Opinion
6 Div. 616.
January 17, 1935. Rehearing Denied February 21, 1935.
Appeal from Circuit Court, Jefferson County; Richard V. Evans, Judge.
Cabaniss Johnston and K. E. Cooper, all of Birmingham, for appellant.
Commercial paper negotiated before maturity is not subject to set-off. Code 1923, §§ 1078, 9237; 24 R. C. L. 820; 8 C. J. 804; Daniel Neg. Inst. § 1437; Manning v. Maroney, 87 Ala. 563, 6 So. 343, 13 Am. St. Rep. 67; Emanuel v. Atwood, 6 Port. 384; O'Hara v. Bank, 2 Ala. 367; Bull v. First Nat. Bank, 123 U.S. 105, 8 S.Ct. 62, 31 L.Ed. 97; First Nat. Bank v. Johnston, 97 Ala. 655, 11 So. 690; Harrisburg Trust Co. v. Shufeldt (C. C. A.) 87 F. 669; Murphy v. Ark. L. L. Imp. Co. (C. C.) 97 F. 723; Worden v. Gillett (D.C.) 275 F. 654; Mfr's Alliance Corp. v. Vye Neill Co., 62 F.(2d) 625. And this even if the holder had notice of the claim of set-off at the time of acquisition. Ludwig v. Dearborn, 8 Pa. Dist. R. 69; First Nat. Bank v. Danser, 70 W. Va. 529, 74 S.E. 623; Tillou v. Britton, 9 N.J. Law, 120; Southeastern Rubber Works v. Nat. Dis. Co., 27 Ga. App. 244, 107 S.E. 598. One is a holder in due course though the paper is taken as collateral for a pre-existing debt. Vogler v. Manson, 200 Ala. 351, 76 So. 117. The trust fund doctrine is not properly invoked by plea 6. Code 1923, § 7062; People's Auto Co. v. Mfrs.' F. A. Corp., 226 Ala. 370, 147 So. 145; City Bank T. Co. v. Leonard, 168 Ala. 404, 53 So. 71; Standard C. O. Co. v. Faircloth, 200 Ala. 657, 77 So. 31.
Horace C. Wilkinson, of Birmingham, and C. W. Sanders, of Ensley, for appellee.
Appellant never acquired title to the note. An Alabama bank that is insolvent, and known to be insolvent, cannot pledge a part of its assets, consisting of negotiable paper, for a loan to one who knows of its insolvency. Code 1923, §§ 7062, 10427; Londenback Mills v. Bohlke, 123 Wn. 75, 211 P. 891; Nelson v. Svea Pub. Co. (D.C.) 178 F. 136; Adams v. Perryman, 202 Ala. 469, 80 So. 853; Standard C. O. Co. v. Faircloth, 200 Ala. 657, 77 So. 31; Clemmons v. Cox, 114 Ala. 350, 21 So. 426; Meyer Bros. v. Mitchell, 75 Ala. 475; Elmore County Bank v. Avant, 189 Ala. 418, 66 So. 509; Reliance Eq. Co. v. Sherman, 216 Ala. 214, 112 So. 822; Ford v. H. C. Brown Co., 114 Tenn. 467, 88 S.W. 1036, 1 L.R.A. (N.S.) 188; Henderson v Garner, 200 Ala. 59, 75 So. 387. Plaintiff not being a bona fide holder in due course, defendant can interpose any defense to the note which he could assert if the note were other than negotiable paper.
The main question involved in this appeal is the sufficiency of the defendant's special plea 6.
The plea, when reduced to its final analysis, is nothing but an attempted set-off against the note sued upon, for the reason that the plaintiff, when acquiring the said note, had notice of the insolvency of its assignor, the Ensley Bank. Section 10178 of the Code of 1923 provides: "Paper governed by the commercial law, negotiated before maturity, is not subject to set-off or recoupment." Whatever may be the decisions elsewhere, this court has decided that said section precludes a set-off when the instrument sued on is commercial paper and was negotiated for value before maturity. Manning v. Maroney, 87 Ala. 563, 6 So. 343, 13 Am. St. Rep. 67; First Nat. Bank of Montgomery v. Slaughter, 98 Ala. 602, 14 So. 545, 39 Am. St. Rep. 88. The statute, as thus construed, has been re-enacted in several Codes since said decisions. The complaint shows that the instrument sued on is commercial paper, was purchased by the plaintiff for value and before maturity. Therefore, regardless of what the effect of the insolvency of the Ensley Bank and the notice of the plaintiff may have had upon the bona fides of the plaintiff's claim as against other defenses, plea 6, invoking a set-off, was no answer to the complaint, and the trial court erred in not sustaining the plaintiff's demurrer to same.
True, we now have the trust fund doctrine in this state, as section 7062 of the Code of 1923 says: "The assets of insolvent corporations constitute a trust fund for the payment of the creditors of such corporations, which may be marshalled and administered in courts having equity jurisdiction in this state." But this is solely a question of equitable cognizance and not available to this defendant in a court of law. Moreover, if the instrument in question be regarded as a part of the trust fund of the insolvent corporation, the defendant would not be entitled to set off its deposit in the bank against the note, for, if the assets be insufficient to pay the creditors, this would, in effect, give it a preference, as the other creditors would only get their pro rata. New Farmer's Bank's Trustee v. Young, 100 Ky. 683, 39 S.W. 46; Storts v. George, 150 Mo. 1, 51 S.W. 489.
As the defendant's plea 6 was bad and subject to the plaintiff's demurrer, it is unnecessary for us to pass upon the replications to said plea.
The judgment of the circuit court is reversed, and the cause is remanded.
Reversed and remanded.
THOMAS, BROWN, and KNIGHT, JJ., concur.