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860 X-33S7 IN THE SUPREME COURT OF THE STATE OF WASH!lJGTON • 0. B. r~ILLIAMS 1 sole t:ra.de:t", doing business unde:t" the fi:t"m nama a.nd style of o. :a. :'TILLIAT,£ & co. I Appellant, Vt JOHN P. DUKE, Supervisor of Banks, R. A. LANGLEY, Cnief Deputy SUi)e:rvisor of Banks, liquida.ting The Scandina.vian Ame:rican Bank of Saa.ttle, a. co:rpo:ra.tion, and the FEDERAL RESE!l.VE :OANK, Twelfth District, a. co rpo :ra. ti on , Respondents. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Ho. 17766 Deva.:rtrr.ant One Filed IV'J.Sy 25, 1923 • A gene:r.:>l demur:re.r wa.s susta.ined to the compla.int in t:is c:Jse ana the pb.intiff, l'efusing to plea.a fuT"thel', ha.s a.ppealed from a. judgment dismissing the a.ction. Substantially, the compla.int al bges a.::> follo•VS: May, 1921, a.ppel.l:mt executed and delivel'ed his .. :;,oo.:..oo net,otia.ble pl'omissory note due August 20, 1921, to the Scandina.via.n American Ba.nk of Sea.ttle (hereina.fter ·spoken of a.s the Scandina:vie.n Ba.nk:) and in June, 1921, he executed and delivered his $20,000.00 negotiable p:romi&sory note due Septemoor-1}, 1921, to the same ba.nk. ::Oefo:re na.turi ty of the notes they were transferred and. negotia.ted fo:r value by the payee bank to the Feder-3.1 Reserve Bank of Sa.n Ft-ancisco. On June 30, 1921, the Scandina.vian Bank fa.iled and was taken over by the supe:rvi soX" of ba.n};:s of the Sta.te of Wa.shington, for the fUr.pose of settling its a.ffa.i:rs, At the time the bank failed the appdllant had on deposit in tha.t bank In 17766 X•3387 - 2 - .' 861 $11 .398· 52 and a.t tha.t time the Federal Reserve .Bank held colla.te.:r.a.l pledged by the Sca.ndina.via.n :Bank, unde:r the ta:rrns of an a.g:reement, a.s security for the payment of any and all indebtedness of the Scandinavian Bank to the Federal Rese:rve :Bsnkt and such colla.teral exceeded the anount of all the lia.bilities of the Sca.ndina:vicm :Bank to the Federal Reserve :Bank. It i:> furthe:r alleged in the compl3int tha.t the liquida.ting a.gent of the Scand ina:via.n Bank has been making 1 t a. practice to allow make.:r.s of notes held by the bank to offset a.ga.ins t the notes the s.mo1.mts of the it' deposits • a.nd tha.t at the time of the :respective ma.turitie.:; of the notes in question appellant demanded tha.t the Fede:ra.l Rese:rve :B.9nk and the Scandinavian Bank and its liquidating a.gent pe:rmit him to offset a.gainst his notes the amount of his deposit in the Scand ina.via.n :Bank a.t the time it failedj tha.t the requests were rafused and in o:r.de:r. to a.void li tiga.tion and protect his credit he 1Ja.id the notes in full, under protest. The a.ppella.nt ha.s presented a. cla.im and d err.and to the supe:r.visor of ba.nks for the amount of his deposit, as a. preferred cla.im, w~:ich wa.s :rejacted a.s such. It is fu'r:'ther a.lleged in the COII:\Pla.int tha.t the allowance of a set-off to makers of notes held by the Scandina.vian :Ba.nk a.t t~'le time it closed its doors and the denial of a. simila.:r. p:r.ivilege to makers of notes discounted and sold by the Scand ina:?. vian :Bank wol.Lld result in a.n unwarranted preference of one class ove:r anothe:t'• 'lhe p:ra.yer of the compla.int is ·to enjoin the Fed- e:ra.l Rese:rve Bank fX"om returning to the Scand~na:via.n Bank o:r its liquida.ting a.gent the colla.te:ral held gene:t'ally t but tha.t the colla.te:ral be impounded and . applied, to the extent necessa.t'Y, to the pa~nt of appellant's cla.im in the sum of $11,398·52· After the sale a.nd delivery of the notes by the Scandina.vian :Bank it no longe:r had any interest in them as owne:r.. The Federal Reserve Ba.nk beca.m3 the owner of a.ll inte·l"est in 17766 - 3 - X-3837 862 them having purcha.sed them before ITl.a.tu:r.i ty, in good faith and for value. The ca.se is not one vmerein the payee bank pledged the notes a.f:l colla.tera.l, thus :reta.ining a.n inte:t'est in them a.s ownar, like the case of In re.Bank, 7l Minn. 394, 73 N.w. 1096, cited and relied on by the appellant, but it is a. ca.se identical in p:t'inciple, with the ca.se of Munger v. Albany City Na.tional Bank et al., 85 N.Y.· 5¢0, wherein MutJger had $3,000.00 in a. bank in Rochester represented by a certifica.te of deposit in his fa.vo:t', which he continued to hold until the bank fa.iled. B~ further dealing he gave the Rochester bank his promissory note for $1,500.00 which that ba.nk discounted a.nd transfer:t'ed to the Albany bank. The Rochester bank ha.d already furnished the Albany bank gene:t>al colla.te:t"a.l a.ssut>ing the payment of all discounted items. In disposing of the :rignts of Munger the cou.rt of ail:pea.ls concluded: tlVJhen the bank a.t Rochester t:ransfer:red to the bank a.t .Albany the note of the pla.intiff 1 no eq_ui ty existed empowering him to set off his deposit aga.inst th.9.t note. The Rochester bank. did just vma.t he gave i.t lega.l and equi ta.ble rie}:l t to do. It transferred his note-, and topk the a.va.ils of the transa.ction, and became a. debtor colla.tera1 or contingent to him. Those avails entered into its property. The securities tha.t i t had before tha.t pledged undeX' the general a.g:reement were its property • .All were its a.ssets, held by it for the security of all of its creditors - other cred i to:rs a.s well as the pla.intiff. He ha.ving no right of set-off or stoppa.ge or a.pplication 'hhen his note wa.s transferred, we .fa.il to see how a pa.ramount right thereto now axises to him from the fa.ct tha.t the Rochester bank ha.d put with the Albany bank certain seC\U"i ties a.s colla.tera.l for a. geneX'al indebtedness, or general contingent lia.bility. They were put there before this note wa.s r~Ja.de, a.s a. gener-al and continuing ~ecu:rity for any :ndebtedness of the bank at Roches te:r a.rising from the fa.ilu.'(-'3 of promiso:rs to pa.y, and with tha e.xpecta.tion tha.t paym3nt should fi:Y"st ba sought f:t<om those promiso:rs. *** And When there cama insolvency and b~nk X"'lptcy upon the bank a.t Rochester, a.s there were not then in fa.ct and in law mutualfdebts or credits between it a.n~ the pla.intiff, why did not· the legal rights of other cNdlto:rs and their eq_uitiaS 1 as grea.t as those of tha pla.intiff, intervene o:r take equal rank?" This :rule ha.s baBn covered by sta.tute in this state• 191, ~m. Comp .. Sta.t., p:rovides: n* * * negotia.bla pa.par of ha.s pu:r.cha.sed the Qwner of a.ll Sac. no countar cla.im or offsat sha.ll ba plaa.dad a.ga.inst a.ss igned befo:t'e due, and whera the hold el". therethe same in good faith and for va.lue, a.nd iS inta:t'ast thaN in." 17766 X-3SiH' - 4- 266, Rem. Comp. Sta.t. also p:rovides a.ga.inst set-off Sc:c. in a.ctions upon nagotia.ble promissol'y notes, o:r bills of excha.nge, nagotia.ted in good fa.ith and without notice b~fo:r.a due. The ~ppellant invokes the ~id of equity to relieva"him fl'Om tha fo:r.ce of the sta.tutol'y rule. Tha case involves negotia.ble pa.pel', and must be determined upon considera.tion of tba l'ights of the holda:t' of the pa.pal' as well a.s those of the maker. Under provisions of the negotia.ble instl'tunants la.w, sees. 3443 Bank baca~ 3450, and Rem, Comp. Stat., the Fedel'~l Rese:t"ve the hold eX' in due cou:tse, bafora ma.turi ty and foX' value, of the not as in question, 11\hile undel' other sections of the code, a.lrea.dy refe:rr.;:o to, there is no l'igb.t of set-off a.ga ins t them. Thel'e is no la.ck of positiveress in the law. In such situa.tion aquity doi:lS not a.ttempt to a.ssa.il o:r abrogate but follows and is subox-dina.te to tha la.w. p:rinciple tho:; supr~llld a.l. v. Thomson, In aiscussing this cou:rot of the Unit<:}d State::. in M3.gnia.c et 56 U. S, 281, 14 L. Ed. 696, ::;aid~ 11 'lha.t whel'eve:r the :rights or the situa.tion of the parties aN clea.:rly defirud and esta.blished by la.w. equity bas no power to change OX' unsettle those :rights o:r tha.t situa.tion. but in a.ll such instancas the maxim equi ta.s s agui tur legem is st:rictly a.ppli ca.ble • 11 Upon tha same subj~ct, see also: Beeson v. Brotherhood of Locomotive Fi:reman a.nd :≤!,ineman, 101 Ka.n. 399, 466; 166 Pee. Allen v .. Kitchen, 16 Idaho 133, 100 Pac. 1052. Holding such to ba the la.w, it is unnacessa.x•y to dis cuss the a.lL~ga.tions of tha compla.int tha.t the appallant pa.id the Fada:ral Ros.:lrve Bank to avoid l i tiga.tion, to save his c:redit and und_er pl'otest. He only aisch~rged his promise to pa.y to ond enti tlad to receive it, without any :r.ight to. set-off and without any a-ccompanying right to raduce Fro tanto the general coll~te:«:-~1 held by the Fadclral 17766 X-3077 - J - Resd:t'Ve i3ank. belonging to th<> Scandinavian Bank, tha original pay88 in the not<:ls. Affi.rmad. (Signed) We concu:r-: (Sign;;d) .r . Jv._:nn, c. J• II Mackintosh, J. It .Jridgcs, J• " Holcomb. J. Mitchell, J. ~. --,.~A"