In Re Liquidation of Hibernia Bank & Trust Co.
1938 La. LEXIS 1236, 180 So. 646, 189 La. 813 (1938)
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Rule of Law:
For legal compensation (setoff) to occur by operation of law, the two debts must be simultaneously existing, liquidated, and equally demandable. A debtor cannot unilaterally waive the maturity date of their obligation to force compensation against a creditor if the term of the obligation was also stipulated for the creditor's benefit.
Facts:
- D. H. Holmes Company, Limited (Holmes) maintained a deposit account with the Hibernia Bank & Trust Company (Hibernia).
- Beginning on March 2, 1933, Hibernia began operating on a restricted basis, making only 5% of Holmes's deposit available and freezing the remaining 95%.
- On March 13, 1933, Holmes renewed a prior note by executing a new promissory note for $100,000, payable to Hibernia on June 12, 1933.
- On April 3, 1933, Holmes sent a letter to Hibernia requesting that its unmatured note be offset by its frozen deposit account.
- Hibernia did not consent to this early payment and offset.
- On May 20, 1933, the State Bank Commissioner took over Hibernia for liquidation, at which point Holmes's note had not yet matured.
Procedural Posture:
- D. H. Holmes Company, Limited intervened in the liquidation proceedings of the Hibernia Bank & Trust Company in the trial court, demanding its note be declared offset by its deposit.
- Hibernia Bank & Trust Company, in liquidation, filed a reconventional demand (counterclaim) for the balance due on the note.
- The trial court rendered judgment in favor of Hibernia, rejecting Holmes's demand and granting the bank's reconventional demand.
- D. H. Holmes Company, Limited, as the intervener and appellant, appealed the trial court's judgment.
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Issue:
Does legal compensation occur between a depositor's unmatured promissory note owed to a bank and the bank's debt to the depositor (the deposit account) at the moment the bank is placed into liquidation?
Opinions:
Majority - Justice Fournet
No. Legal compensation does not occur because the two debts were not equally due and demandable at the time the bank was placed in liquidation. Under the Louisiana Civil Code, compensation takes place by operation of law only when two debts are equally liquidated and demandable. The rights of the parties became fixed at the moment of liquidation. At that time, while the bank's debt to Holmes (the deposit) was demandable, Holmes's debt to the bank (the note) was not due until June 12, 1933. Although a debtor may typically waive a term stipulated in their favor, this cannot be done unilaterally if the term also benefits the creditor, as was the case here. Therefore, the essential condition of the debts being equally demandable was not met, and compensation did not occur.
Analysis:
This decision reinforces the strict requirements for legal compensation under the Louisiana Civil Code, particularly the mandate that both debts be 'equally demandable.' It clarifies that the maturity date of a note is a term that can benefit the creditor (the bank), preventing the debtor from unilaterally accelerating it to gain an advantage in insolvency proceedings. The ruling establishes that the rights and obligations of parties are fixed at the moment of a bank's liquidation, thereby preventing debtors from obtaining a preferential settlement over other creditors by offsetting unmatured debts against frozen deposits.
