all of them based on the idea that the justice of the particular case requires it, and that injustice would result from refusing it; but none of them approaching in likeness to the case before the court. There is no rule of justice or equity which requires that Gray Brothers should be paid, in preference to other creditors of the insurance company, out of the specific assets represented by the notes of Gray and Gaylord. If the complainant instead of the insurance company were bankrupt, and the notes were valueless, his brother and the creditors of Gray Brothers would think it very hard if the company were allowed to pay the insurance pro tanto with that

. The case of Tucker v. Oxley, 5 Cranch, 34, which arose out of the bankrupt act of 1800, has been pressed upon our attention by the counsel of the appellant, on the supposition that it is decisive in his favor. The clause relating to set-off contained in that act (2 Stat. 33, § 42) does not materially differ from the corresponding clause in the act of 1867. Mutual credits given, and mutual debts existing, before the bankruptcy, are made the ground of set-off in both acts. But the case of Tucker v. Oxley will be found to differ from the present. There two persons by the name of Moore, being partners, became indebted to Tucker. They afterwards dissolved partnership, and Tucker became indebted to one of them, who continued the business, and who afterwards became bankrupt. Oxley, the assignee, sued Tucker for this debt, but the latter was allowed to set off his claim against the two. The court put the decision upon the ground that the debt due from the two Moores to Tucker could have been collected from the property of either of them, and was provable under the bankruptcy proceedings against the estate of him who became bankrupt, and hence it might be set off against any claim which the bankrupt had against Tucker. The case, therefore, was the same as the case before us would have been if the complainant had been solely entitled to the insurance money, and if he and not the company had become bankrupt. In such case the company, according to the case of Tucker v. Oxley, could have set off the notes of the complainant and Gaylord against the claim for insurance. The reciprocal form of this rule would have enabled the complainant to succeed in this case had he been the sole claimant of the money due for insurance. In other words, the case of Tucker v. Oxley

. decides that a joint indebtedness may be proved and set off against the estate of either of the joint debtors who may become bankrupt, and the fact that it may be subject to be marshalled makes no difference. The joint debtors are severally liable in solido for the whole debt. But the case does not decide that a joint claim, that is to say, a debt due to several joint creditors, can be set off against a debt due by one of them. If a debt is due to A and B, how can any court compel the appropriation of it

Vol. I.)

SCHLATER v. WINPENNY.

(No. 5.

to pay the indebtedness of A to the common debtor without committing injustice toward B? The debtor who owes a debt to several creditors jointly cannot discharge it by setting up a claim which he has against one of those creditors, for the others have no concern with his claim and cannot be affected by it; and no more can one of several joint creditors, who is sued by the common debtor for a separate claim, set off the joint demand in discharge of his own debt, for he has no right thus to appropriate it. Equity will not allow him to pay his separate debt out of the joint fund. And if he had the assent of his co-obligees to do this, it would be unjust to the suing debtor, because he has no reciprocal right to do the same thing.

The case before us, therefore, is clearly distinguishable from that of Tucker v. Oxley, and the ground on which that case was put is not applicable to this.

The decree must be affirmed.

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A was told in January, 1868, that B's partnership was for one year. Held, that

A in January, 1869, had such notice of its dissolution as put him on inquiry. ERROR to district court of Philadelphia. Opinion by WILLIAMS, J. There are three questions in this case :1st. Whether the partnership of F. Schlater & Co. expired on the 1st of January or the 13th of February, 1869 ?

2d. If on the former day, whether the plaintiff below had notice of its dissolution ?

3d. Whether John Clendenning was authorized to wind up the affairs and settle the business of the partnership after its dissolution ?

1. The evidence shows that the plaintiff sold yarns after the 1st of January, 1869, to John Clendenning, who was authorized by power of attorney, bearing date the 17th of January, 1868, “to buy and sell goods and merchandise,” for and in the name of the firm, and that the price of these yarns was included in the notes sued on. The plaintiff himself testified that “ these notes were given for a balance of account and are renewals of others.” If then the partnership expired on the 1st of January, 1869, and the plaintiff had notice of its dissolution, it is clear that he is not entitled to recover that portion of the notes embracing the price of the yarns sold after that date, even if John Clendenning, by whom they were given, was authorized to settle the business of the partnership. It is, therefore, a material question, whether the partnership expired on the 1st of January, 1869, or was dissolved on the 13th of February thereafter.

Vol. I.

SCHLATER v. WINPENNY.

[No. 5.

Clendenning was examined as a witness for the plaintiff, and testified that the partnership continued until the 13th of February, 1869, and that it was then dissolved. On his cross-examination he said that he did not tell Benj. Rowland, Jr., that this firm expired January 1st, 1869; and that he did not tell him that all coal charged to F. Schlater & Co. after that date must be re-charged to himself, as the firm expired January 1st, 1869; and that the coal was not so re-charged, and he did not pay the bill for the same. The defendants called Rowland, who testified: “We furnished coal to F. Schlater & Co. In January and February, 1869, we charged coal to F. Schlater & Co. and sent the bill to Schlater & Co." The defendant then offered to show that Clendenning gave notice to the witness that this partnership ended January 1st, 1869, and that as to the coal charged to F. Schlater & Co. after January 1st, 1869, Clendenning said that it was to be re-charged to John Clendenning; and that it was 80 re-charged and paid by Clendenning, and that this notice was given before the date of these notes. The plaintiff objected to the offer and the court sustained the objection. The defendant then offered to prove by the witness the declarations of Clendenning that the firm of F. Schlater & Co. was dissolved January 1st, 1869. This offer was objected to unless the plaintiff was present and had notice of the dissolution, and the court sustained the objection and excluded the offer. If anything in the law of evidence can be regarded as settled, it is, that the credit of a witness may be impeached by proof that he has made statements out of court contrary to what he has testified at the trial. The principle is too familiar to need the citation of any authority in its support. The matter in regard to which it was proposed to contradict the witness was material and relevant to the issue ; and his attention was called to the person and the particular circumstances involved in the supposed contradiction. The offers should, therefore, have been admitted, and the court fell into a palpable error in rejecting them.

II. If the defendant informed the plaintiff in January or February, 1868, that the partnership was for one year, and that it ended on the 1st of January, 1869, then the latter had such notice of its dissolution as should have put him upon inquiry. He had no right to sell goods to Clendenning on the credit of the firm after that date without ascertaining that the partnership still continued.

III. The dissolution of the partnership, whether it terminated on 1st of January or the 13th of February, 1869, undoubtedly operated as a revocation of the power of attorney authorizing Clendenning to conduct its business, and unless he was authorized by the members of the firm to settle the business of the partnership after its dissolution, he had no authority to give the notes in controversy. On his cross-examination he said: “I exercised no powers except under the letter of attorney, which was for the business of F. Schlater & Co.;

his reëxamination he said: “I had authority to wind up the affairs of the firm, after dissolution.” In saying this he may have supposed that under the power authorizing him to conduct the business of the firm he had authority to

up and settle its affairs ; or he may have so testified because he was expressly authorized by the members of the firm to settle the business of the partnership after its dissolution. But be this as it may, it is clear

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