SECTION SIXTY-EIGHT SET-OFFS AND COUNTERCLAIMS § 68. Set-offs and Counterclaims.—a In all cases cf mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid. b A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate; or (2) was purchased by or transferred to him after the filing of the petition, or within four months before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent, or had committed an act of bankruptcy. Analogous provisions: In U. S.: Act of 1867, § 20, R. S., § 5073; Act of 1841, § 5; Act of 1800, § 42. Cross-references: To the Law: Claims of partnership against individual estates, and vice versa, § 5-g. Liability of co-debtors of bankrupt, § 16. Proof and allowance of claims; proof of claim by surety, § 57-i. Set-off of new credit recovery of property preferentially transferred, § 60-c. SYNOPSIS OF SECTION SET-OFFS AND COUNTERCLAIMS I. Set-offs in Bankruptcy, 1602. a. Comparative legislation, 1602. b. Cross-references, 1603. c. General principles section not self-executing, 1603. d. Mutual debts or mutual credits, 1604. (1) DEFINITIONS AND DISTINCTIONS, 1604. (4) JOINT AND SEVERAL CLAIMS, 1609. I. Set-offs in Bankruptcy-Continued. e. Time when set-off may be made, 1610. f. Time when right to set-off is determined, 1610. h. Waiver of set-off, 1616. II. When not Allowed, 1617. a. Not provable against the estate, 1617. b. Purchased after bankruptcy or within four months before, 1618. (1) In general, 1618. (2) With a view to such use and with knowledge, 1619. I. SET-OFFS IN BANKRUPTCY 3 a. Comparative legislation.- All bankruptcy laws contain clauses similar to these. They are doubtless merely expressive of recognized principles. The English rule differs from ours only in stopping the set-off at the moment of notice of the commission of an act of bankruptcy. The Canadian act applies the law of set-off to all claims against the estate and actions the trustee, except as affected by the provisions respecting frauds and fraudulent preferences. Our law of 1800 went no further than does subsection a of the present statute declaring the principle and leaving the exceptions to the courts.* So also of that of 1841.5 The original act of 1867 was identical with that now in force, save that it did not refuse allowance to set-offs growing out of debts or credits "with a view and with knowledge" within the four months' period; the genesis of the words just quoted, which are found in the law of 1898, appears in the 1. Doctrines of set-off not enlarged, Thus, in Sawyer v. Hoag, 17 Wall. €10, 9 N. B. R. 145, it was said by the United States Supreme Court, with reference to Revised Statutes, section 5073 (Act of 1867, sec. 20), the section analogous to the one now under consideration: "This section was not intended to enlarge the doctrine of setoff, or to enable the party to make a set-off in cases where the principles of legal or equitable set-off did not previously authorize it. The debts must be mutual; must be in the same right." 2. Eng. Act of 1914, § 33; Williams 4. Act of 1800, § 42. 7 amendment of 1874, which, however, was applicable only to involuntary cases. Considered historically, the purpose and development of the section are clear. In their application to a given set of facts, however, the law of set-off as applied to bankruptcy is somewhat hazy, and precedents are not always reliable. b. Cross-references.-The most important is § 60-c which provides that new credits may be set-off. Indeed, the courts have had little to do with set-offs under the act of 1898, save collaterally to the animated controversy over the surrender of so-called innocent preferences. This section c. General principles; section not self-executing. does not create the right of set-off, but recognizes its existence and provides a method by which it could be enforced even after bankruptcy. The provision is permissive and not mandatory, and does not enlarge the doctrine, and may not be invoked in cases where the general principles of set-off would not justify it.10 The determination is within the discretionary control of the bankruptcy court, to be exercised in accord with general principles of equity." It has been 7. R. S., § 5073. 8. See discussion under section 60, subtitle, Set-off of a subsequent credit." 9. Studley v. Boylston Nat. Bank, 229 U. S. 523, 30 Am. B. R. 161, 57 L. Ed. 1313, 33 Sup. Ct. 806, affg. 29 Am. B. R. 649, 200 Fed. 249; Fourth Nat. Bank of Wichita v. Smith (C. C. A., Sth Cir.), 38 Am. B. R. 771; Lehigh Valley Coal Sales Co. v. Maguire (C. C. A., 7th Cir.), 42 Am. B. R. 319, 251 Fed. 581. from 20 of the Act of 1867. In re Sawyer v. Hoag, 17 Wall. 610, 21 L. Ed. 731, in considering that section of the Act of 1867, this court said: "This section was not intended to enlarge the doctrine of set-off or to enable a party to make a set-oft in cases where the principles of legal or equitable set-off did not previously authorize it.' While the operation of this privilege of set-off has the effect to pay one creditor more than another, it is a provision based upon the general recog nized right of mutual debtors, which has been enacted as part of the bankruptcy act, and when relied upon should be enforced by the court. New York County Nat. Bank v. Massey, 192 U. S. 138, 11 Am. B. R. 42, 48 L. Ed. 380, 24 Sup. Ct. 199. It hence appears that the object of this section was to give the district court the right to apply the established principles of setoff to mutual credits, when its action was invoked for the purpose." V. 10. Cumberland Glass Mfg. Co. v. DeWitt, 237 U. S. 447, 34 Am. B. R. 723, 59 L. Ed. 1042, 35 Sup. Ct. 636; Matter of Kyte (D. C., Pa.), 25 Am. B. R. 337, 182 Fed. 166. 11. In the case of Cumberland Glass Mfg. Co. v. DeWitt, 237 U. S. 447, 34 Am. B. R. 723, 59 L. Ed. 1042, 35 Sup. Ct. 636, the court said: "The matter is placed within the control of the bankruptcy court, which exercises its discretion in these cases upon the general Hitchcock principles of equity. Rollo, 3 Biss. 267, Fed. Cas. No. 6,535. The section was taken almost literally See also Whaley v. King (Tenn. Sup. Ct.), 42 Am. B. R. 488, 206 S. W. 31. held, however, that a State court, in an action by a trustee in bankruptcy, has jurisdiction to allow a set-off.12 After the commencement of bankruptcy proceedings the right of set-off is under the control of the bankruptcy court and it is not mandatory on the court to make a set-off or to pass upon the question, unless the parties interested take the proper steps to secure the set-off. Its benefit is to be had upon the action of the District Court when it is properly invoked, and that court has the primary duty of determining for itself whether there are "mutual debts or credits" that should be set off one against the other according to the true intent and meaning of the bankruptcy act.13 This does not prevent the creditor from exercising the right of set-off before bankruptcy without the action of the court.14 d. Mutual debts or mutual credits.-(1) DEFINITIONS AND DISTINCTIONS. These words or equivalents are found in the set-off clauses in all bankruptcy laws. Indeed, the words, "mutual creditors" seem to be peculiar to such laws.15 High authority has declared that "mutual credits" are something different from "mutual debts." 16 To the lay mind, the distinction is one without a difference for a mutual credit, as, for instance, the delivery of collateral to 12. Gill v. Farmers & Merchants" Bank (Mo. Ct. of App.), 41 Am. B. R. 806, 195 S. W. 538. 13. Cumberland Glass Mfg. Co. v. DeWitt, 237 U. S. 447, 34 Am. B. R. 723, 59 L. Ed. 1042, 35 Sup. Ct. 636; Matter of American Paper Co. (C. C. A., 3d Cir.), 41 Am. B. R. 141, 246 Fed. 790. 14. See under this section, post, subtitle "Time when set-off may be made." 15. In re Dow (Ex parte Whiting), Fed. Cas. 17,573. Compare also Libby v. Hopkins, 104 U. S. 303, 26 L. Ed. 769, where the Supreme Court laid down the rule that the term "mutual credit" includes only such where a debt might have been within the contemplation of the parties. The term "mutual credits" in the bankruptcy act has a more comprehensive meaning than the term "mutual debts" in the statutes of set-off. The term "credit" is synonymous with trust, and the trust need not be of money on both sides, but if one party intrusts the other with goods or value, it will be a case of mutual credit. In re Catlin, Fed. Cas. 2,519. Must be between same parties.-A defendant claiming set-off must in general, in point of fact, own and control it, so that his suing creditor is, as to that claim, his debtor; and he is bound to prove the same facts in relation to the set-off as though he had brought his action upon it. Moulton v. Perkins (Me. Sup. Ct.), 40 Am. B. R. 34, 100 Atl. 1020. 16. Rose v. Hart, 8 Taunt, 499; s. c., in Smith Leading Cases, Vol. 2, p. 330, holding that where cloth was deposited with a fuller to dress, by a party who afterward became a bankrupt, there was a case of mutual credit to the value of the services for dressing the cloth, but not for a general balance due from the bankrupt. And in this case the general rule was laid down that the credits intended by the act were only such as must, in their very collect and apply in the end becomes a debt and is set off as such.17 Indeed, in effect, at least under the present law, there can be practically no difference. In the ultimate analysis a mutual credit is not unlike an unliquidated debt, and such debts are now provable.18 There are, however, some exceptions to the rule of mutual credits. Thus, if the credit will not terminate in a debt,19 or if a creditor intrusted by his debtor with goods has not the right to sell them until after the bankruptcy,20 or if such goods are delivered to the creditor for a specific purpose, a mutual credit does not arise, and there can be no set-off. These distinctions are, however, not important. The claim to set-off is usually made on mutual debts, the creditor owing the bankrupt a sum of money and the bankrupt, and, therefore, his estate, being liable to the creditor for a larger sum. In such a case, a balance is struck and the claim is allowed for the balance, provided the facts do not fall within subsection b.22 But mere payments on account before bankruptcy are not mutual debits or credits within 21 nature, terminate in cross debts. See Williams on Bankruptcy (12th ed.), p. 161. 17. In re Dow (Ex parte Whiting), Fed. Cas., 17,573; Myers v. Davis, 22 N. Y. 489; Aldrich v. Campbell, 70 Mass. 284; Medomak Bank v. Curtis, 24 Me. 36. 18. See Bankr. Act, § 63-b. 19. Rose v. Hart, 8 Taunt. 499; Groom v. West, 8 Ad. & E. 758. 20. In re Dow (Ex parte Whiting), Fed. Cas. 17,573. 21. Libby v. Hopkins, 104 U. S. 503; Alsager v. Currie, 12 Mees. & W. 751; Lehigh Valley Coal Sales Co. v. Maguire (C. C. A., 7th Cir.), 42 Am. B. R. 319, 251 Fed. 581. Money held by creditor in fiduciary capacity. Money received by a creditor from property delivered to him by the debtor to indemnify him against loss on a suretyship bond is not a mutual credit as against a debt of the bankrupt to such creditor. Alvord v. Ryan (C. C. A., 8th Cir.), 32 Am. B. R. 1, 212 Fed. 83. A bailment of grain received by the creditor, under the circumstances disclosed in this case, cannot be considered as a portion of the mutual credits and debits which a creditor is entitled to set-off against the debtor, and the act of the creditor in retaining the grain, under such circumstances, constitutes a conversion of the grain, and the trustee in bankruptcy is entitled to recover its value for the benefit of all the creditors of the bankrupt estate. Hockman v. Elliott & Myers (Neb. Sup. Ct.), 47 Am. B. R. 446, 185 N. W. 433. 22. Progressive Wallpaper Corp. (D. C., N. Y.), 39 Am. B. R. 557, 240 Fed. 807; Walther v. Williams Mercantile Co. (C. C. A., 6th Cir.), 22 Am. B. R. 328, 169 Fed. 270, holding that where an agreement, giving the business and possession of the goods of a mercantile company to bankrupts to operate for a year provided that upon its termination the mercantile company should pay any inventory excess to the extent of $500, and that the bankrupts should be liable for any deficiency, and at the termination of the agreement the stock was appraised at $1,323.24 in excess of the original inventory value, and the bankrupt owed the company on the contract and incidental thereto the sum of $769.93, such items constitute "mutual debts" within the |