Appeal from the District Court of the United States for Middle District of Pennsylvania; Albert L. Watson, Judge.
Before MARIS and GOODRICH, Circuit Judges, and SMITH, District Judge.
On September 2, 1941, the Mauch Chunk Brewing Company filed a petition for reorganization under Chapter 10 of the Bankruptcy Act.*fn1 It then had on deposit in the Lehigh National Bank of Catasauqua, Pennsylvania, the appellant, $777.07. On September 4, 1941, P.J. Cummings who had been appointed trustee of the debtor's estate, deposited additional sums raising the total to $1201.86. At the same time he informed the cashier of the bank of the reorganization proceedings and that he wished to have the account transferred to his name as trustee for the debtor. At the cashier's direction, a check was drawn by the trustee, for the total sum on deposit, to the order of "Mauch Chunk Brewing Company, P.J. Cummings, Trustee" and delivered, unindorsed, to the teller who issued a deposit slip and book, showing credit for the full amount of the check, in the name of P.J. Cummings, Trustee for Mauch Chunk Brewing Company. On September 6, 1941 a check for $1201.86, drawn by the trustee to his order was presented for payment to the bank which resused to honor it and answered "Not sufficient funds on account of set off against indebtedness of Mauch Chunk Brewing Company". This consisted of four notes of the debtor which were not due until the lattr part of September and October of 1941. The trustee thereupon filed a petition for a turnover order hich was resisted by the bank, on the ground that the matter of the bank's set-off could not be adjudicated summarily.*fn2 The referee granted the trustee's petition and the District Court affirmed the order.*fn3 This appeal followed.
The appellant does not dispute the given facts. Nor does it deny that if its conduct has lost it the claim of set-off, the court had the requisite jurisdiction to issue the turnover order. This being a proceeding under Chapter 10 of the Bankruptcy Act and there being no allegation or proof of the debtor's insolvency, it is questionable whether the bank could set off the debtor's unmatured obligation against its deposit.*fn4 However, that question need not be determined at present, for we believe that the bank lost whatever claim of set-off it may have had.
Section 68 of the Bankruptcy Act allows a creditor to set off, if certain conditions of that section are met, mutual debts existing between him and the debtor.*fn5 This is a privilege which the creditor may or may not claim. If it is not asserted, it is lost.*fn6 Likewise if the creditor's conduct is inconsistent with a subsequent claim of set-off, he is held to have waived it. Thus, as between a bank and a bankrupt depositor, the former has been held to have lost its claim of set-off where, failing to claim it, it entered into an assignment for the benefit of creditors and changed the name of the account to that of the creditor's committee,*fn7 where it transferred the bankrupt's account to his executrix prior to bankruptcy,*fn8 and where it did not assert its set-off in an attachment proceeding nor in the subsequent bankruptcy proceedings when it filed its proof of claim.*fn9 The same result obtained when a bank, after reorganization proceedings had been instituted, honored the debtor railroad's checks and accepted its deposits, the court applying the "first in-first out" rule.*fn10
In each of these cases the action of the creditor was considered tantamount to a renunciation of its privilege of set-off. The conduct in each instance amounted to a repesentation to other creditors and trustees that it did not choose to apply the funds on deposit with it to the debtor's obligations. Having thus apparently surrendered its claim of set-off, it could not thereafter revive it. We think it clear this is what happened here. With full knowledge of the reorganization proceedings the appellant manifestly and without apparent reservation did all it possibly could have done to recognize that the trustee held the entire debtor's deposit as trustee for the benefit of the debtor's estate. This constituted a elinquishment of whatever set-off the bank may have had.Under such circumstances the court had summary jurisdiction to issue the turnover order against it.
The order of the District Court is ...