[149 NJSuper Page 155] This court entered a judgment for Hudson United Bank (bank) against the House of Supreme, Inc.
(House) and the individual defendants in the amount of $784,529 plus interest, based upon a default by House on its "with recourse" obligation on accounts sold directly to the bank, on House's default on its "Dealer Contract for Assignment of Paper," on various guarantees of dealer obligations and on the acceleration of the direct loans made to House caused by such default. The court determined that House was insolvent within the meaning of N.J.S.A. 14A:14-2 and appointed a statutory receiver thereunder.
The present controversy arises out of a motion made by the bank to amend the court's order and judgment to permit the bank to set off against the judgment certain monies deposited in various accounts of House and held by the bank. The accounts in question are the following: House of Supreme Reserve Account; House of Supreme Special Reserve Account; Central House of Supreme Furniture Reserve Account; House of Supreme Checking Account; Savings Account Certificate.
The bank contends that pursuant to N.J.S.A. 14A:14-8 and the decisional law it is permitted a set-off for all these accounts. The receiver disputes this and alleges that with the exception of the checking account, all of the above-mentioned accounts are "special deposits" and as such cannot be set off by the bank but rather must be turned over to the receiver.
Before the court addresses itself to the ultimate issue of whether the bank is entitled to set off the deposits against House's indebtedness to the bank, the court must first determine whether New Jersey law recognizes the general-special deposit distinction with regard to set-offs since the bank contends that our courts have consistently permitted set-offs of all deposits regardless of the nature of such deposit.
The general rule is that a bank has a right of set-off against all monies or funds in its possession belonging to a depositor to secure the payment of the depositor's indebtedness to the bank. McFarland v. Withers , 122 N.J. Eq. 167 (1937); Federal Trust Co. v. Conklin , 87 N.J. Eq. 185
(1916); see 5A Michie, Banks and Banking (rev. perm. ed. 1973), § 114, at 300, and cases cited therein. However, the weight of authority on the issue of set-offs by banks recognizes a distinction between general deposits and special deposits. This distinction arises as an exception to the general rule as a condition precedent to the accrual of the right of set-off in that before the fund can be set off it must have been deposited without restrictions and not have been a special fund. Joseph v. United of America Bank , 131 Ill. App. 2d 434, 266 N.E. 2d 438 (App. Ct. 1970); Feuer v. Peoples Bank , 43 N.Y.S. 2d 32 (Sup. Ct. 1943), aff'd 268 App. Div. 809, 48 N.Y.S. 2d 593 (App. Div. 1944), aff'd 294 N.Y. 748, 61 N.E. 2d 746 (Ct. App. 1945); First Nat'l Bank of Schulenberg v. Winkler , 146 S.W. 2d 201 (Tex. Civ. App. 1940), aff'd 139 Tex. 131, 161 S.W. 2d 1053 (Com. App. 1942); Southwest Nat'l Bank v. Evans , 94 Okl. 185, 221 P. 53 (Sup. Ct. 1923); Conner v. First Nat'l Bank of Sedrowoolley , 113 Wash. 662, 194 P. 562 (Sup. Ct. 1921).
The general nature of deposits to which the right of set-off attaches arises when the customer deposits money in the usual course of business without any restrictions. However, these same funds become special deposits and the bank's right to detain them is controlled when there is a special agreement showing that set-off was not intended by the parties, or where the circumstances or the particular modes of dealing are inconsistent with its existence. See Michie, supra , § 118(a), at 321-322. Funds deposited in a bank for a special purpose which is made known to the bank or under a special agreement cannot be set off by the bank against a debt due to it from the depositor. In re Foutz , 271 F. Supp. 847 (W.D. Va. 1967); Avant v. U.S. , 165 F. Supp. 802 (E.D. Va. 1958). Thus, it appears that deposits made by a customer become "special" by means of the contractual agreement or relationship between the customer and the bank.
Special deposits are immune from set-off by a bank because the right of set-off arises only when there is a mutuality of relationship between the customer and the bank. The bank and
the depositor each must occupy the relation of debtor and creditor and they must have rights to mutual demands. Stated otherwise, there must be a mutuality between the debtor and the creditor and between the debt and the fund deposited. Kaufman v. First Nat'l Bank , 493 F.2d 1070 (5th Cir. 1974). This mutuality exists only in connection with general deposits but not with special deposits, for the customer can only draw on the former and ...