Cornell v. Donovan — 13 N.Y. St. Rep. 704

Majority

p. 704

Robert G. Cornell v. Daniel Donovan et al.

(City Court of New York, Trial Term,

Filed December, 1887.)

Headnote

Judgment as counteeclaim by assignee—Validity op assignment

A judgment may be used as a counterclaim Where an undertaking sued upon is joint and several, either surety thereon may plead as a counterclaim, a judgment held by him against the party suing, and if the principal upon the undertaking is sued, such a judgment, when pleaded may enure to the benefit of the co-sureties. A debtor has as good a right to purchase a cross-demand to extinguish a claim against himself by set-off as he has to accomplish the same object by payment. If, however, the cross-demand was merely borrowed for lhe purpose of set-off, it will not be allowed, or if a judgment is assigned on condition that if it can be set-off then the assignment is to be valid, if not, then to be void, set-off will be disallowed. But if the transfer be made by the principal debtor to protect his sureties it is valid, because the principal is legally bound to protect them.

It is practically conceded that the plaintiff is entitled to recover $250 from the defendants on the undertaking executed by them, less $107.65 paid on account of such liability, leaving $142.35 due, with $5.60 interest thereon, aggregating $147.95. The contention is whether the defendants are entitled to their counterclaim. The defendant Donovan recovered a judgment in this court against, the plaintiff, May 5, 1886, for $867.31, on which there is now due $729.66. On May 12, 1886, Donovan assigned to the co-defendant,

p. 705

Denis Harrington, one-third of said judgment, and to the other defendant, John Harrington, one-tnird thereof, thereby making the three defendants joint owners of the judgment. This action was Commenced subsequently to the assignment. The plaintiff proved by the deiendant, Denis Harrington, that the assignment was not intended to be absolute, but was made merely for the purpose of protecting the sureties upon the undertaking sued on. Upon' this evidence turns the legal proposition to be decided.

J. T. Cornell and Horace Secor, Jr., for pl’ff: Joseph C. Wolff, for deft.

That a judgment may be used as a counterclaim is conceded (Boston Mills v. Eull, 6 Abb. [N. S.], 319; Chamboret v. Cagney, 10 id., 31; Taylor v. The Mayor, 82 N. Y., 10 ), and how far the purpose of making the assignment of the judgment defeats its use as a counterclaim, is the question raised. The practice of set-off is of equitable origin. It was recognized in equity long before it was known in courts of law. The want of it in legal contentions was found productive of great injustice, a circumstance that ultimately led to the enactment of statutes permitting set-offs to be pleaded in common law actions. Daniel Donovan owned the judgment set up by way of counterclaim. He is the principal obligor on the undertaking sued upon. His co-defendants are his sureties. Whether he or they pay the sum demanded, the money must come from him in the end, as he is hable over to his sureties for any sum they may be required to pay in discharge of their liability. If Donovan had not assigned two-thirds of the judgment to the two sureties he could have counterclaimed the whole amount of his judgment against the plaintiff, for the undertaking sued upon, is joint as well as several. Parsons v. Nash, 8 How. Pr., 454 ; Newell v. Salmons, 22 Barb., 647 . He has, however, assigned two-thirds of the judgment to his sureties. His evident design was to protect them and in that way protect himself. There would seem to be nothing illegal in this. There is a natural equity in favor of Donovan, that he should not be called upon to pay the plaintiff $147.95, when the plaintiff owes him $729.66, which the former will not pay, and which the latter seems unable to collect. Lord Mansfield remarked, “that the natural sense of mankind was first shocked at the old legal doctrine which failed to allow set-off, especially in the case of bankrupts. They thought it hard that the person should be bound to pay the whole that he owed to the bankrupt, and receive only a dividend of what the bankrupt owed him.” Waterman on Set-off, 20, note.

p. 706

The purpose of subsequent enactments was to change the rule at law to conform to the more reasonable practice, prevailing in equity, and the object is supposed to have been accomplished. It has been held, that a debtor has as good a right to purchase a cross-demand, to extinguish a claim against himself, by set-off, as he has to accomplish the same object by payment. Rider v. Johnson, 8 Harris, Pa., 192; Russell v. Spear, 12 Phila., 230 . If, however, the cross-demand has been merely borrowed for the purpose of set-off, it will not be allowed (Russell v. Spear, supra), or if a judgment is assigned on condition, that if it could be set-off, then the assignment was to be valid; if not, then to be void, set-off will be disallowed. Miller v. Gilman, 7 Cow., 469 ; Porter v. Davis, 2 How. Pr., 30 .

These cases proceed on the principle that in no case, can a party set-off a judgment, unless he be the beneficial as well as the nominal owner of it. The transfers in this case, although absolute on their face, were not intended to be absolute, but merely for the purpose of protecting the sureties. To this extent they were to be absolute. Donovan, the judgment creditor, was beneficially interested in the use of the judgment in this form and to the extent stated, and such was the evident purpose and intent of his act. He had the right to give his co-sureties an interest in the judgment, even without consideration. Such a transfer is legal against every one, but a judgment-creditor. Sheridan v. TheMayor, 68 N. Y., 30 . The judgment has not been borrowed from the judgment-creditor, for experimental or speculative purposes, to be returned to him in case it could not be profitably used by the sureties, but the transfers were required for the protection of the judgment-creditor himself, and their use by him in the form adopted is neither repugnant to law, equitable principles or good morals. A debtor threatened with suit, who _ borrows a chose in action or a judgment against his creditor, and is to return it if not made available, has no equity on which to found a set-off, he needs no aid from the law, because he has no beneficial interest to protect, and loses nothing, if his borrowed set-off is disallowed. The present set-off stands on a different footing. It is founded on the equity existing in favor of Donovan, the judgment-creditor himself, and next on the transfers made to sureties he is bound to protect. Parsons v. Nash, 8 How. Pr., 454 ; Newell v. Salmons, 22 Barb., 647 . If these equities are not recognized, Donovan suffers an actual loss of $147.95.

In this respect the transfers made herein do _ not fall within the principles laid down in the cases cited, in which the set-offs claimed were disallowed, nor within the reasons which gave rise to these principles.

p. 707

It follows that the defendants are entitled to their counter-claim, which with interest aggregates $741.76, less the amount of the plaintiff’s claim and interest, $147.95, leaving due to the defendants, $593.81, for which sum the defendants are awarded judgment, with costs.