Edward Wolf and Willard P. Barrows, as Receivers of Blum Brothers, Incorporated, Plaintiffs, v. National City Bank of New York, Defendant

Edward Wolf and Willard P. Barrows, as Receivers of Blum Brothers, Incorporated, Plaintiffs, v. National City Bank of New York, Defendant. First Department, December 30, 1915. Insolvency—loan procured by fraud of insolvent—rescission of loan by bank on discovery of fraud — right of set-off—duties of rescinding party — receiver, when not entitled to notice of rescission. Although a corporation was adjudged insolvent in the State of Pennsylvania at a time when, under the law of the State of New York, an unnurtured claim held by the creditors of the insolvent could not be set off against a claim presently due from the creditors to the insolvent (which rule has now been changed by statute of this State), a bank which was induced to discount the note of the insolvent corporation by false representations and fraud and which has placed the proceeds to its credit may upon the discovery of the fraud rescind the transaction and apply the balance of the deposit remaining in part payment of the insolvent’s note. The receiver of the insolvent is not entitled to recover the balance of the deposit. While the general rule is that in a case of rescission of & contract for fraud the rescinding party must act promptly and return whatever of value he has received under the contract, the bank acted promptly where it rescinded the loan immediately upon learning that the statement of the borrower as to its financial standing, upon the faith of which the loan was made, was false, and, under the circumstances, no value passed to the bank by discounting the note which it was required to return to the borrower. Such rescission is complete and effective although no notice thereof was given to the receiver in insolvency, there being nothing to be returned to him by reason of the rescission. Submission of a controversy upon an agreed statement of facts, pursuant to section 1279 of the Code of Civil Procedure. The following is the statement of facts agreed to by the parties. “First. That heretofore and on or about the 31st day of July, 1913, the plaintiffs were duly appointed receivers of all the property, rights and franchises of Blum Brothers, Incorporated, a corporation organized and existing in the State of Pennsylvania, to wit, in the City of Philadelphia, in an action in the Court of Common Pleas in the County of Philadelphia, State of Pennsylvania, in equity wherein Gabriel Blum, Ealph Blum, Emil Loeb, Ferdinand L. Loeb, A. B. Loveman, M. V. Joseph and Emil Loeb, copartners, trading as Loveman, Joseph & Loeb, were plaintiffs and the said Blum Brothers, Incorporated, was defendant. The bill, answer and decree in the said action are annexed hereto, marked Exhibit A, Exhibit B and Exhibit C, respectively. That at the time of the said appointment of the plaintiffs as receivers of Blum Brothers, Incorporated, as aforesaid, the said Blum Brothers, Incorporated, was insolvent and unable to pay its debts as they matured. That thereafter the plaintiffs duly qualified and have thereafter been acting as such receivers. “ Second. That by virtue of said order of appointment dated the 31st day of July, 1913, the plaintiffs were duly authorized to conduct the business of Blum Brothers, Incorporated, to collect their outstanding accounts, claims and choses in action, and to bring any action or actions, proceeding or proceedings for the collection or reduction to possession thereof. “ Third. That the defendant is a national bank, existing and doing business under a charter of the United States and having its principal office and place of business in the City of New York. “Fourth. That from some time in the year 1903 to and including the 31st day of July, 1913, the said Blum Brothers, Incorporated, of which the plaintiffs are receivers, was a depositor of the defendant. That the annexed statement marked Exhibit D annexed hereto, is a true and correct statement of all the credits and deposits in the account of Blum Brothers, Incorporated, with the defendant between the dates of February 1st, 1913, and July 31st, 1913. That, as shown by the said statement hereto annexed and marked Exhibit D, there was on the 31st day of July, 1913, on deposit with the defendant and to the credit of Blum. Brothers, Incorporated, the sum of $3,571.51. “ Fifth. That on or about the 24th day of February, 1913, the said Blum Brothers, Incorporated, made to its own order and duly indorsed and delivered to the defendant its certain promissory note for $35,000, dated February 24th, 1913, and payable six months after date, to wit, on August 24th, 1913. ‘ ‘ Sixth. That the defendant, at the request of the said Blum Brothers, Incorporated, discounted the said note and placed the proceeds thereof to the credit of the account of the said Blum Brothers, Incorporated, and that the item of Exhibit D dated February 24th, 1913, reading as follows: ‘Feb. 24, Discount $34,115.28,’ represents the amount so placed to the credit of Blum Brothers, Incorporated. “ Seventh. That on or about January 31st, 1913, the said Blum Brothers, Incorporated, for the purpose of obtaining credit, issued a statement as to its financial condition, in which it appeared that its assets exceeded liabilities by $1,162,791.36. That in discounting the said note, as aforesaid, the defendant relied upon the said statement of January 31st, 1913, and believed that it was a true, correct and complete statement of the financial condition of the said Blum Brothers, Incorporated, on the date when it was issued. That the said statement was not, in fact, a true, complete and correct statement of the financial condition of the said Blum Brothers, Incorporated, on the day it was issued, but was false, misleading and incomplete at the time when it was made, in that the statement of liabilities contained therein omitted liabilities in excess of $1,000,000, and in that on the date when it was issued the liabilities of the said Blum Brothers, Incorporated, exceeded its assets; and that the said statement was known to the said Blum Brothers, Incorporated, to be thus false, incomplete and incorrect. “Eighth. That on July 31st, 1913, the defendant for the first time learned that the said financial statement was false, incorrect and incomplete, and that it thereupon cancelled the said balance of $3,571.51 appearing on its books to the credit of the said Blum Brothers, Incorporated, on that day, and attempted to apply the same to the partial payment of the said note, payment of that amount being credited upon it. That it did not at any time give notice to the plaintiffs of its intention to rescind and cancel the credit given by the aforesaid note, dated February 24th, on the ground of the misrepresentations of the plaintiff’s assignors. “Ninth. That the defendant had due notice of the appointment of the plaintiffs as Receivers of Blum Brothers, Incorporated, and that the plaintiffs, after their appointment as such Receivers, and on or about August 26th, 1914, demanded payment of the said sum of $3,571.51, which was the balance on deposit with the defendant to the credit of Blum Brothers, on July 31st, 1913, as aforesaid,- and that the defendant refused and still refuses to pay the same, and no part thereof has been paid to the plaintiffs. “Tenth. That no part of the said note for $35,000 has been paid to the defendant, except as aforesaid. “ The plaintiffs claim that upon the foregoing facts, the defendant is indebted to them in the sum of $3,571.51, and that they are entitled to recover that amount from the defendant. The defendant claims that it was entitled to rescind the loan which it made by discounting the said note and to apply the said balance of $3,571.51 in part payment of the said note, and that it is entitled to offset its claim on the said note against the claim of the plaintiffs for the said sum of $3,571.51.” Julius Henry Cohen, Samuel Conrad Cohen and Henry H. Nordlinger, for the plaintiffs. John A. Garver and Chauncey B. Garver, for the defendant. [MAJORITY — Scott, J.:] Scott, J.: It was undoubtedly the law of this State at the time the plaintiffs were appointed receivers of Blum Brothers, Inc., that an unmatured claim held by the creditors of a bankrupt could not be set off against a claim presently due from the creditors to the bankrupt. (Fera v. Wickham, 135 N. Y. 225; Matter of Hatch, 155 id. 401.) The rule has now been changed by statute so as to conform to the rule established by the Bankruptcy Act (Laws of 1914, chap. 360, adding to the Debtor and Creditor Law [Consol. Laws, chap. 12; Laws of 1909, chap. 17], § 13; 30 U. S. Stat. at Large, 562, § 63; Id. 565, § 68). If, therefore, nothing else appeared except that at the date of the appointment of the receivers the defendant was indebted to Blum Brothers, Inc., in the sum of $3,571.51 on open account, and held an unmatured promissory note of said corporation for a much larger sum, we should be obliged to hold that no right of set- off existed, and that plaintiffs were entitled to judgment. Something else does appear, however, and that is, that defendant was induced to discount the note and extend credit for the proceeds to the corporation in reliance upon false and fraudulent representations by the corporation as to its condition. Under these circumstances it is universally held that defendant, upon discovery of the fraud, was entitled to rescind the credit extended in reliance thereon, whereupon the amount advanced became immediately due and payable and available as an offset. The precise question has been passed upon by the Court of Appeals in Rothschild v. Mack (115 N. Y. 1) and Bradley v. Seaboard Nat. Bank (167 id. 427). This follows naturally and logically from the general rule that where money, credit or anything else has been obtained by a person by fraud, he has an immediate right to get it back. (Willson v. Foree, 6 Johns. 110; Weigand v. Sichel, 4 Abb. Ct. App. Cas. 592.) On this subject Judge Peckham said in Rothschild v. Mack (supra, at pp. 7 and 8): “An action in the nature of an action of assumpsit lies against one who has obtained money from another by a fraud, and such a claim is a proper subject of set-off in an action brought by the party against whom it exists. An assignee of such party takes a cause of action subject to such defense. This money thus obtained is, in contemplation of law, money received for the use of the party who is defrauded, and the law implies a promise on the part of the person who thus obtains it to return it to the rightful owner. The tort arising from the manner in which the money was obtained may be waived and the action founded upon the implied contract. * * * In this case the defendant’s assignors having obtained money to the amount of nearly $5,000 from the plaintiffs by means of the fraud above stated, at once became liable to repay the same, and the law will imply a promise to repay it to the plaintiffs. This cause of action (the tort being waived) was on contract, and it existed the moment the assignors obtained the money from the plaintiffs, and, of course, it was in full life when they assigned their property to the defendant, who took it subject to all defenses existing against it while owned by the assignors.” And in Fera v. Wickham, (supra), a leading authority for the rule that an unmatured claim cannot be set off against one presently due, the court said: “In the Rothschild case, neither plaintiffs’ claim on the note, nor the assignee’s claim against them, were due at the time of the assignment, but because of the fraud practiced upon the plaintiffs, in the manner in which the moneys were obtained from them, it was held that a cause of action in assumpsit arose at once in their favor for the recovery back of the moneys. It existed the moment the insolvent assignors obtained the money, and being a proper subject of set-off in any action which might have been brought by the parties against whom it existed, it could properly be off set against the debt due from the plaintiffs to the assignee, pro tanto.” Of course the right of rescission in such a case is subject to the general rule applicable to the rescission of contracts for fraud that the party seeking to rescind must act promptly and must return whatever of value he may have received under the contract. The defendant certainly acted promptly, for it is agreed “ that on July 31st, 1913, the defendant for the first time learned that the said financial statement [upon which it had relied] was false, incorrect and incomplete, and that it thereupon cancelled the said balance of $3,571.51 appearing on its books to the credit of the said Blum Brothers, Incorporated, on that day, and attempted to apply the same to the partial payment of the said note, payment of that amount being credited upon it.” It does not appear that anything of value passed to defendant upon the discount of said note, and there was nothing, therefore, to be returned to the makers of the note or the plaintiffs. Plaintiffs claim, however, that the attempted rescission was not complete and effective because notice thereof was not given at once to plaintiffs. We are cited to no case, however, holding that such notice is necessary in a case like the present where there is nothing to be returned to the party against whom the rescission is claimed. The effect of such rescission where the contract was merely one extending a term of credit for a sum of money, is to cancel the credit, whereupon the debt becomes instantly due. The creditor is not hound to give any notice of the rescission hut may wait, as the defendant apparently did, until a demand is made upon him and then assert his right to a set-off. It follows that defendant is entitled to judgment as prayed for in the submission, with costs. Ingraham, P. J., McLaughlin, Laughlin and Dowling, JJ., concurred. Judgment ordered for defendant, with costs. Order to be settled on notice.