set-off

In May 1930 the Van Sweringen Corporation issued $30,000,000 in notes under an indenture naming Guaranty Trust Co. of New York as trustee with power to enforce noteholders' rights. In October 1930 Guaranty and other banks advanced large sums to companies affiliated with the Corporation and controlled by the Van Sweringens. When the Corporation could not meet its obligations, Guaranty participated in an exchange plan under which noteholders could surrender their notes for cash equal to 50 percent of face value plus twenty shares of Van Sweringen stock per $1,000 note; the offer remained open until December 15, 1931. In 1934 respondent York received $6,000 of the notes as a gift from a donor who had not accepted the exchange offer. In April 1940 three accepting noteholders filed the Hackner suit in federal court charging Guaranty with fraud and misrepresentation in connection with the exchange. York's motion to intervene was denied, and summary judgment for Guaranty was affirmed on appeal. On January 22, 1942, after her exclusion from the Hackner litigation, York filed the present class action in the United States District Court for the Southern District of New York on behalf of non-accepting noteholders. The complaint, resting exclusively on diversity of citizenship, alleged that Guaranty had breached its trust by failing to protect noteholders' interests when it assented to the exchange offer and by failing to disclose its own self-interest. The district court granted Guaranty's motion for summary judgment on the authority of the Hackner decision. The Circuit Court of Appeals reversed, holding that a federal court sitting in equity is not required to apply the New York statute of limitations that would govern an identical suit in the New York state courts. The Supreme Court granted certiorari.

Shady Grove Orthopedic Associates, P.A., provided medical care to Sonia E. Galvez for injuries she suffered in an automobile accident. As partial payment for that care, Galvez assigned to Shady Grove her rights to insurance benefits under a policy issued in New York by Allstate Insurance Co. Shady Grove tendered a claim for the assigned benefits to Allstate, which under New York law had 30 days to pay the claim or deny it. Allstate apparently paid, but not on time, and it refused to pay the statutory interest that accrued on the overdue benefits at two percent per month. Shady Grove filed this diversity suit in the Eastern District of New York to recover the unpaid statutory interest. Alleging that Allstate routinely refuses to pay interest on overdue benefits, Shady Grove sought relief on behalf of itself and a class of all others to whom Allstate owes interest. The individual claim was worth roughly $500, which fell far short of the amount-in-controversy requirement for individual suits under 28 U.S.C. § 1332(a). The District Court dismissed the suit for lack of jurisdiction. It reasoned that N.Y. Civ. Prac. Law Ann. § 901(b), which precludes a suit to recover a penalty from proceeding as a class action, applies in diversity suits in federal court despite Federal Rule of Civil Procedure 23. Concluding that statutory interest is a penalty under New York law, it held that § 901(b) prohibited the proposed class action.

Several tenants rented apartments in Clifton Terrace, a three-building apartment complex in Northwest Washington, by separate written leases with First National Realty Corporation. On April 8, 1968, the landlord filed separate actions in the Landlord and Tenant Branch of the Court of General Sessions seeking possession on the ground that each tenant had defaulted in the payment of rent due for the month of April. The tenants admitted that they had not paid the landlord any rent for April but alleged numerous violations of the Housing Regulations as an equitable defense or claim by way of recoupment or set-off. The tenants offered to prove that there are approximately 1500 violations of the Housing Regulations of the District of Columbia in the building at Clifton Terrace, where the defendant resides, some affecting the premises of the defendant directly, others indirectly, and all tending to establish a course of conduct of violation of the Housing Regulations to the damage of defendants. They conceded at trial that this offer of proof reached only violations which had arisen since the term of the lease had commenced. The Court of General Sessions refused the offer of proof and entered judgment for the landlord. The District of Columbia Court of Appeals affirmed, rejecting the argument that the landlord was under a contractual duty to maintain the premises in compliance with the Housing Regulations. Because of the importance of the question presented, the United States Court of Appeals for the District of Columbia Circuit granted the tenants' petitions for leave to appeal.