Second National Bank vs. Robert Hemingray

CASES

ARGUED AND DETERMINED

IN THE

SUPREME COURT OF OHIO

DECEMBER TERM, 1877.

PRESENT:

                                         HON. JOHN WELCH, CHIEF JUSTICE.

                                         HON. WILLIAM WHITE,

                                         HON. WILLIAM J. GILMORE, }JUDGES.

                                         HON. GEORGE W. McILVAINE,

                                         HON. W. W. BOYNTON,

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THE SECOND NATIONAL BANK OF CINCINNATI v. ROBERT HEMINGRAY.

1. The right of set-off in an action is governed by the law of the place where the action is brought.

2. In an action brought in Ohio, by the indorsee, against the maker, of a promissory note payable to order, executed in Kentucky, and indorsed before due, the maker can not set off a debt due to him from the payee, notwithstanding the Kentucky statute which declares such notes "assignable so as to vest the right of action in the assignee," but provides that such assignment shall not "impair the right to any . . . offset the defendant has or might have used "against the payee.

ERROR to the Superior Court of Cincinnati.

This was an action by the bank against Hemingray, upon his three promissory notes, for $4,000 each. The notes were drawn payable to the order of B. Homans, Jr., in one, two, and three years, respectively, and indorsed to the bank by Homans before due. Homans carried on a banking business in Cincinnati, and the notes were indorsed and delivered to the plaintiff in that place, but they were executed and dated in Covington, Kentucky, where the defendant resided. At the date of the notes, a statute of Kentucky was in force which provides as follows:

"All bonds, bills, or notes, for money or property, shall be assignable so as to vest the right of action in the assignee; but not to impair the right to any defense, discount, or offset the defendant has or might have used against the original or any intermediate assignor, before notice of the assignment to the plaintiff."

After the maturity of the first note, and before the maturity of the other two, Hemingray, being unadvised of the assignment, purchased claims against Homans, to an amount which, with a small sum Hemingray had on deposit in Homans' bank, nearly equaled the amount of the three notes. The claims so purchased were in the shape of checks drawn by depositors in Homans' bank. Homans failed, and closed his bank on the day the checks were drawn, and on the evening of the same day made a general assignment for the benefit of creditors. A few days thereafter, proceedings in bankruptcy were instituted against Homans, which resulted in his being declared a bankrupt, and receiving a final certificate of discharge. Hemingray had notice of the failure of Homans before he purchased the checks.

The defendant set up these claims against Homans — these deposits in Homans' bank, as a set-off against the plaintiff's demand.

The defendant also alleged that there was an agreement between him and Homans, before the defendant had notice of the indorsement of the notes, that these deposits should be applied in payment of the notes, but in the opinion of the court the evidence failed to show any such agreement.

The case was reserved by the superior court in special term for decision by the general term, where the set-off was allowed, and judgment entered for the balance due on the three notes; and the plaintiff' now seeks to reverse this judgment, on the ground that the court erred in allowing the set-off.

Lincoln, Smith & Stephens, and E. S. Throop, for plaintiff in error, contended that the right of set-off was governed by the law of the state where suit is brought, and not by the law of the state where the contract was executed. Story on Conflict of Laws, sec. 575; Gibbs v. Howard, 2 N. H. 297; Davis v. Horton, 5 Bush. 165; Bank of Gallipolis v. Trimble, 6 B. Mon. 600; Savary v. Savary, 3 Clarke, 272; Don v. Lippman, 5 Clarke and Fin. 20; Holland v. Makepeace, 8 Mass. 422 ; Fuller v. Steigletz, 27 Ohio St. 355.

Wm. E. Jones, for defendant in error, contended that right of set-off was governed by the law of the place where the contract was made. 1 Parsons on Contracts, 88, 89; Story on Conflict of Laws, secs. 266, 332, 343, 344, 345 ; Ory v. Winter, 16 Martin, 277; Peck v. Hibbard, 26 Vt. 702; Aymer v. Sheldon, 12 Wend. 439; Story on Notes, sec. 168, and case cited ; Van Clef v. Terran, 3 Pick. 12; Yeatman v. Cullen, 5 Blackford, 340; Smith v. Parsons, 1 Ohio, 236; Palmer v. Yarrington, 1 Ohio St. 253; Kanaga v. Taylor, 7 Ohio St. 134, 248, 387; Findlay v. Hall, 12 Ohio St. 610; Webster v. Massey, Washington C. C. R. 157; Sanborn v. Little, N. H. 539; Small v. Browder, 11 Monroe, 212; Waterman on Set-off', sec. 102; Brown v. Richardson, 6 Martin, 143; Parsons on Notes, sec. 338.

Hoadly, Johnson & Colston, for trustees of Homans.

WELCH, C. J. The legal questions made and argued in the case are: 1. Whether the statute of Kentucky has the effect to make these notes subject to set-off' in Ohio; 2. Whether the set-off, if allowable at all, should be allowed except as against the first note, the only one that had matured when defendant received notice of the indorsement; and 3. Whether these checks procured by the defendant operated as an assignment to him of the deposits they were drawn upon. Counsel have elaborately argued all three of these questions. It is evident, however, that the consideration of the two last named questions becomes unnecessary, if the first is to be determined in favor of the plaintiff. A majority of us incline so to determine that question. We think the laws of Kentucky are powerless to control the laws of set-off outside of that state. They may fix the character of the contract or instrument, as being negotiable or non-negotiable, and its construction, but they can not determine whether a contract or instrument of the character so fixed shall be subject to set-off in an action brought thereon outside the state. Laws of set-off relate to the remedy, and not to the right, and therefore the law of the forum, and not the law of the place of the contract, must govern in such cases. If this be not so, then any statute changing the law of set-off would, so far as subsisting or past contracts are concerned, be a law impairing the validity of contracts, and void. I suppose the legislature of Ohio has the constitutional power to repeal all her laws of set-off, and require each party to bring a separate action for his demand. I think it has the same power to do so that it has to change its laws as to the organization of the courts, the form of action, its limitation, or the testimony on the trial. The real object of laws of set-off is to prevent multiplicity of actions. No such thing was allowed at common law. It is the creature of statutes. In different states the laws of set-off are quite different. Whether any of the states are without such laws, I do not know. Counsel concede that the set-off in this case must be of matters or claims which are made the subjects of set-off by the laws of Ohio. Is not this a concession of the whole question? If the laws of Ohio allowed no set-off, then none could be had in the case; but if by her laws unliquidated damages, as for slander, or assault and battery, could be set off, the defendant could avail himself of their provisions. I say this is a concession of the whole question, because it is an admission that the statute of Kentucky is dependent for its vigor and vitality in the present case upon the laws of Ohio, and if enforced as the law of the case, it is enforced because Ohio has adopted it, and made it her own law. It is an admission that the case must be governed by the laws of set-off in Ohio applicable to such paper. Now, what is the character of this paper, as fixed by the statute of Kentucky? What is the true construction of that statute? Is it merely a statute changing the form of the action, hy allowing a party who has a mere equitable right to bring the action? Was it the purpose of the act to single out from the numerous classes of choses in action these three — notes, bonds, and bills — and authorize the equitable owner of these, and of these only, to sue in his own name? If so, why insert an express provision making them "assignable?" They were assignable, so as to pass an equitable title, before the statute, as all other choses were, and still are. A majority of us think that such is not the true construction of this statute. We think it enables the holder of such instruments to transfer his legal title to the assignee. It is not a statute to impede or take away negotiability, but a statute authorizing it, under certain restrictions and limitations. It is, moreover, a statute in derogation of what might be regarded as the common law of the country, and should, therefore, be strictly construed. It is enough, however, for the present purpose, to say that" it makes such notes "assignable" so as to pass the legal title; that its provision in regard to set-off can have no operation outside of Kentucky; and that we have no law in Ohio which enables the maker of such notes, in an action thereon by the legal owner, to set off an independent demand against the payee or indorsor. Our code makes no changes in the law of set-off, or as to the negotiable character of such paper. It merely authorizes the equitable assignee to maintain a suit in his own name, instead of maintaining it in the name of the assignor or in a court of equity. Before the enactment of the code, we had no law, and we now have none, authorizing a set-off, in an action by the legal owner of a bill or note, of a claim against the assignor, whether acquired before or after notice of the assignment. The only set-offs allowed by our statutes, as they existed before the enactment of the code, were of claims against the plaintiff — that is, claims against the legal owner of the note. Suppose this action had been brought before the enactment of the code. It would then, as now, have had to be brought in the name of the bank, and not in the name of Homans. What statute of Ohio would have authorized a set-off, in such a case, of any claim other than a claim against the bank itself? There was no such statute. In such a case, the defendant could have set up as defense any infirmity which inhered in the note, or its consideration, or any payment, accord, or counter-claim, which showed that no right of action existed at the time of the assignment. In other words, he could have defeated the action by showing that the plaintiff took nothing by the assignment; but he could not have defeated it by setting up a claim which was the ground of a separate action against the assignor. Outside of Kentucky, as well as in Kentucky, I concede to this statute the effect of making such notes, in the hands of the assignee, subject to defenses which inhere in the paper itself, or which go to its consideration or its discharge. Were we to follow the rulings of the Kentucky courts in their construction of this statute, we would wholly disregard its provisions, and hold that the negotiability or non-negotiability of these notes, as well as their liability or non-liability to set-off, is to be determined by our own statute (S. & C. 862), which declares such notes to be "negotiable by indorsement thereon so as absolutely to transfer and vest the property thereof in each and every indorsee." Such was the holding in the case of Davis v Morton, 5 Bush, 160. That was an action brought in Kentucky, by the indorsee, against the maker of a negotiable promissory note made in Tennessee, where such notes are negotiable as commercial paper, and indorsed before due. The defendant pleaded a set off of a claim against the maker of the note. The court held that under the statute in question the set-off' was allowable. In delivering the opinion in the case the court say:

"Such paper in this state would be a promissory note, assignable under our statutes, subject, however, to all the equities and defenses existing between the original parties, and any payments or offsets before notice of assignment; whilst, by the statutes and numerous decisions of the Supreme Court of Tennessee, it would be regarded as commercial paper, and not liable to such defenses in the hands of an assignee in good faith, who had taken it in the usual course of business. ....

"A set-off is but a part of the remedy, and as this paper would be regarded by the laws of Kentucky a mere promissory note, to which the right of set-off' would attach, and as comity does not require us to reject any right of defense permissible under our laws because this paper was made in Tennessee, where such defense would not be allowed, and as our own, and all other citizens seeking our forums, should be satisfied with the administration of remedies according to our laws, this set-off', if established according to the allegations of the answer, should be allowed."

Now, while I am quite willing to admit that this decision of the Kentucky court is bad law, in so far as it denies to Tennessee the right to fix the negotiable character of its own paper, I think it ought to be regarded as good authority to show that by the true construction of the Kentucky statute, it can have no extra-territorial effect in matters of set-off. It is the judicial construction of her own statute by a court of Kentucky, to the effect that as to matters of set-off, the statute was intended to be remedial, and to have effect only in actions brought in Kentucky. It is a declaration, in effect, that outside of Kentucky, notes made under this statute are to be regarded as negotiable paper, according to the laws of the place where suit is brought, not only to the effect of defeating any right of set-off, but to the extent of defeating all defenses to the action. In other words, our construction of the Kentucky statute gives to it an extra-territorial vigor and effect, which, by implication at least, is denied to it by her own courts.

We think the court erred in allowing any set-off in the case.

                                                                                                                  Judgment reversed.

MCILVAINE, J., dissents from the views expressed in the opinion as to the effect of the statute of Kentucky upon the negotiability of the notes which were executed in that state. In my judgment the notes were not negotiable, within the meaning of commercial law, in the state where they were made, and, therefore, not negotiable within that meaning in this state. The quality of negotiability as understood in the commercial law is the same as in our laws relating to offset.

The statute of Kentucky inheres in these notes for the purpose of determining the character and quality of the contract.

After the quality and nature of the contract is ascertained by the statute of Kentucky, of course, the laws of Ohio in relation to offset should control the rights of the parties in the courts of this state. And if the notes are not negotiable, they were subject, under our laws, to the defense of offset as to all claims acquired by the maker before notice of the assignment, and pleaded by way of such defense.