CITIZENS' BANK v. KENDRICK, PETTUS & Co.

[92 TENNESSEE, 437.]

NEGOTIABLE INSTRUMENTS, INSOLVENCY OF MAKER AND INDORSER-I! both the maker and indorser of a negotiable instrument become insol. vent and assign their property for the benefit of creditors, the holder of such paper may prove the whole amount thereof against both parties at the same time, and receive from each estate the full pro rata of that amount, provided only that the two sums so received shall in no case exceed the true amount of the debt. ASSIGNMENT FOR THE BENEFIT OF CREDITORS.-AN INDORSER for an insolvent debtor is, before the payment of the debt, entitled to prove his claim as such indorser against the estate of the insolvent. NEGOTIABLE INSTRUMENTS-INDORSER'S RIGHT TO EQUITABLE SETOFF.Indorser for insolvent maker, being indebted to such maker, may bring the holder of the paper indorsed and the maker before a court of equity and have the indorser's debt to the maker applied to the debt of

the holder.

EQUITABLE SETOFF.-The right of an equitable setoff already existing by reason of the insolvency of the creditor cannot be affected by his assignment of his assets.

House and Merritt, for Citizens' Bank.

R. H. Burney, for Kendrick, Pettus & Co.

Leech and Savage, for Franklin Bank.

W. M. Daniel, T. J. Bailey, A. E. Garner, and J. L. Stark, for the creditors of Kendrick, Pettus & Co.

438 CALDWELL, J. On December 10, 1890, Kendrick, Pettus & Co. made a general assignment for the benefit of creditors. The indebtedness aggregated about two hundred and fifty thousand dollars, and the assets were worth about one-fourth that amount.

On the same day, a few hours later, Franklin Bank also made a general assignment for the benefit of creditors. liabilities were over nine hundred thousand dollars, and assets about one-fourth as much.

These bills were filed for the settlement of the two trusts. Without going much into detail, the legal questions presented on appeal will be considered in order.

1. Franklin Bank was bound as indorser on the paper of Kendrick, Pettus & Co. to the amount of about seventy-five thousand dollars; and that paper was secured in both assignments alike, and in common with other debts of the assignors respectively.

Each holder of the separate pieces of paper making up that

seventy-five thousand dollars claimed the right to prove his debt in full against both debtors, and to receive from each fund a full pro rata of his whole debt.

439 Franklin Bank and its assignees denied that right in the full sense claimed, and contended that the holders of such indorsed paper should first credit their debts by pro rata of the fund provided by the principal debtor, and then receive pro rata on balance only from the fund of the indorser.

The chancellor was right in sustaining the former contention.

Kendrick, Pettus & Co., the maker of the indorsed paper, secured that paper as it did its other liabilities, giving preference to none. Franklin Bank, the indorser, did the same. That paper, as it then existed, and to its full amount, was provided for in both conveyances; in each as if the other had not been made. Two securities were provided for the holders of that paper, while only one was provided for the other creditors of the respective assignors. Each assignment made equal provision for each beneficiary therein named, without reference to any other security that he might have.

Two trust funds were created, and those entitled to partici pate in the one or the other were named, and placed upon an equal footing. It was not provided, nor contemplated, that any beneficiary of the one fund should receive a greater or less per centum of his whole debt from that fund than any other beneficiary thereof should receive. Those who were creditors of both assignors become entitled to share in both funds; having two debtors, they received two securities, one of which they 440 are to share equally with the other creditors of the debtor providing it, and the other of which they are to share equally with the other creditors of the debtor providing it.

In such cases, each trust should be administered separately, and such fund distributed as if the other had not been created, at least up to the point of making full payment of debts entitled to participate in both. Less than that would be unjust to those having two debtors and two securities.

In the present case the most that such creditors can hope for is one-half of their debts-one-fourth under each assignment-while others will receive just half as much on the dollar.

It seems to be well settled that if both maker and indorser of negotiable paper become insolvent, and voluntarily assign

AM. ST. REP., VOL. XXXVL-7

their property for the benefit of creditors, as in this case, the holder may prove the full amount of his debt against both estates at the same time, and receive from each a full pro rata on that amount, provided only that the two sums so received shall in no case exceed the true amount of the debt. Such is the rule in Kentucky, North Carolina, Michigan, Pennsyl vania, Wisconsin, and Massachusetts: Citizens' Bank v. Patterson, 78 Ky. 291; Brown v. Merchants' etc. Bank, 79 N. C. 244; Southern Mich. Nat. Bank v. Byles, 67 Mich. 296; Miller's Estate, 82 Pa. St. 113; 22 Am. Rep. 754; In re Meyer, 78 Wis. 615, 23 Am. St. Rep. 435; Sohier v. Loring, 6 Cush. 537.

441 We have been able to find no case holding the contrary upon the precise facts stated. The case of Bank v. Alexander, 85 N. C. 352, 39 Am. Rep. 702, is not in conflict. It recognizes the authority of Brown v. Merchants' etc. Bank, 79 N. C. 244, and makes a distinction between the two cases upon their different facts.

The English rule is stated by Mr. Byles as follows: "When accommodation bills are in the hands of a third party, for a valuable consideration, he may prove the whole of each bill upon each of the parties to it, and receive dividends as far as the amount due to him": Byles on Bills, 370.

2. At the time the assignments were made Kendrick, Pettus & Co. had thirty-two thousand dollars on deposit in the Franklin Bank. In its answer and cross-bill, the bank insisted that it was entitled to retain that deposit as indemnity against what it might have to pay as indorser for Kendrick, Pettus & Co. on the seventy-five thousand dollars of commercial paper.

That right was denied by the assignee of Kendrick, Pettus & Co., upon the ground, mainly, that the liability of the bank as indorser had not been ripened into a debt by payment of the paper indorsed.

We think the bank clearly entitled to the indemnity, though it has not, in fact, paid any part of the indorsed paper, so as to become a creditor of the maker in the full sense. Payment is not a prerequisite to the relief sought. Liability to 442 pay and insolvency of the principal debtor are suffi cient. That, without more, justifies an equitable setoff.

The bank must pay as far as its assets will go-that is inevitable. In fact, it has conveyed its property for that pur pose, and can be protected against certain and irretrievable loss in no other way than that proposed in this case, its prin

cipal being hopelessly insolvent, and having assigned all of its property for the benefit of general creditors.

An indorser for an insolvent maker, being indebted to that maker by reason of a deposit, or otherwise, may bring the holder of the paper indorsed and the maker before a court of equity, and have the indorser's debt to the maker applied on the debt of the holder.

That is practically what the bank has done in this case. The fact that the firm of Kendrick, Pettus & Co. assigned its property for the benefit of all its creditors, and that the holders of the paper indorsed by the bank constitute but a small part of those creditors, does not defeat or impair the bank's right to indemnity from the fund in question. In equity, that fund was, at most, an asset of Kendrick, Pettus & Co. only to the extent of any balance thereof that might remain after adjustment of the equities existing between Kendrick, Pettus & Co. and the bank. Being insolvent, the depositor had no power to transfer its claim for the deposit, so as to defeat the bank's right of 443 retention for indemnity. Hence, all that passed by the assignment of the depositor, as against the bank, was what may be left of the thirty-two thousand dollars after the bank shall have been fully reimbursed for all payments made by it on the depositor's paper.

It would be unjust and inequitable in a high degree to compel an indorser, so situated to surrender assets of an insolvent principal before settlement of all liability growing out of the indorsement.

It is worthy of repetition, that the right of equitable setoff existing in favor of the bank by reason of the insolvency of Kendrick, Pettus & Co.was not affected by the latter's assignment of all its assets.

This proposition has unquestioned support in sound reason and justice, and is sustained by authorities directly in point. See In re Receiver of Middle Dist. Bk., 1 Paige, 585; 19 Am Dec. 452; 1 Morse on Banks and Banking, 3d ed., sec. 337. Our own case of Nashville Trust Co. v. Fourth Nat. Bank, 91 Tenn. 336, maintains the same doctrine, though involving different facts.

The decree on this point will be modified accordingly.

NEGOTIABLE INSTRUMENTS-INSOLVENCY OF BOTH INDORSER AND MAKER— RIGHT OF HOLDER.-If both the indorser and maker of a promissory note are insolvent, the holder may prove the note for the full amount thereof

against the estate of each, but the amounts received from the two estates will not in any event be permitted to exceed in the aggregate the amount of the note: In re Meyer, 78 Wis. 615; 23 Am. St. Rep. 435; Miller's Estate, 82 Pa. St. 113; 22 Am. Rep. 754. In Bank v. Alexander, 85 N. C. 352, 39 Am. Rep. 702, it was held that a creditor having received a portion of his claim under a general assignment by his debtor cannot afterwards assert a claim for that portion against a surety for the debt.

SETOFF IS NOT AFFECTED by the appointment of a receiver of a bank, of demands held against the bank when it stopped payment: In re Middle District Bank, 1 Paige Ch. 585; 19 Am. Dec. 452, and note. The trustee of an insolvent debtor stands in regard to cross-demands in the same position as the debtor himself: Krause v. Beitel, 3 Rawle, 199; 23 Am. Dec. 113. See also First Nat. Bank v. Barnum Wire etc. Works, 58 Mich. 124; 55 Am. Rep. 660, and Lockwood v. Beckwith, 6 Mich. 168; 72 Am. Dec. 69.

BANK OF JAMAICA V. JEfferson.

[92 TENNESSEE, 537.]

NEGOTIABLE INSTRUMENTS.-PAROL EVIDENCE IS ADMISSIBLE to prove that persons whose names appear on a note as indorsers signed their names thereon before it was delivered, and are therefore liable as makers. NEGOTIABLE INSTRUMENTS-PERSONS INDORSING A NEGOTIABLE INstrument Before Its DELIVERY must be regarded as joint makers, and liable as such without any demand, protest, or notice of nonpayment. CORPORATIONS-CORPORATE CAPACITY OF PLAINTIFF WHEN MUST BE PROVED.-Evidence that the plaintiff is a corporation is not required in actions of law under the general issue. If the defendant wishes to put plaintiff's corporate capacity in issue, he must do so by a specific denial. In chancery, on the other hand, every allegation not admitted must be proved. Hence an averment of the corporate capacity of the complainant must be supported by evidence unless expressly admitted. Watson and Hirsch, for the plaintiff.

Gantt and Patterson, and McDowell and McGowan, for the defendants.

538 WILKES, J. The Bank of Jamaica, claiming in its bill to be a corporation under the laws of New York, brought suit in the chancery court of Shelby county against J. T. Jefferson, C. C. Glover, and Toof, McGowan & Co., to recover a note for fifteen hundred dollars and interest.

The note is as follows:

"$1,500.00.

MEMPHIS, TENN., Dec. 4, 1890.

"Four months after date I promise to pay to the order of F. W. Dunton fifteen hundred dollars, at Corbin Banking Co., New York, N. Y. Value received.

"J.T. JEFFERSON."