#### CONTINENTAL TRUST COMPANY v. D. W. SPENCER, Receiver of Jackson Lumber Company.

(Filed 18 May, 1927.)

Banks and Banking — Bills and Notes — Negotiable Instruments — Depositors — Debtor and Creditor — Offset—Corporations—Insolvency.

Where the directors of a corporation in their endeavor to prevent its insolvency make a cash payment .on the matured corporation note given to the bank and give their individual note for the balance, the bank retaining the old note as collateral, upon the corporation’s becoming insolvent and in a receiver’s hands, under the relationship of debtor and creditor, the bank has a right in equity to offset the indebtedness on the note of the corporation deposited therein, though the note given by the directors may not have become due at the time.

Appeal by defendant from Finley, J., at March Term, 1927, of Mecklenburg.

Affirmed.

D. E. Henderson for plaintiff.

D. W. Spencer for defendant.

Clarkson, J.

This is a submission of controversy without action, under O. S., 626. The plaintiff is a banking corporation. The Jackson Lumber Company is a corporation, insolvent, and D. ~W. Spencer is the receiver. The Jackson Lumber Company borrowed from the plaintiff bank on 12 June, 1926, $9,000, and made its promissory note due at 90 days, maturing 10 September, 1926. The Jackson Lumber Company, at the maturity of the note, was unable to pay the same, and the directors of the corporation paid $1,000 oh the note, and on 10 September, 1926, executed a 30-day note for $8,000, and as collateral security the bank took the past due note of the Jackson Lumber Company for $9,000.

On 2.9 September, 1926, the Jackson Lumber Company had on deposit in plaintiff’s bank $949.77, and on said date the plaintiff learned of the insolvency of the Jackson Lumber Company, which was placed in the hands of the receiver that day. Plaintiff, on learning of the insolvency, transferred and applied as a credit on the note of the Jackson Lumber Company for $9,000, reduced by the directors to $8,000, the $949.77. The defendant receiver contends that this was illegal, and this is the sole question involved in the appeal. We cannot so hold.

As between plaintiff and the Jackson Lumber Company the relationship, under the facts and circumstances of this ease, was that of debtor and creditor, and the bank had the right to apply the deposit on the past due note of the Jackson Lumber Company. The fact that the note *746of tbe directors was not due did not affect tbe rights of plaintiff. In fact, it is held by this Court in Hodgin v. Bank, 124 N. C., at p. 542 r “Even if tbe indebtedness to tbe bank has not matured, if tbe depositor becomes insolvent, tbe bank by virtue of tbe right of equitable set-off may apply tbe deposits with it of such debtor to bis indebtedness. Dammon v. Bank, 50 Mass., 194; Flour Co. v. Bank, 90 Ky., 225; Trust Co. v. Bank, 91 Tenn., 336; Seed Co. v. Talmage, 96 Ga., 254; Waterman on Set off, 432.” Reversed on another point in 125 N. C., p. 503.

Tbe principle applicable here is set forth in Morse on Banks and Banking, vol. 1, 5 ed., p. 630,. part sec. 337, citing numerous authorities: “Tbe various items of deposit with and payment by tbe bank from a running account between tbe bank and tbe customer. For any indebtedness accruing from the customer to itself, the bank has the right to' set-off. If tbe depositor becomes bankrupt, bis deposit becomes security for tbe payment of bis debt to tbe bank. If this debt be contingent in character, or if it be a claim for unliquidated damages, arising out of a contract, then tbe bank may retain possession of tbe deposit until such time as tbe probable indebtedness shall be ascertained, when tbe deposit may be set off against it.” (Italics ours.)

In Davis v. Mfg. Co., 114 N. C., at p. 328, where tbe matter is fully discussed, it is said: “It may be well here to note precisely who 'are meant by debtors and creditors of tbe insolvent bank, as tbe terms are used in this discussion of tbe rules of equity that should control tbe settlement of its affairs. ' By debtors to tbe bank are meant all those who, at tbe appointment of tbe receiver, were liable to tbe bank for tbe payment of money, whether their liability bad matured or not, and without any regard to tbe exact nature of tbe liability, whether as principal or surety." (Italics ours.)

In a court of equity, seeking to do justice among all parties, it looks at tbe spirit and not tbe form of tbe transaction. It cannot be disputed that tbe Jackson Lumber Company was primarily liable to tbe bank. Tbe directors, although making a note to tbe bank, and tbe bank taking tbe Jackson Lumber Company’s past due note as collateral security, tbe directors did so as an accommodation for tbe Jackson Lumber Company. It does not appear that tbe directors bad any purpose except to save, if possible, tbe Jackson Lumber Company, which from subsequent developments showed was on tbe verge, if not then, insolvent. Any other view, under tbe facts and circumstances of this ease, would work an unjust hardship on faithful directors trying to save an insolvent corporation. Tbe primary liability was tbe Jackson Lumber Company— tbe directors were in effect sureties. We think tbe position here taken borne out by tbe weight of authorities. Moore v. Bank, 173 N. C., p. *747180; Trust Co. v. Trust Co., 188 N. C., p. 766; Graham v. Warehouse, 189 N. C., p. 537; see Hayden et al. v. Citizens Nat. Bank et al., 35 A. & E. Annotated Cases, p. 686.

Some of tbe decisions in other jurisdictions may be contrary to tbe view bere taken, but a liberal and righteous adjustment between tbe parties should prevail. ¥e think tbe majority rule is with tbe bolding in this case and consonant with equity and justice.

For tbe reasons given tbe judgment is

Affirmed.