< ^ /* /v. n. FREE '^,7^:6 vRY. Any ri'Hiili'iit liiivf sii:n'->l III' •_'M:ir;ililii|-. sli:i A ImlTiiWiT I iii'Wt'd. l'(ir r: lli:U tlicliodk i^ Mliiill reftist.' to iiiiy liook, will All injuries t nnidt.' ^ooil ti) t liook «i('t;iin('il to he lost. HondWiTs n siinu' lioust'ho! UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW LIBRARY }, will) shall II :ii-.-c|.|ahlc i|- hniuc use. i\ Uuk'SH YV- \i renewed, lorrower who or viite in Sph shall ho iahle ; every 1, heinti; held nd)er of tlu> M M^M^M^ t-tj M3MjMtJ LiMMfKJMRY* m Wm. A. WHITE I Through hequest of ABBY S. A. WHITE his wufe. I rt must not he take), from the Library. m i^TAlmi^^ LEGAL WORKS BY LEONARD A. JONES. A Treatise on the Law of Mortgages of Real Property. Third l-ldition, Revised and Enlarged, Two volumes, 8vo, 860 pages each. Price $13.00. A Treatise on the Law of Railroad and other Corporate Se- curities, including Municipal Aid Bonds. One volume, Svo, 750 pages. Price 56.50. A Treatise on the Law of Mortgages of Personal Property. Second Edition, Revised and Enlarged. One volume, Svo, 750 pages. Price $6.50. A Treatise on the Law of Pledges, including Collateral Se- curities. One volume, Svo. Price $6.50. A Treatise on the Law of Liens, at Common Law and by Statute. One volume, Svo. (In Preparation.) These works, treating of the three forms of securit}' upon property, — Mort- gages, Pledges, and Liens, — while separately complete, have been prepared with a view to the relations of the subjects to each other; and each treatise con- tains references to the others, so that all together constitute one work upon the subject of Property Securities. *»* For sale by Law Booksellers. Sent, post-paid, on receipt of price by the Publishers, HOUGHTON, MIFFLIN & CO., Bostox. A TREATISE LAW OF PLEDGES, INCLUDING COLLATERAL SECURITIES. LEONARD A. JONES, AUTHOR OF TREATISES O.V " MORTGf AGES OF REAL PROPERTY," "RAILROAD SECURITIES,"' AND "CHATTEL MORTGAGES." BOSTON: HOUGHTON, MIFFLIN AND COMPANY. New York: 11 East Seventeenth Street. C()c HtticrfiiUc IprcoB, Cnmbittiirc. 1883. r jnotp Copyright, 1883, By LEONARD A. JONES. All rights reserved. The Riverside Press, Cambridge : I'rinteU by II. 0. Iloughton and Company. PREFACE. The present work is not upon a new subject ; but it treats, for the most part, of new phases of an old subject. The general principles of the Law of Pledges, first system- atically stated very briefly by Lord Chief Justice Holt, and afterwards restated more fully by Sir William Jones, have in recent times been more elaborately expounded in the treatises of Judge Story and Mr. Schouler : but all these writers have treated the subject only as one topic of the general branch of the law, known as Bailments. Moreover, these principles were formulated with refer- ence to Pledges of tangible personal chattels ; and to such transactions they were applied exclusively, until, in re- cent times, the business of the commercial world came to be conducted largely by the use of paper representatives of credits and values, and paper symbols of property. During the last half century the Law of Pledges has assumed a new importance from its adaptation to such transactions as loans upon negotiable paper, upon shares and bonds of corporations, upon bills of lading of railroad companies and other common carriers, and upon ware- house receipts. But even so recent a writer as Judge Story found it possible to dismiss in three lines the mat- ter of pledges of corporate stocks. V PREFACE. The present work has been written chiefly with the view of statinoj and discussinu; the Law of Pled. Gibbs 418 Whitten i: Wright 701 Whitwell V. Brisbam 590, 599 Wichita Sav. Bank v. Atchison, Topeka & Santa F4 K. R. Co. 246 Wicks V. Hatch 736, 737 Wilcox V. Fairhaven Bank 549 Wiley, in re 83, 111, 586 Wiley V. First Nat. Bank of Brat- tleboro 415 Wilhelm V. Schmidt 590, 681, 687 Wilkes V. Ferris 299, 372 Willcocks, ex parte 441 Williams v. Cheney ~ 675 V. Little 96, 115, 117 V. Mechanics' Bank of New Haven 178 V. Price 692, 693 V. Smith 106, 675 Williamson v. Branch Bank of Mobile 485 V. Culpepper 21 V. IMcClure 729 V. Morton 485 Willis V. Fry 461 u. Phila. & Darby R. R. Co. 171,466,479 Willoughby tJ. Comstock 577, 737 V. Spear 681 Wilson V. Anderton 568 V. Brannan 603 V. Doster 61 V. Foot 518 V. Force 691 V. Knapp 12 V. Little 9, 151, 153, 509, 608, 610, 665, 736, 755 V. Moore 485 Winslow V. Norton 261 Winter v. Belmont Mining Co. 183, 461, 480 Winthrop Bank v. Jackson 409, 410, 413, 594 Wisconsin M. & F. Ins. Co. v. Bank of British N. A. 257 Wise V. Charlton 103 V. Chase 688 Wolf r. Wolf 361 Wood's Appeal 466,481,482,483 Wood V. Dudley 18 V. Ellis 485 V. Hayes 498 17. Matthews 82, 717 V. Rowelitfe 345 V. Seitzinger 110 Woodard v. Fitzpatrick 396 Woodrufl' V. Halsey 429 V. Hill 111 Wookey v. Pole 96 Woolcocks V. Hart 679 Woolfolk V. Bank of America 104 Worcester County Bank v. Dor- chester & Milton Bank 104 Worcester Nat. Bank v. Cheeney 111 Word V. Kase 124 V. Morgan 692, 700 Work V. Bennett 422, 579 V. Bray ton 111 Wormley i^. Lowry 117 AVorthington v. Tormey 495, 508, 509, 612, 727 Wright V. Bircher 13 V. Crockery Ware Co. 687 V. Ross 5, 137, 140, 740 AV^urtz V. Hart 587 Wyckoffi'. Anthony 356, 357, 360 Wyeth V. Nat. Bank of Brighton 40 V. Nat. Market Bank 87 Wyman v. American Powder Co. 750 Yeatnian v. Savings Inst. 584 Yenni v. McNamee 280, 324, 325, 326 Young V. Lambert 280 V. Scott 334 V. Vough 513 Youngs V. Lee 115, 122 V. Stahelin 678, 687 Z. Zellweger v. Caffe 89 Zinipleman v. Veeder 651, 653, 716 Zulick i;. Markham 466 xxxiii THE LAW OF PLEDGES, INCLUDIKG COLLATERAL SECURITIES. THE LAW OF PLEDGES INCLUDING COLLATERAL SECURITIES. CHAPTER I. THE NATURE OF A PT:EDGE. L The contract defined, 1-3. I IIL Delivery is essential to create a pledge, n. Distinguished from a chattel mortgage, | 23-39. 4-22. I IV. Possession is essential to continue a I pledge, 40-47. I. The Contract defined. 1. A pledge raay be defined to be a deposit of personal prop- erty as security, with an implied power of sale upon default.^ Lord Holt,^ who was the first to make a s^'stematic statement of the general law of bailment, defined a pawn to be that sort of bailment " when goods or chattels are delivered to another, to be a security to him for money borrowed of him hy the bailor." Sir WiUiam Jones ^ defined it to be " a bailment of goods by a debtor to his creditor, to be kept by him till his debt is discharged." The definition given it by Judge Story ^ is, " a bailment of per- sonal property as a security for some debt or engagement." In a few states there is a statutory definition of a pledge. ^ An implied power of sale always Derrick Co. 1 Johns. & H. 93; and accompanies a deposit of property in though the usual definitions of a pledge, though there may also be an pledge do not allude to this charac- express power of sale. This implied teristic, it seems that no definition is power of sale is a feature which complete which does not include it. diHtinguishes a pledge from a lien ; "^ Coggs v. Bernard, 2 Ld. Raym. Polhonier v. Dawson, Holt N. P. 383 ; 909, 913. Doane v. Kusseil, 3 Gray (Mass.), 382; 8 Bailments, 118. Thames Iron Works Co. v. Patent * BailmentP, § 28G. 1 1 § 2.] THE NATURE OF A PLEDGE. Thus, in California ^ and in Dakota Territory,^ a pledge is de- fined to be a deposit of personal property by way of security for the pei'formance of another act. Every contract by which the possession of personal property is transferred as security only is to be deemed a pledge. In Georgia,^ a pledge or pawn is de- clared to be property deposited with another as security for the payment of a debt. In Louisiana* a pledge is declared to be a contract by which a debtor gives something to his creditor as a security for his debt. The term " collateral security " has in recent years come into general use to designate a pledge of negotiable paper, corporate stocks, or other incorporeal personalty, as distinguished from a pledge of corporeal chattels. In a broad sense, " collateral secu- rity is one, side by side with, or in addition to, the first, or in addition to the debtor's own obligation ; " ^ and in this sense might apply to a mortgage whether of real or personal property, or to a pledge of a chattel, or of a chose in action as well. But the customary use of the terra to designate a pledge of incorpo- real personal property seems now to be well established ; and it is convenient to have a term to distinguish a pledge of such prop- erty from an ordinary pledge of chattels, because many rules of law applicable to the one pledge are not applicable to the other ; and therefore this use of the term is here adopted and adhered to.6 2. A pledge is something more than a mere lien and some- thing less than a mortgage. In an early English case. Chief Justice Gibbs said : ^ " Undoubtedly, as a general proposition, 1 Codes & Stats. 1876, § 7986 ; Civil enants, or the payment of money he- Code, § 2986. sides the principal security. By 2 R. Codes 1877, § 1757 of Civil Worcester, as security for the fulfil- Code. ment of a contract, or a pecuniary ob- 8 Code 1873, § 2138. ligation in addition to the principal 4 R. Civil Code 1870, p. 373, art. security. 3133. 6 Story on Bailments, § 288, note 6 Chambersburg Ins. Co. v. Smith, by Schouler. And see, further, upon 11 Pa. St. 120, 127, per Coulter, J. : the present use of this term, Schoul- '' Collateral security" is defined by er's Bailments, 159. Bouvier as a separate obligation at- "^ Pothonier v. Dawson, Holt N. P. tached to another contract to guar- 383,385. " It may be inferred, there- anty its performance. By Webster, fore, that the contract was this : 'If as security for the performance of cov- I (tbe borrower) repay the money, 2 THE CONTRACT DEFINED. [§ 3. a right of lien gives no right to sell the goods. But when goods are deposited by way of security, to indemnify a party against a loan of money, it is more than a lien.i The lender's rights are more extensive than such as accrue under an ordinary lien in the way of trade." Both in a pledge and in a lien the general prop- erty remains in the debtor, and the creditor has only a special property. But the nature and extent of this special property in the two cases is quite different. A lien gives only a personal right to retain possession.^ The creditor holding this security cannot transfer it to any other person, nor can he himself enforce it by sale of his own motion, without the aid of judicial pro- ceedings.3 A creditor holding a pledge may, on the other hand, transfer his interest to another, and he may himself enforce his security by sale without the aid of a court. 3. On the other hand, a pledge is something less than a mortgage, or, in other words, " a mortgage is a pledge and more ; for it is an absolute pledge to become an absolute in- terest, if not redeemed at a certain time.* A pledge is a deposit of personal effects, not to be taken back but on payment of a certain sum, by express stipulation or the course of trade, to be a lien upon them." The legal title to the property passes by the you must redeliver the goods; but if In Donold v. Suckling, L. R. 1 Q. B. I fail to repay it, you may use the se- 585, Cockburn, C. J., said: " We are curity I have left to repay yourself.' not dealing with a case of lien, which I think, therefore, the defendant (the is merely the right to retain possession lender) had a right to sell." Per of the chattel, and which right is im- Gibbs, C. J." mediately lost on tlie possession beino- ^ In the report the word " pledge" parted with, unless to a person who is used ; but, as suggested by Mellor, may be considered as the agent of the J., in Donold r. Suckling, L. R. 1 Q. party having the lien for the purpose B. 585, this is obviously a mistake for of its custody. In the contract of the word " lien." pledge, the pawnor invests the pawnee 2 M'Combie v. Davies, 7 East, 6. with much more than the mere right Lord Ellenborough there declared that of possession. lie invests him with " nothing could be clearer than that a right to deal with the thing pledged liens were personal, and could not be as his own, if the debt be not j)aid, transferred by a tortious pledge." and the thing redeemed, at the ap- Mr. Justice BuUer, in his celebrated pointed time." judgment in Lickbarrow v. Mason, 6 » Thames Iron Works Co. i;. Patent East, 21 note, says that he who has Derrick Co. 1 Johns. & II. 93; Mul- a lien only on goods has no right to liner v. Florence, 3 Q. B. D. 484. Bell or dispose of the goods; he can ♦ Jones v. Smith, 2 Ves. Jr. 372, only retain them till the price is paid, per Master of the Rolls. 3 § 4.] THE NATURE OF A PLEDGE. mortgage, and not merely the possession, or the right of posses- sion ; while the mortgagor has merely an equitable right to re- deem.^ A pledge, therefore, differs from a mortgage, and from a lien as well. As said by Mr. Justice Willes, in delivering a judgment in the Exchequer Chamber : "There are three kinds of security : the first, a simple lien ; the second, a mortgage pass- ing the property out and out ; the third, a security intermediate between a lien and a mortgage, viz., a pledge, where by contract a deposit of goods is made a security for a debt, and the right to the property vests in the pledgee so far as is necessary to secure the debt." 2 II. Distinguished from a Chattel Mortgage. 4. A pledge differs from a chattel mortgage in three essen- tial characteristics. 1. It may be constituted without any con- tract in writing, merely by delivery of the thing pledged.^ 2. It is constituted by a delivery of the thing pledged, and is continued only so long as the possession remains with the creditor.* 3. It does not generally pass the title to the thing pledged, but gives only a lien to the creditor, while the debtor retains the general property.^ " While the distinction between these two forms of security is well defined, yet, owing to the haste with which transactions are often made, and to the meagreness or abbrevia- tions of the written papers which accompany them, it is not easy 1 Walter v. Smith, 5 B. & Al. 439 ; ^ §§ 7.17 . Jones on Chattel Mort- Maugham v. Sharpe, 17 C. B. N. S. gages, § 4 ; Jones t;. Baldwin, 12 Pick. 443. (Mass.) 315; Parshall v. Eggart, 52 2 Halliday v. Holgate, L. R. 3 Exch. Barb. (N. Y.) 36 7 ; Robertson v. Wil- 299. cox, 36 Conn. 426, 430; Fletcher v. 8 § 5. Howard, 2 Atk. (Vt.) 115; Conner v. * § 22. It is stated by Sir William Carpenter, 28 Vt. 237 ; Union Trust Jones that " the distinction between Co. v. Rigdon, 93 111. 458; Lobban v. pledging, where possession is trans- Garnett, 9 Dana (Ky.), 389 ; Petit v. ferred to the creditor, and hypoth- First Nat. Bank, 4 Bush (Ky.), 334; ecation, where it remains with the Hamilton v. Wagner, 2 Marsh. (Ky.) debtor, was originally Attic; but 332; Sanders v. Davis, 13 B. Mon. scarce any part of the Athenian laws (Ky.) 432; Luckett v. Townsend, 3 on this subject can be gathered from Tex. 119; Evans v. Darlington, 5 the ancient orators, except what re- Blackf. (Ind.) 320. So declared by lates to bottomry, in the five speeches statute. Georgia: Code 1873, § 2142, of Demosthenes." Bailments, 84. 4 DISTINGUISHED FROM A CHATTEL MORTGAGE. [§ 5. always to determine what character is properly to be attributed to thein." 1 5. The contract of pledge is in general a contract wholly implied in law. No written contract is necessary, and generally none is made. If there be a written contract, it is generall}'^ made either to show that the transaction is a pledge and not a sale, or to provide a special mode for enforcing the lien.^ A mortgage under the registry laws must necessarily be made by a written transfer, while a pledge, though it may be constituted by writing, is ordinarily made by a delivery of the property without any writing, the contract of the parties being wholly implied in law.^ A delivery of property as security for a debt without a written conveyance cannot be a mortgage, but must be a pledge.* But in Louisiana the contract of pledge of movable property, other than promissory notes, bills of exchange, stocks, or claims, in order to affect third persons, must be by written act ; and the amount of the debt and the nature of the thing pledged must be mentioned in the act.^ The Code^ declares that the pawn invests the creditor with the right of causing his debt to be satis- fied by privilege and in preference to the other creditors of his debtor, out of the product of the movable, corporeal or incor- poreal, which has been thus burdened. But this privilege shall take place against third persons only in case the pawn is proved by an act made either in a public form or under private signa- ture ; provided such act has been recorded in the manner re- quired by law ; provided, also, that whatever may be in the form of the act, it mentions the amount of the debt, as well as the species and nature of the thing given in pledge, or as a state- ment annexed thereto of its number, weight, and measure. All pledges of movable property may be made by private 1 Thompson r. Dol liver, 132 Mass. * Jones on Chattel Mortgages, § 2; 103, 104, per Devens, J. Arendalew. Morgan, 5 Sneed (Tenn.), 2 Cortelyou v. Lansing, 2 Caincs 703. Cas. (N. y.) 200; West v. Beach, 3 * Day v. Swift, 48 Me. 3G8. Cow. (N. Y.) 82; Barrow v. Paxton, "^ De Blois v. Reiss, 32 La. Ann. 5 Johns. (N.Y.) 25H, 200; M'Lean v. 58G; MaUliews v. lluthorford, 7 La. Walker, 10 lb. 471; Roinaine i-. Van Ann. 22."); Martin v. Casey, 15 La. Allen, 20 N. Y. 30'J; Wright v. lio.ss, Ann. ICi. 3G Cal. 414, 429; Doak v. Hank of the » i^. civ. Code 1870, §§ 3157, 3158. State, C Ired. (N. C.) L. 309. § 6.] THE NATURE OF A PLEDGE. writing, accompanied by actual delivery ; ^ and the delivery of property on deposit in a warehouse shall pass by the private assignment of the warehouse receipt, so as to authorize the owner to pledge such property ; and such pledge so made, with- out further formalities, shall be valid as well against third per- sons as against the pledgors thereof, if made in good faith. If a credit not negotiable be given in pledge notice of the same must be given to the debtor. 6. Though a pledge be evidenced by a writing it need not "be recorded if the writing constitute a pledge and not a mort- gage. Thus a written instrument given by the purchaser of a stock of drugs to indemnify a surety upon his purchase note, and to secure him for rent of the premises where the stock was kept for sale, provided that a third person as receiver should take and hold possession of the stock, furniture, and fixtures, keep the books, superintend the business, secure the money, and pay, at the end of each week, to the surety, all the moneys received, until his claims should be satisfied ; and possession was taken by such receiver accordingly. It was held that the transaction was a pledge, and not a mortgage, and, therefore, required no regis- tration to render the agreement valid against creditors of the pledgor.2 The transaction was a pledge because the written in- strument did not undertake to sell, transfer, or convey the stock in question to the surety, but merely to transfer the possession of it to a third person for his benefit, to be held till the debt should be discharged, the general property remaining all the while in the debtor. There is nothing in an act requiring the registry of mortgages of personal property from which an inference can be drawn that a pledge must be recorded in order to be valid. In the absence ^ The act of pledge whicli states comes into the actual possession of the amount of the debt, and the na- the pledgee before any conflicting lien ture of the thing given in pledge, need attaches to it. Helm v. Meyer, 30 not, it seems, state that the property La. Ann. 943. was delivered to the pledgee. This 2 McCreary «;. Haslock, 3 Tenn. fact may be proved by parol evidence, Ch. 13. such, for instance, as the testimony And though in writing, the instru- of the pledgee. Auge v. Variol, 31 ment when a pledge need not bear a La. Ann. 865. There is no occasion mortgage stamp. Harris v. Birch, 9 to record a pledge when the property M. & W. 591. 6 DISTINGUISHED FROM A CHATTEL MORTGAGE. [§§ 7, 8. of direct legislation affecting pledges, these are to be regarded as contracts at common law, requiring no registration to give them effect.i 7. A pledge differs from a mortgage of personal property in being a lien upon property and not a legal title to it. The legal title to property pledged remains in the pledgor, while a mortgage passes the legal title of the property itself to the mortgagee, subject to be revested in the mortgagor, upon the performance by him of an express condition subsequent.^ It is true that Lord Coke has said that the pledgee has a prop- erty in the thing pledged ; ^ and again that he has a property in it, and not a custody only.* But he is understood to mean by this a special property, and not a property in the general sense of the word. Lord Holt said the pawnee has a special property giving him security for the repayment of the debt, and power to compel the pawnor to pay him.^ Chief Justice Fleming in an early case said:^ "There is difference between a mortgage of land and pledging of goods ; for the mortgagee hath an absolute interest in the land, but the other hatli but a special property in the goods, to detain them for his security." 8. The form of the transaction is therefore important in determining its character.'^ Whenever there is a conveyance of the legal title to personal property upon an express condition subsequent, whether contained in the conveyance or in a separate instrument, the transaction is a mortgage- Thus, if a bill of sale 1 Doak V. Bank of the State, 6 4G5 ; Sims v. Canfield, 2 Ala. 555; Ired. (N. C.) L. 309 ; Barrett v. Cole, Petitt v. First Nat. Bank, 4 Bush 4 Jones (N. C.) L. 40 ; Thorns v. (Ky.), 334 ; Eastman v. Avery, 23 Me. Southard, 2 Dana (Ky.), 475, 479 ; 248; Cortelyou v. Lansing, 2 Caines Hamilton v. Wagner, 2 Marsh. (Ky.) (N. Y.) Cases, 200. Kent, C. J.,dur- 332; Sanders v. Davis, 13 B. Mon. ing an argument of Barrow v. Paxton, (Ky.) 432. 5 Johns. 2G0, says this case was never * Jones on Chattel Mortgages, 84; decided, and that tlie opinion, though Jones V. Smith, 2 Ves. Jr. 378 ; Lick- written by him, was never (iled. barrow v. Mason, G East, 22, 25, note ; « Co. Litt. 89 a. Brown v. Bcment, 8 Johns. (N. Y.) 9G; * Southcote's Case, 4 Hop. 8.3 h. Browncli v. Hawkins, 4 Barb. (N. Y.) ^ Coggs v. Bernard, 2 Ld. Kaym. 491; Bates v. Wiles, 1 Handy (Ohio), 909, 91 G, 917. 532; Union Trust Co. v. Iligdon, 93 111. « ItatclifT v. Davie s, Cro. Jac. 244. 458; Barfield v. Cole, 4 Sneed (Tenn.), ' Jones on Chattel Mortgages, § 8. 7 § 8.] THE NATURE OF A PLEDGE. of a horse be made, and at the same time a defeasance be given back by the purchaser, engaging that on the payment of the pur- chase price within a specified time he will redeliver the horse, the transaction is a mortgage and not a pledge of the horse. An instrument in writing which records a debt, and declares that the debtor does thereby deliver certain property to his cred- itor to secure the debt, is a pledge and not a mortgage, because there is no transfer of the title to the propert}^ but only a deposit of it. Although such an instrument contains a covenant to war- rant and defend the title, such as is usual in a mortgage, the character of the instrument is not thereby changed.^ The cove- nant is not a present conveyance, but an executory stipulation. A delivery of personal property by a debtor, in security for a debt, accompanied by a written agreement, whereby the debtor agrees that if he does not pay the debt by a certain time the cred- itor may dispose of the property to pay the debt, is a pledge and not a mortgage ; for the agreement does not show any intention to transfer a title to the property absolutely or conditionally, but only to deliver the property as security, with a right in the cred- itor to sell it if the debt be not paid by a certain time.^ A de- livery of such property to a creditor upon an oral agreement in like terms is, of course, a pledge.^ In fact, an ordinary pledge implies an agreement by the parties in effect the same as that which in the cases above referred to the parties expressed in their written or verbal agreements. Whatever may be the form of an express agreement upon which property is delivered as security for a debt, if this be in effect the same that is implied in an ordinary pledge, the transaction is a pledge. An agreement whereby certain certificates of stock are de- livered as collateral security, with a stipulation that if the debt is not paid at maturity the securities shall be under the control of the holder, who is authorized to dispose of them, and ajDply the proceeds to the credit of the maker, is a pledge of the stocks and not a mortgage ; for the instrument contains no words of sale, whereby the title to the stocks passes to the creditor. The title remains in the pledgor, with merely an authority in the pledgee to sell in case of default. The clause giving the cred- 1 Hamilton v. Wagner, 2 Marsh. (N. Y.) 491; Houser v. Kemp, 3 Pa. (Ky.) 331. St. 208. 2 Brownell v. Hawkins, 4 Barb. » Eastman v. Avery, 23 Me. 248. 8 DISTINGUISHED FROM A CHATTEL MORTGAGE. [§ 9. itor control of the property after default gives him no other or further right than any pledgee has to sell the pledge, according to law, to obtain payment.^ 9. Though the title must be conveyed to constitute a mortgage, yet the transaction is not necessarily a mortgage because the title is conveyed. There is a qualification of the general distinction between a mortgage and a pledge that a mort- gage is a transfer of title, while a pledge is a mere lien, with respect to choses in action ; for in most cases these cannot be pledged without transferring the title.^ Thus, in a pledge of negotiable paper, the title necessarily passes by a delivery of the paper if this does not require indorsement ; or if it does require indorsement, then by delivery after such indorsement. To make the pledge an effectual security, it is necessary that the pledgee should have the legal title. The same is true in general as to other transfers of choses in action, such as transfers of corporate stocks. A transfer of the title to such incorporeal property is generally an essential part of the delivery of it in pledge. An absolute transfer of such property as security for a debt is a pledge and not a mortgage. The general property may be re- garded as remaining in the debtor, though the legal title be trans- ferred to the creditor. A transfer of such property by an assign- ment which is not in form or substance a mortgaere will constitute a pledge of it. " Thus, a transfer of stock may be absolute, but still, if its object and character are qualified and explained by a contemporaneous paper which forms a part of the contract, and declares it to be a deposit of the stock as collateral security for the payment of a loan, and there be nothing in the contract to work a forfeiture of the right to redeem, or otherwise defeat it, except by a lawful sale under the power expressly conferred in the agreement, the transaction will be regarded as a pledge. It is also well said that here, as in other cases, the intention of the parties and the real effect of their agreement are to be considered and respected in its enforcement. The purport and substance of the contract determines whether it shall be considered a mort- 1 Lewis y. Graham, 4 Abb. (N. Y.) 2 Cliapters iii. and v.; Jones on Pr. lOG; aflirined upon tliis point in Chattel Mortgafies, § 4; Wilson v. Lewis I'. Mott, 3G N. Y. 395, 400, Little, 2 N, Y. 4 13 ; Dewey v. IJow- per Davi.-H, C. J.; and see M'Lean v. man, 8 Cal. 145, 151. Walker, 10 Johns. (x\. Y.) 471. 9 § 10.] THE NATURE OF A PLEDGE. gage or a pledge." ^ It is true that there may be a mortgage of such property ; but, to constitute a mortgage of it, the conveyance must be made substantially in the form of a mortgage ; that is, it must be a conveyance upon a condition or defeasance expressed in the instrument of conveyance, or by a separate instrument which would be construed as part of the conveyance. Thus, if a policy of insurance be assigned, and the instrument of assign, ment or a separate defeasance provides that the assignment shall be null and void upon the payment of the debt secured, but otherwise shall continue in full force, the transfer constitutes a mortgage and not a pledge. " The purport and substance of the contract, and the intention of the parties as disclosed by the lan- guage they have made use of to express it, clearly indicates a sale or mortgage rather than a pledge." ^ An assignment of a contract absolute in form, as collateral security, is a pledge rather than a mortgage of it. The fact that the title passes in form does not make the transaction a mort- gage. A transfer of title is necessary in order that the creditor may have full control of the contract, and the means of promptly enforcing it.^ 10. If property be deposited in the hands of a third person to secure a creditor, without transferring the title to either the one or the other, the transaction will be a pledge and not a mortgage.^ A written contract to secure advances upon wheat by the de- livery of warehouse receipts, and to give a lien not only upon the securities then in the creditor's hands, but also upon all such as might be thereafter delivered to him, with a power of sale in case of default, followed by a delivery of such receipts, constitutes a pledge and not a mortgage of the wheat. It is also immaterial in this respect that the receipts contain a clause, that in case of a flood — the warehouse being situated on the bank of a river — the property should be at the risk of the owner. " There was no sale of the property or transfer of the title to the plaintiff, but a deposit thereof with a warehouseman as a security for money loaned. The term ' mortgage ' is not used in the contract, neither 1 Duncran v. Mut. Benefit, Life Ins. ^ Gay v. Moss, 34 Cal. 125. Co. 38 Md. 242, 253, per Miller, J. 4 McCready v. Haslock, 3 Tenn. Ch. 2 Dungan v. Mut. Benefit Life Ins. 13. Co. supra. 10 DISTINGUISHED FROM A CHATTEL MORTGAGE. [§§ 11, 12. does it contain any language which indicates in the least a sale or transfer of title. The stipulation for a lien, though unnecessary in case of a pledge, is in harmony with the idea of one, of which it is an essential feature ; but inconsistent with the idea of a mort- gage, which goes further and passes the legal title. The power of sale is also consistent with the purpose to constitute a pledge, of which it is a legal incident, although not an unusual provision in a mortgage. The issue and delivery of the receipt was only a mode of furnishing the plaintiff with the evidence of the deposit of the pledge at the place agreed upon, and the right to the pos- session of the same, and to dispose of it according to the terms of the bailment. But from the nature of things it was a pledge, qualified by the situation and subject of the contract, and the conduct of the parties under it ; so that the custody of the prop- erty, instead of being actually or absolutely in the creditor, re- mained in the warehouseman, subject to his control for the pur- poses of the contract, and while there at the risk of the ' owners ' in case of flood." ^ 11. An instrument which in terms pledges property creates only a lien upon it, and is a pledge, whereas one which in terms conveys it absolutely as a security is in legal effect a mortgage.^ Yet the use of the word " pledge " does not of itself conclusively determine the character of the transaction ; for even when the word " pledge " is used if it is clear that the intent of the par- ties was that the possession of the goods should remain in the debtor, and the possession does so remain, the transaction will be regarded as a mortgage, and not a pledge.^ " But where the word ' pledge ' is used, and the nature of the transaction is in con- formity with the character of a pledge, in this material respect, that the possession is to be in the creditor, the word is accurately used, and must control, both as expressive of the intent of the parties, and of the legal effect of their agreement." * 12. The use of the term mortgage in an instrument whereby ^ Bank of British Columbia v. Mar- 8 J.an^nlon v. Bud, 9 Wend. (N. Y.) shall, 11 Fod. R.-p. 19, 27 (C. C. D. 80; Ilaskins v. Patterson, E.hn. Seh Oregon, 1882), j.er Deady, J. Cas. 120; and see Bonsey v. Amee, 8 " Jones on Chattel Mortga^'es, § 11; Biek. (Mass.) 236. Prescott V. Brescott, 41 Vt. 131. * Ilaskins v. Patterson, supra. II § 12.] THE NATURE OF A PLEDGE. security is given does not necessarily make the transaction a mortgage. 1 An instrument whereby a debtor acknowledges his indebted- ness in a certain sum, " and in guaranty of said sum, and all in- terest that may accrue thereon, I hereby give this guaranty mort- gage on the British barque Trait d' Union, her apparel, ballast, chains, and all goods, furniture, and appurtenances appertaining to said vessel, all being my property as per register," possession being delivered to the creditor, is not a mortgage but a pledge.^ In such case the vessel goes towards the discharge of the debt, and the pledgee's possession is consistent with the legal title of the owner, and his right to regain possession upon satisfying the debt. Expenses incurred by the pledgee, for repairs upon the vessel while in his charge, are to be deducted from the receipts for her earnings. If a mortgagee under a mortgage void as against creditors takes possession of the mortgaged property, under an agreement with the debtor that he shall hold possession until the debt is paid, his title will be good as against subsequent attachments and exe- cutions by other creditors, by virtue of the contract of pledge, and of the possession under it, though his mortgage be defective be- cause it is not recorded.^ If property not in existence or not owned by the mortgagor be mortgaged, the mortgage is invalid at law as against third per- sons, who may acquire an interest in it, or a lien upon it, before possession be delivered by the mortgagor to the mortgagee. The mortgage is simply an executory contract binding upon the par- ties, but void as to third persons who have no notice of it. But if the mortgagee, before a third person has obtained any specific interest in it, takes possession of the after-acquired property, he holds the property by way of pledge, but in the same manner as though the mortgage had been executed at the time he takes possession, and in the same manner as though he had taken the property under and by virtue of a chattel mortgage covering the property.* 1 Jones on Chattel Mortgages, §12; Nash v. Norment, 5 Mo. App. 545; Thorns V. Southard, 2 Dana (Ky.), Jones on Chattel Mortgages, §§ 178, 475. 167. 2 Wilson V. Knapp, 70 N. Y. 596. * Cameron v. Marvin, 26 Kans. 612, 8 Greeley v. Reading, 74 Mo. 309 ; 629. 12, DISTINGUISHED FROM A CHATTEL MORTGAGE. [§ 13. A pledge of goods by a mortgagor to the mortgagee, when the mortsfag-e is fraudulent acrainst the creditors of the former, be- cause the mortgage was of a stock of goods which the mortgagor was allowed to sell in the usual course of business, is effectual, and protects the pledgee against a subsequent attachment by a creditor of the pledgor, although the pledgee leaves the pledgor in pos- session under an agreement that the latter shall sell the goods and pay the proceeds to the former.^ 13. Contracts substantially the same in terms may be construed either as mortgages or pledges under different circumstances, according as the one security or the other will best effectuate the intentions of the parties, and subserve the pur- poses of justice.^ If it appear that the parties intended that their contract should have the legal effect of a mortgage, the fact that they used words denoting a pledge will not necessarily make it a pledge. Thus, an instrument using the words, " I pledge and give a lien," may be construed to be a mortgage ; ^ and a writing in the following words, " Turned out and delivered to A. one white-and-red cow, which he may dispose of in four- teen days to satisfy an execution," was held to be a mortgage with a power of sale, chiefly for the reason that the cow was left in the possession of the debtor, and effect could be given to the instrument only by regarding it a mortgage.* An instrument which would be a pledge if possession of the property be given to the creditor may be a mortgage if possession be retained by the debtor.^ Thus, where a conveyance of chattels was made upon condition that it should be void if the grantor should hold the grantee harmless from certain indorsements made by him, the fact that there was no delivery of the property was held 1 Pettee v. Dustin, 58 N. H. 309 ; 322, per Bakewell, J. See Jones on Janvrin v. Fogg, 49 N. H. 340, 351. Chattel Mortgages, § 14. In New Hampshire a mortgage of a ^ Langdon v. Buel, 9 Wend. (N. Btock of goods which the mortgagor Y.) 80. may sell in the usual course of trade is * Atwater v. ^Mower, 10 Vt. 75. invalid, unless it provides that the pro- See, also, Coty v. Barnes, 20 Vt. 78, ceeds of all sales shall be paid to the for a similar case, mortgagee, and they are actually so ^ Conner i>. Carpenter, 28 Vt. 237; paid. But this rule does not apply to and see (ileason v. Drew, \) Mo. 71), a pledges. questionable decision; D'U'olf v. Ilar- 2 Ward V. Sumner, 5 Pick. (Mass.) ris, 4 Mason, 515. 59 ; Wriglit v. Bircher, 5 Mo. App. 13 §§ 14, 15.] THE NATURE OF A PLEDGE. to be decisive that the transaction was a mortgage and not a pledge. 1 14. The law favors the conclusion that a transaction is a pledge when there is doubt whether it is a pledge or a mort- gage. " Whether a transaction amounts technicall}^ to a mort- gage or a pledge is sometimes a nice question ; but the ultimate object of the inquiry is not so much to name the transaction, as to ascertain what was the intention and understanding of the pai'ties to it ; and, therefore, such intent, when ascertained, ought to control. In the case of a pure pledge the creditor takes the possession, actual or constructive, of the goods ; while in that of a mortgage there is a transfer of the title to him, but not the pos- session. In all cases, then, where personal property is given as a security for a debt or engagement, accompanied by a change of possession, either actual or constructive, the transaction better comports with the character of a pledge than a mortgage ; and where the transaction imports nothing more than giving a security without a sale or change of title of the property', the law favors the conclusion that it was intended as a pledge and not a mort- gage. But the rights and obligations of the parties to a pledge may be modified indefinitely by special contract between them, as that the pledge shall be kept, until the default of the pledgor, at some particular place or by some particular person." ^ 15. A bill of sale absolute in terms, or a receipted bill of parcels intended only as collateral security, is a pledge if ac- companied by a delivery of the property to the creditor.^ A bill of sale is a mere bill of parcels, subject to explanation by parol evidence.* A bill of parcels, tending upon its face to show an absolute sale, may be shown by parol evidence to have been ex- ecuted by way of security merely, and, therefore, to be a pledge.^ 1 Ward V. Sumner, 5 Pick. (Mass.) dreth, 8 Allen (Mass.), 167; Ex parte 59. Fitz, 2 Lowell, 519 ; Bright v. AVagle, 2 Bank of British Columbia v. Mar- 3 Dana (Ky.), 252, 257. shall (C. C. D.Oregon, 1882), 11 Fed. See Jones on Chattel Mortgages, Rep. 19, per Deady, J. § 14. ® Walker v. Staples, 5 Allen *■ Walker v. Staples, supra; New- (Mass.), 34; Whitaker v. Sumner, 20 ton v. Fay, 10 Allen (Mass.), 505, Pick. (Mass.) 399; Hazard v. Loring, ^ Jones v. Rahilly, 16 Minn. 320; 10 Cush. (Mass.) 267; Kimball v. Hil- Shaw v. Wilshire, 65 Me. 485; Fast- is man v. Avery, 23 Me. 248. DISTINGUISHED FROM A CHATTEL MORTGAGE. [§§ 16, 17. Although a delivery of goods be accompanied by an absolute bill of sale the ti'ansaction will, in equity, be regarded as a pledge merel}'^, where it is sliown that it was intended as a security for a debt or indemnity for a liability ; and it is immaterial that the bill of sale provides that the pledge shall be irredeemable.^ But there are cases where the courts have regarded such an absolute transfer as a mortgage and not a pledge. Thus, in Ver- mont it has been held that if chattels be delivered by a debtor to his creditor as security for a debt, accompanied by a bill of sale, the transaction is a mortgage ; for although the bill of sale con- tain no defeasance and be not accompanied by a separate defeas- ance, the law gives effect to the intention of the parties, and a verbal defeasance may be proved or implied. The title to the property is transferred to the creditor, subject to be defeated by payment of the debt secured.^ 16. A receipted bill of parcels of chattels, •whicti on its face purports to be a security for a debt, is a pledge and not a mortgage.^ "A bill of parcels given as collateral security only, under which the articles transferred are at once delivered, has all the characteristics of a pledge. The only property intended to be passed is the special property wbich the pledgee derives from possession. The form here used was not that of a mort- gage ; there was no defeasance or agreement to reconvey con- nected with or forming a part of it." * 17. An assignment of securities by a debtor to his cred- itor is presumed to be as collateral security and not in pay- ment of the debt, in the absence of evidence tending to show an intention that the securities should be applied in satisfaction of the debt, in whole or in part. If the debtor does not show that the assignment was so made in satisfaction of the debt, the law makes a positive inference that the assignment was only as col- lateral security.^ That the assignment is absolute in form is of no consequence as regards the question of intention.*' 1 Morgan v. Dod, 3 Colo. 551. 6 Leas v. James, 10 S. & R. (Pa.) 2 Hlo(l;rftt V. BloiJgett, 48 Vt. 32. 307, 315; Peril v. Pittfickl, 5 Rawle ^ Tlioiiipson i;. Dollivcr, 132 Mass. (Pa.), IGG, 171; Jones v. John.son, 3 103; and see Shaw v. Wilshire, 65 W. & S. (Pa.) 276, 278; Eby v. Me. 485. Iloopes, 1 Pennypackur (Pu.), 175. * Thompson v. Dolliver, supra, per ' Eby v. Iloopes, supra. Devens, J. 15 § 18.] THE NATURE OF A PLEDGE. 18. A bill of sale conditional in form is a mortgage and not a pledge. 1 An absolute bill of sale with a separate defeas- ance is in like manner a mortgage.^ In like manner a bill of sale, which in express terms secures a debt and authorizes the creditor to sell the property after a given time to pay the debt, if this be not paid before that time, is in legal effect a mortgage.^ A written assignment of stocks and bonds to a trustee, who is empowered to sell at discretion, and required to dispose of enough to discharge a note due a third person if the interest thereon is not paid at a specified date, does not constitute a pledge, and the assignor is not entitled to demand or notice before sale. It is manifest that the parties to such agreement intended to place the control of the securities in the trustee, and to arm him with the fullest power to dispose of them. The in- terest transferred to the trustee is not a mere pledge, but some- thing more. The title is vested in the trustee with a power to sell and pay certain debts, and with a requirement to sell and pay in a certain contingency. Such a contract is to be construed according to its terms and the circumstances attending it.* Whether the contract be a mortgage or not, it is certainly more than a pledge, under which the pledgor would be entitled to notice to redeem, and notice of the time and place of sale. An assignment by a debtor to his creditor of a note secured by a mortgage, with condition that upon default in payment of the principal debt the creditor should have authority to- collect the collateral note, or to negotiate it for the purpose of liqui- dating the principal debt, vests the creditor with the legal title to the collateral note, and the transaction is a mortgage rather than a pledge ; although both the debtor's assignment and the creditor's receipt refer to the note and mortgage as collateral security.^ 1 Wood V. Dudley, 8 Vt. 430; 59 Miss. 152. For a case bearing a Homes V. Crane, 2 Pick. (Mass.) 607; strong resemblance to tbis, see Milli- Barrow v. Paxton, 5 Jobns. (N. Y.) ken v. Dehon, 27 N. Y. 364, which, 258. if a pledge in a legal sense, was de- 2 Brown v. Dement, 8 Jobns. (N. clared to be a peculiar contract in- Y.) 96; Clark v. Henry, 2 Cow. eluding more tban a pledge, and con- (N. Y.) 324. ferring rights according to the lan- 8 Barfield v. Cole, 4 Sneed (Tenn.), guage used. 465. 5 Fraker v. Reeve, 36 Wis. 85. * Murdock v. Columbus Ins. Co. 16 DISTINGUISHED FROM A CHATTEL MORTGAGE, [§§ 19, 20. A contract to secure the purchase money of a herd of cattle, whereby the vendor appoints an agent to accompany the cattle and retain possession of them, with power to enforce the security bv sale, is in the nature of a mortgage rather than a pledge, be- cause the lien, as between the parties, is not made to depend altogether upon possession, but upon a contract which defines the rights of the parties, and provides for its enforcement.^ 19. An absolute bill of sale, with an agreement that the original owner shall have the property back again after a fixed day, upon repaying the price, with an additional sum for trouble in trying to sell the property, amounts to a pledge, which is lost by giving possession to the general owner.^ A contract by a tenant with his landlord, whereby he agreed to cut the hay on the premises, and to put it into the barn where it should remain the property of the landlord, unless the tenant should, before a specified date, pay a certain sum for the hay less than its value, when it should become his property, was properly held to be a pledge.^ In like manner a lease of real estate, assigned as security for a debt, is a pledge rather than a mortgage. The creditor has the right to collect the rents, and apply them on the debt. The creditor's title to the lease would not become absolute in law upon the debtor's default in payment of the debt ; but the cred- itor has merely a lien upon the rents, the ownership of the lease remaining with the debtor.* ft 20. Whether a particular transaction be a pledge or a sale and agreement to purchase, upon contradictory evidence re- specting the terms of the agreement, is a question for the jury, and the court will not disturb their verdict when this is justified by the evidence. Thus, where the transaction was the sale of a * Grpgory i\ Morris, 96 U. S. 619, out notice, and creditors levying ex- per Waite, C. J. ; Powder Company r. editions or attaclinients ; and if fol- Burkliardt, 97 U.S. 110; Ilauselt v. lowed by a delivery of possession, Harrison, 105 U. S. 401. In the lat- before the ri Dearborn v. Union Nat. Bank of Civil Code, § 2986. Brunswick, 61 Me. 369; A\an Blar- * R. Codes 1877, § 1757, of Civil com v. Broadway Bank, 9 Bosw. (N. Code. Y.) 532; affirmed 37 N. Y. 540; ^ Barrow v, Paxton, 5 Johns. (N. Brown v. Warren, 43 N. H. 430. Y.) 258 ; Haskins v. Patterson, Edm. 20 DELIVERY IS ESSENTIAL TO CREATE A PLEDGE. [§§ 26, 27. draft." Upon this he was credited with the proceeds of the draft, and it was held that the stocks referred to were a pledge for the draft as well as for the discounts previously made on this se- curity.^ 26. A pledge of a part of a quantity of goods is not com- plete until such part is separated and set apart. Thus, a pledge of tliirty cords of bark in a pile containing much more than that quantit}'^ is ineffectual until the particular thirty cords have been measured and set apart ; ^ unless, perhaps, the part of the pile to be held in pledge be designated by agi-eement of the parties, so that the pledgee could take the number of cords pledged without any further act on the part of the pledgor. 27. A mere agreement of parties is not equivalent to an actual or symbolical delivery.^ The maker of a note, to in- duce a surety to continue his liability upon it for a year, verbally agreed to turn over to him a horse, and that the horse should be the surety's property, and he should have the right to go and take it in case the debtor did not pay the note. The horse was not present at the time of this agreement, nor was it ever de- livered to the surety; but the latter being compelled to pay the note, went upon the debtor's premises and took the horse. In an action for the recovery of the horse, it was held that the agreement conferred no lien upon it by way of pledge, and no title by way of mortgage.* A debtor being pressed for pay- ment agreed that certain molasses in his distillery should stand as collateral security for the debt, which was thereupon ex- 1 Van Blarcom v. Broadway Bank, my discounts and this draft,' he had 9 Bosw. (N. Y.) 532, per Barbour, J. at the same time handed the stocks to ♦' Very little is necessary to constitute the bank, would that have made the a pledge. It is only essential that the case any stronj^er ? " property be, or be placed by the ^ Collins v. Buck, G3 Me. 459. owner, in the hands of the creditor or * Cafhn y. Karwan, 7 La. Ann. 221; trustee, with an intention on the part Collins v. Buck, 63 Me. 459 ; Gale v. of both parties that it should be re- Ward, 14 Mass. 352; Tucker v. Buf- tained as security for a certain debt fini^ton, 15 Mass. 477; Keiser v. Top- or claim. In this case the stocks were \n\\\l,, 72 111. 22G ; Nisbit v. Macon already lield by the itank. Sujipose Bank & Trust Co. 12 Fed. Kep. 7 See Thorndike v. Bath, 114 Mass. N. Y. 34; Cartwright v. Wilmerding, 116, a case of sale. 24 N. Y. 521. 3 Brown v. Warren, 43 N. H. 430; '' Ryall v. RoUe, 1 Atk. 165, 171, Parsons v. Overniire, 22 111. 58. per Burnett, J.; Atkinson v. Maling, 4 Ryall V. RoUe, 1 Atk. 165, 176. 2 T. R. 462. 26 DELIVERY IS ESSENTIAL TO CREATE A PLEDGE. [§§ 38, 39. owner to pass the property to the consignee, who has made ad- vances upon them, is an effectual delivery. The carrier is then the bailee of the person to whom, and not of the person by whom, the goods are sent. A delivery of a savings bank book to a third person, for delivery to a creditor as security for a debt, creates a valid pledge of the book and deposit.-^ 38. A pledge or contract for a pledge, ineffectual for want of delivery, may be rendered valid by a subsequent delivery, even as against an intermediate creditor at large of the pledgor. Of course such subsequent delivery would not prevail against a creditor who had, between the time of the making of the con- tract and taking possession under it, acquired a specific lien upon the thing pledged by attachment or levy of execution. The only other obstacle which could prevent such a transaction from being effectual would be the intervention of fraud. But such a trans- action is not fraudulent in itself, and fraudulent intent in it is a question for the jury.^ 39. A subsequent delivery, if made before other rights have intervened, is effectual. Thus, a merchant obtained from a banking house a discount of his note, having attached to it a receipt headed with his name, place of business and the date, in the following words : " Received in store, for the account of A. (the bankers), subject to their order, the following named prop- erty, as security to my note given this day for fourteen hundred and eighty dollars, for twenty days from date," with a descrip- tion of the propert3% The receipt was signed by the merchant, but the property was not immediately delivered to the bankers, nor until after the note became due and was dishonored. Tlie merchant had, in the mean time, absconded. But one of the pledgees went to the store where the property was, and demanded possession of it from the clerk in ciiarge, and received from the latter the keys of the building. An hour afterwards the prop- erty was seized by the sheriff upon an attachment in favor of a creditor of the pledgor. In a suit by the bankers against the sheriff to recover the property, the Supreme Court held the delivery of the property, or rather the possession of it gained 1 Boynton v. Payrow, 67 Me. 587. » Parshall v. Efrgert, 54 N. Y. 18; reversing S. C. 52 Harb. 3G7. 27 § 40.] THE NATURE OF A PLEDGE. by the pledgees, was not sufficient as against the attaching cred- itor. But upon appeal this decision was reversed, and it was held that a contract for a pledge, ineffectual for want of deliver}^, may be made valid by a subsequent delivery ; and that nothing but the intervention of fraud, or the acquiring by a creditor of a specific lien upon the thing pledged, will prevent the perfect- ing of the pledgee's right.^ " Certainly there is no rule of law," say the court, " which requires a pledge in writing to be filed as a chattel mortgage ; nor is it consonant with any rules for the construction of statutes to borrow such a requirement as to pledges from the positive provisions which, when enacted, were introductive of a new rule, and which declared unfiled chattel mortgages absolutely void as against creditors ; nor is there any ■warrant for saying that, because a chattel mortgage unfiled could not be afterward filed with the effect to cut off the right of an intermediate creditor to avoid it as under the statute conclusively fraudulent, therefore, a pledge of undelivered goods cannot be made effectual against an intermediate creditor by delivery in the absence of fraud. Though a contract of pledge should be regarded, when unaccompanied by delivery, as within the other provisions of the statutes in regard to conveyances and contracts as to personal property, the question of fraud then arising would be a question of fact upon which the party would have a right to go to the jury. In the absence of any intermediate right, the parties could perfect a written contract of pledge by subsequent delivery." IV. Possession is essential to continue a Pledge. 40. It is a well settled principle that a delivery back of the possession of the thing pledged terminates the pledgee's title, unless such redelivery be for a temporary purpose only, or be to the pledgor in a new character, such as special bailee, or agent;^ Thus, a pledgee of a carriage loses his lien by permit- 1 Parshall v. Eggert, 54 N. Y. 18; Bank of Brighton, 132 Mass. 597; reversing S. C. 52 Barb. 36 7. Walcott v. Keith, 22 N. H. 196 ; Look 2 Ryall V. Rolle, 1 Atk. 165; Reeves v. Comstock, 15 AVend. (N. Y.) 244 ; V. Capper, 5 Bing. N. C. 136, 140, Fletcher u. Howard, 2 Aik. (Vt.) 115; 141; Harper v. Godsell, L. R. 5 Q. B. Day v. Swift, 48 Me. 3G8; Shaw v. 422; Citizens' Nat. Bank v. Hooper, Wilshire, 65 Me. 485 ; Barrett f. Cole, 47 Md. 88; Kimball v. Hildreth, 8 4 Jones (N. C.),40; Smith y. Sasser, Allen (Mass.), 167; Wyeth v. Nat. lb. 43; Bodenbammer v. Newsom, 5 28 POSSESSION IS ESSENTIAL TO CONTINUE A PLEDGE. [§ 41. tino- the pledgor to retain possession, and let it for hire for his own benefit. The pledgor's possession in such case is absolute and unqualified, although the pledgee restricted its use to the pledgor's most careful drivers.^ But a pledgee of a carriage would not affect his lien by temporarily putting it into the hands of the pledgor for the purpose of having repairs made upon it. The owner is but a special bailee for the creditor in such case, and his possession for this purpose does not amount to an interruption of the pledgee's possession. A temporary loan of a carriage by the pledgee to the jDledgor would not invalidate the pledge, and the pledgee may recover it of the pledgor, if he refuses to return it, by an action of replevin.^ But where a horse was pledged, and was immediately delivered back to the owner upon an agreement that he should keep and use the horse until the ensuing autumn, when the pledgee was to sell the horse and pay himself out of the proceeds, it was held that the horse in the owner's hands was liable to be seized and sold upon execution by a creditor of his.^ And so where a horse taken in pledge was returned to the pledgor that he might have the horse to use, it was held that the lien of the pledge was thereupon destroyed, and a purchaser of the horse from the debtor would acquire a good title as against the pledgee ; "* or that a creditor of the pledgor might attach the horse and hold it against the pledgee.^ 41. Possession and control of the pledge obtained by the wrongful act of the pledgor, without the assent of the pledgee, will not create a forfeiture of the lien, nor defeat his right to re- cover damages for an injury to the pledge, or for a conversion of it.^ The pledgee cannot be deemed to have released his lien when the possession of the pledge has been obtained by the pledgor through deception and false pretences.'^ A pledgor may be guilty of stealing the pledge from the pledgee, although the pledgor is the general owner, and the pledgee has no title to it lb. 107; Kii-Ht Nat. Bank v. Nelson, 3 Barrett v. Cole, 4 Jones (N. C), 38 Ga. 3'Jl ; Geddes v. Bennett, G La. 40. Ann. 51G; Tieadwell v. Davis, .-34 Cal. * Day v. Swift, 48 Me. 3G8. 601. 6 Colby V. Cressy, 5 N. 11. 237. 'Walker v. Staples, 5 Allen « Waleott r. Keith, 22 N. II. lOG. (Mass.), 34. ' Bruley v. Rose, 57 Iowa, G;j1. ' Cooper V. Kay, 4 7 111. .OS. 29 §§ 42, 43.] THE NATURE OF A PLEDGE. but only a special property. The property, in an indictment for larceny, may be laid in the special owner.^ 42. Possession of the property by the pledgor after it is pledged is not conclusive evidence of fraud, but is prima facie evidence of it. Such possession ma}^ be explained and proved to be a possession by the pledgor as agent or servant of the pledgee. 2 If the circumstances make out a good reason for giving the custody and apparent control of the property to the pledgor, who undertook to act as the pledgee's agent, there may not even be any evidence of fraud ; and at most the pledgor's possession will only be evidence either that the pledge has been abandoned, or that the transaction was fraudulent.^ Where a wagon-maker and a blacksmith entered into an arrangement for building wagons, whereby the former was to do the wood-work and the latter the iron-work, and also to furnish the materials for the wood-work, and as security therefor was to have a lien upon the wagon-maker's interest in the wagons ; upon an attachment of the wagons as the property of the latter by another creditor, it was held that the arrangement constituted a pledge of the wagon- maker's interest in the property to the blacksmith, and that when wagons came into the possession of the latter, he became a pledgee in possession, and was entitled to retain possession until bis claim was paid.* At the time of the attachment it appeared that the pledgee was in exclusive possession of the wagons, which were upon his own premises, and were marked with his name as maker. The pledgor was, however, at that time en- gaged in painting one of the wagons. But it was considered that this fact, when viewed in its relation to the subject, and to the attending circumstances, did not show any surrender on the part of the pledgee of the actual possession of the property.^ 43. A pledgee may employ the pledgor as his agent to sell goods held in pledge, and he does not lose his lien by allowing the pledgor to contract in his own name for their sale, or by de- 1 Bruley v. Rose, 57 Iowa, 651. see Rothermel v. Marr, 98 Pa. St. 2 Macomber v. Parker, 14 Pick. 285. (Mass.) 49 7. 4 Waldie v. Doll, 29 Cal. 555. 8 Ex pane Fitz, 2 Lowell, 519; and ^ Waldie v. Doll, sujjra. 30 POSSESSION IS ESSENTIAL TO CONTINUE A PLEDGE. [§ 44. livering the goods on his order to the purchaser.^ By allowing the pledgor to contract in his own name the pledgee takes the usual risk of such an authority ; and if the purchaser has paid the agent in full, the pledgee cannot reclaim the goods nor re- cover the price ; but will be compelled to look only to his agent for the proceeds. But he also retains the rights of a principal ; and, by notifying the purchaser of these rights, he becomes en- titled to receive the unpaid purchase money in preference to his agent.2 If the pledgee employs the owner to sell the goods pledged, and the latter sells with notice to the purchaser of the pledgee's lien, and moreover renders bills of sale in the latter's name, and the purchaser agrees to pay the price to him, it is wholly clear that the pledgee's rights are fully protected, and in a suit by the pledgee for the price of the goods,^ the purchaser cannot set off a claim against the owner. 44. A pledgee does not lose his lien by permitting the pledgor to have possession of the property for a special and limited purpose, and not merely for his own use and benefit.'^ Thus the master of a ship having pledged his chro- nometer to the owners, they permitted him to keep it on board their ship, and use it for the purpose of navigating the ship for a limited period without losing their lien.^ In like manner, if the pledgee of a convertible railroad bond deliver it to the pledgor to be exchanged for stock of the same company, which is to be returned to the pledgee and substituted for the bond in pledge, but the pledgor neither returns the bond nor the stock, he is liable in trover for the value of the bond. The pledgor receives back the bond in a new character, namely, that of special bailee 1 Thayer v. Dwight, 104 Mass. 254; 136; Langton v. Waring, 18 C. B. N. and see Rothermel t;. Marr, 98 Pa. St. S. 315; Way r. Davidson, 12 Gray 285. (Mass.), 465, 466 ; Bruley v. Rose, 57 * Per Wells, J., in Thayer r. Dwight, Iowa, 651, 654; Hutton y. Arnctt, 51 »»pra. 111. 198; Cooper v. Ray, 47 III. 53; 8 Nottebohm v. Maas, 3 Robt. (N. Black v. Bogert, 65 N. Y. 601; Col- Y.) 249. lins V. Buck, 63 Me. 459. See, how- * Martin v. Ruid, 11 C. B. N. S. ever, Bodcnhainnier v. Newsoni, 5 ^3^- Jones (N. C), 107, not in accord with * Reeves v. Capper, 5 Bing. N. C- the best authorities. 31 § 45.] THE NATURE OF A PLEDGE. or agent of the pledgee to exchange it for siock, and the posses- sion of the latter was not thereby impaired.^ And so where the proprietors of a brick-yard contracted it out on shares to a brick-maker, agreeing to advance the money requi- site for the making of bricks, and to divide with him the profits, after repayment of the advances, it was further agreed that the bricks, so fast as made, should be pledged to the owners of the yard as security for their advances ; but the brick-maker was to keep them in his charge, and sell them at retail, and as often as he got the amount of a hundred dollars from the sales he was to deposit it in bank to the credit of the owners. The bricks were afterwards attached at the suit of a creditor of the brick- maker ; but the court held that the owners of the yard had not, by leaving the bricks in the hands of the maker, lost their lien as pledgees of the entire property. This limited authority to sell at retail, in small sums, was no waiver of the possession of the residue by the owners.^ 45. A pledgee may maintain an action of trover against his pledgor, for a conversion of colhiterals which tlie former has returned to the latter for a special purpose. Thus if a creditor has redelivered to his debtor notes and mortgages held as collat- eral security, in order that they may be collected for the creditor's account, and the debtor fails to return them upon demand, he is liable in trover, or in a statutory action, which is a substitute for trover.^ The measure of damages in such case is the plaintiff's interest in the collaterals, which cannot exceed the amount of the debt secured. In like manner the pledgee of a promissory note, who has de- livered it back to the pledgor under an agreement to return it, or another note, may maintain an action against him for the conver- sion of the note, although he obtained it without fraud.* After the special and temporary purpose for which a pledge 1 Hays V. Riddle, 1 Sandf. (N. Y.) which only an action of assumpsit 248. The pledgor contended that un- could be maintained. der the arrangement between the par- ^ Macoinber v. Parker, 14 Pick, ties, whereby he was to return stock (Mass.) 497. for the bond, the creditor's special ^ Hurst v. Coley (C. C. Dist. Ga. property was lost, and changed into 1882), 15 Fed. Rep. 645. a mere right of action upon the debt- * Way v. Davidson, 12 Gray or's promise to substitute stock, upon (Mass.), 465. 32 POSSESSION IS ESSENTIAL TO CONTINUE A PLEDGE. [§ 46. has been redelivered to the pledgor has been accomplished, the pledgee may recover it or its value by action.^ 46. Civil law makes practically the same exception as the common law, in regard to a deliver}^ to the pledgor for a tem- porary and special purpose, although in general the civil law is more strict than the common law, in requiring permanent and continued possession in the pledgee. Thus Troplong, commenting upon the articles of the Code Napoleon, respecting the pledgee's possession, says : ^ " Though the merchandise be deposited in the creditor's storehouse, it may still need the care of the debtor. Then it is not forbidden to stipulate that he shall continue to attend to it in the interest of the creditor. The important thing is, that this clause does not cover a fraud. Aside from this, the possession of the creditor is not incompatible with a certain co- operation of the debtor, — being for the conservation of the thing, — he still being the owner. The creditor does not any the less continue exclusive possessor of the thing. The debtor is none the less dispossessed of it." He instances the pledge of a large quantity of sparkling Burgundy which was delivered to an agent of the creditor, and deposited in a vault of which the agent was to keep the keys, but it was agreed that the debtor should give the wine all necessary care. It sometimes happened that the agent gave the keys to the debtor, and once the latter removed some of the bottles of wine to his own premises. The debtor having failed, his assignee insisted that the pledge was null and void, because the debtor was not dispossessed of the wine. But it was held that there were sufficient reasons for the creditor's employing the debtor to attend to the wine, and thiit the agent's allowing liiin to take the keys was a mere matter of convenience, to facilitate the operations of the workmen. But a different re- sult was reached in a case where wines were pledged and the debtors reserved the care of them, and though stored in vaults leased to the creditors, those vaults communicated by open doors with other vaults of the debtors, where their workmen were em- ployed on tlie wines, and there was nothing to indicate which were pledged and which were not, and nothing to {)revent a sub- > Roberts »;. Wyalt, 2 Taunt. 2(18 ; ^ Nautisseinent, No. 309. Cooper V. Hay, 4 7 111. b'6] llultoa v. Ariielt, r,l Jil. \'JH. a 83 §§ 47, 48.] THE NATURE OF A PLEDGE. stitution of other wines ; so that the debtors appeared in posses- sion and kept up their credit thereby, which they could not otherwise have done. 47. A pledgor in possession can give a good title to a bona fide purchaser. If pledged property which has been redelivered to the pledgor for a special purpose be sold by him, in violation of the agreement under which possession was redelivered to him, the purchaser having acted in good faith can maintain his title against the pledgee.^ Thus, the fact that the pledgor of a horse obtained possession for a special purpose, such as to drive for a few miles, to visit a relative, upon the promise to return it in a day or two, and while upon the visit traded this horse for an- other, does not enable the pledgee to recover the horse from the purchaser.- The decisions in these cases rest upon the general principle that one who voluntarily allows personalty to pass into the possession of another is bound by the fraudulent acts of the latter, and can- not reclaim the property in the hands of an innocent purchaser for value without notice. 48. But a pledgor cannot defeat the lien of the pledgee by- disposing of the property after it has been restored to the latter. Thus, if the pledge be delivered back to the pledgor for a temporary purpose, and after this is served it be restored to the pledgee; while it is in his possession, the pledgor cannot mortgage or sell the property, except subject to the interest of the pledgee. The lien of a mortgage made under such circum- stances would be subordinate to the interest of the pledgee, and the mortgagee could obtain possession only after paying or tendering the pledgee the amount of the debt secured after its maturity.^ 1 Smith V. Sasser, 4 Jones (N. C), ^ Bodenhammer v. Newsom, supra. 43 ; Bodenhammer v. Newsom, 5 lb. ^ Cooper v. Kay, 47 111. 53. 107 ; Way v. Davidson, 12 Gray • (Mass.), 465, per Metcalf, J. 34 CHAPTER II. OF THE SUBJECT MATTER AND THE PARTIES. I. The subject matter in general, 49-51. n. The title of the pledgor, 52-05. III. Fledges by married women, 66-68. IV. Pledges by partners, 69. V. Pledges by corporations, 70-74. VI. Pledges to corporations, 75-79. I. The Subject Matter in general. 49. Every kind of property of a personal nature may be the subject of a pledge, provided it be in existence, and be capable of actual or symbolical delivery. Formerly, ordinary goods and chattels formed the subject matter of nearly all pledges ; but in recent times, negotiable instruments, choses in action, shares of the stock of incorporated companies, bills of lading, and warehouse receipts are the subject matter of the greater number of transactions that come under the designation of pledges. The application of the general principles of the old law of pledges to these modern transactions, in which the paper evidences of values, or the documentary titles to property, are chiefly used, has wrought a new and great development of the law of this subject ; and has rendered it necessary to treat sep- arately of each of general classes of these incorporeal things which are now so frequently delivered in pledge. Therefore, the chap- ters following this will be devoted respectively to the considera- tion of pledges of negotiable paper, of choses in action, of cor- porate stocks, of bills of lading, and of warehouse receipts ; while the present chapter will be devoted to the consideration of the subject matter of pledges in general. 50. Property exempted by law from attachment and levy of execution may be pledged by tlio owner, who by such act waives the benefit of the exemption so far as the incumbrance extends.^ Such an exemption is no abridgment of tlie right of 1 Frost i;. Shaw, a Ohio St. 270 ; Jones i;. Scott, 10 Kans. 33. §§ 51, 52.] OF THE SUBJECT MATTER AND THE PARTIES. an owner of property to deal with it voluntarily as he may please, either in selling or pledging it ; it is only a protection which he may avail himself of as against the adverse action of his cred- itors. Moreover, the fact that the owner has pledged property exempt from execution does not subject his interest in it to ex- ecution in favor of a general creditor. 51. There may be a statutory prohibition of the pledging of a particular species of property. Thus, a pledge of a pen- sion certificate is wholly void whatever be the purpose for which it is made.^ This prohibition rests upon principles of general public policy. The Roman law prohibited the pledging of a debtor's necessary apparel and furniture, beds, utensils, and tools ; his ploughs, and other utensils for tillage ; things esteemed sacred ; the benevolence, or pension, or bounty of a monarch ; and the pay and emoluments of officers and soldiers.^ In Eng- lish speaking countries, although such property is generally ex- empt from attachment and execution, the debtor is left free to use it as he may choose for the purpose of obtaining loans or se- curing debts. II. The Title of the Pledgor. 52. A pledgor by the act of pledging impliedly warrants that he is the general owner of the property pledged ; ^ and he is liable to the pledgee in damages if the property, or any part of it, is taken from the latter under a superior title.^ The pledgor cannot, on the ground that he has no title to the pledge, recover it in an action against the pledgee. The pledge is valid between the parties, and invalid only as against the true owner of the property. But the fact that the pledgor has no title to the prop- erty, authorizes the pledgee to deliver it to the real owner, and 1 Act of Congress July 29, 1848; It has been decided on principles R. S. § 4745; Payne v. AVoodhall, 6 of public policy that the half-pay of an Duer (N. Y.), 169 ; Moffatt v. Van officer is not assignable or attachable. Doren, 4 Bosw. (N. Y.) 609. M'Carthy v. Goold, 1 Ball & B. 387, 2 Story Bailm. § 293. So, also, 389; Lidderdale v. Montrose, 4 T. R. the Code of Jewish law, bearing the 248; Flartyu. Odium, 3 T. R. 681. name of Moses, forbade the giving in ^ Goldstein v. Hort, 30 Cal. 372; pawn certain implements of husbandry Mairs v. Taylor, 40 Pa. St. 446. and a widow's raiment. Sir William * Cass v. Higenbotam, 27 Hun Jones Bailm. 84. (N. Y.), 406. 36 THE TITLE OF THE PLEDGOR. [§ 53. exempts the pledgee from all liability to the pledgor for its re- turn to him.i But it would seem that the pledgee should not be allowed to set up the title of a third person against the pledgor until such third person has given him authoritj'^ so to do, or has enforced his own superior right of property .^ A pledgor who has no title to the thing pledged at the time he pledges it, but afterwards acquires title, cannot set up such title against his pledgee.^ Of course, if the pledgor has no title to the property, the pledgee will acquire no title by the pledge. The pledgee can take no greater right than the pledgor can confer.* 53. But it is not indispensable that the pledge should be- long to the pledgor. One may make a valid pledge of prop- erty belonging to another if he has the owner's consent to use it in this way.^ Such consent may be either express or implied. But his authority to pledge cannot be inferred merely from his possession of the property. Thus, a person to whom a debtor, on leaving the state on account of his pecuniary embarrassments, has given a verbal direction to assist in the settlement of his af- fairs, has no authority to transfer any property in pledge as security for a debt.^ In Louisiana the Code provides that a debtor may give in pledge whatever belongs to him. But with regard to those things in which he has an ownership which may be divested, or 1 Jones on Bailment, p, 83 ; Chees- ful owner." Parke, B., said: " I think man v, Exall, 6 Ex. 341 ; Jarvis v. tLat a person with whom property is Rogers, 13 Mass. 105; S. C. 15 lb. pledged may set up the jus tertii, un- 389. In Cheesman v. Exall, supra, less he has entered into an engage- Pollock, C. B., said : " It may be that ment with the person who pledged it a person with whom property is to return the property to him." pledged may contract absolutely, and ^ Story Bailm. § 291 ; Biildle v. in all events, to deliver back the prop- Bond, 6 Best & S. 225 ; Garth v. erty to the pledgor; in which case I Howard, 5 Car. & P. 346, 350; Palm- agree that the former would be an- tag v. Dontrick, 59 Cal. 154. swerable in damages for the breach ^ § 31 j Goldstein v. Hort, 30 Cal. of such contract, though the damages 372. migiit be nominal only. That, how- * Waller v. Hanger, 3 Bulst. 17; ever, is not the ordinary result of the Hooper y. Kamsbottom,4 Campb. 121; common contract. In that case, the Cheesman i'. Exall, .s'(//;?7j. p<;rson who pledges iin[)Iieilly under- '' Story Bailm. § 291. takes that the property pledged is his ^ Swett v. Brown, 5 Pick. (Mass.) own; and if it turns out not to be so, 178. the pledgee may restore it to the law- 37 § 53.] OF THE SUBJECT MATTER AND THE PARTIES. which is subjected to incumbrance, he cannot confer on the cred- itor, by the pledge, any further right than he had himself. To know whether the tiling given in pledge belonged to the debtor, reference must be had to the time when the pawn was made. If at the time of the contract the debtor had not the ownership of the thing pledged, but has acquired it since by what title so- ever, his ownership shall relate back to the time of the contract, and the pledge shall stand good.^ One person may pledge the property of another, provided it be with the express or tacit consent of the owner. But this tacit consent must be inferred from circumstances so strong as to leave no doubt of the owner's intention, as if he was present at the making of the contract, or if he himself delivered to the creditor the thing pawned. Although the property of another cannot be given in pledge without his consent, yet so long as the owner refrains from claiming it, the debtor who has given it in pledge cannot seek to have it restored until his debt has been entirely discharged. Tutors of minors and curators of persons under interdiction, curators of vacant estates and of absent heirs, testamentary ex- ecutors, and other administrators named or confirmed bj^ a judge, cannot give in pledge the property confided to their administra- tion without being expressly authorized in the manner prescribed by law. An attorney cannot give in pledge the property of his prin- cipal without the consent of the latter, or an express power to that effect.^ Nevertheless, where the power of attorney con- tains a general authority to mortgage the property of the prin- cipal, this power includes that of giving it in pledge. The property of cities and other corporations can only be given in pledge according to the rules and subject to the restric- tions prescribed on that head by their respective acts of incor- poration. In California ^ and Dakota Territory * it is provided by statute that one who has allowed another to assume the apparent owner- 1 R. Civil Code 1870, p. 374, arts. « Codes and Stats. 1876, § 7991; 3142-3150. Tliis is in effect a state- Civil Code, § 2991. rnent of the civil law upon this part of * R. Codes 1877, § 1762 of Civ. the subject of pledges. Code. 2 Eeeves v. Smith, 1 La. Ann. 379. 38 THE TITLE OF THE PLEDGOR. [§§ 54-56. ship of property for the purpose of making any transfer of it, can- not set up his own title to defeat a pledge of the property made b}' the other to a pledgee who received the property in good faith, in the ordinary course of business, and for value. 54. Mere possession of a chattel, though indicative of title, is not title ; and one taking a pledge of it is bound to satisfy himself that the pledgor is the owner ; and if he relies solely upon the pledgor's possession, he takes the risk of having to surrender the property to the true owner.^ Thus, if one puts a chattel into the hands of a mechanic to repair it, the latter can- not, by force of his possession, though this be lawful, give any effectual lien upon it by way of pledge.^ If one holding goods for safe keeping pledges them with intent to convert the proceeds to his own use, he, in effect, commits a larceny, and the pledgee acquires no title as against the owner, although he deals with the pledgor in good faith.^ 55. One in possession of stolen chattels can ordinarily give a pledgee no better claim to them than he himself had. Though the pledge be taken in good faith for a valuable consideration, the title of the proper owner is not affected, and he can take the property wherever he can find it.* But there is a well settled distinction between the case of chattels acquired by felony, and the case of chattels acquired by fraud, as regards the title which the possessor may confer.^ It is everywhere admitted that the title to stolen goods remains in the proper owner, and continues in him through whatever transfers of possession the goods may pass, except the sales be in market overt under the doctrine of such sales at common law, which doctrine, however, has not been adopted in this country. 56. But the consequences of a sale or pledge of property held under a contract or transfer duly executed by the proper owner, though obtained from him by fraud, are very different. The contract or transfer between the immediate parties may be 1 Atrnew V.Johnson, 22 Pa. St. 4 71. * Duell v. Cudlipp, 1 Ililt. (N. Y.) 2 G;illaher v. Cohen, 1 Browne 166. (Pa.), 43. 6 Arcndalc v. Morgan, 5 Sneed 8 Ilartop V. Iloare, .3 Alk. 44, 48; (Tenn.), 70.'J. Gottlieb V. llartnian, 3 Colo. 53. 39 §§ 57, 58.] OF THE SUBJECT MATTER AND THE PARTIES. avoided by reason of the fraud, and tlie defrauded vendor may recover the property from the fraudulent purchaser, or from any one who has received it from him with knowledge of the fraud. But if the fraudulent purchaser has sold or pledged the property to another, who has taken it in good faith for value, the latter can hold it as against the defrauded vendor,^ In other words, while one holding possession of goods without the title can confer upon a pledgee no rights which the proper owner is bound to respect ; one who holds not only the possession but also the indicia of title, though acquired by fraud, can confer upon a pledgee acting in good faith a lien which must be respected by .the defrauded vendor. " As, for example, if a man purchases and obtains possession of a specific chattel, and pays for it by a fictitious bill of exchange, or by a check on a banker where he has no funds, and then pledges the article with a party who ad- vances money upon it without any knowledge of the fraud, the pledgee will have a lien for his advances against the vendor who has been defrauded. But if the article has been stolen and then pledged, the pledgee will have no lien upon it as against the owner. ^ 57. Possession alone of a security negotiable by delivery before due is presumptive evidence of title ; ^ but when such security is proven to have been stolen or otherwise appropriated in fraud of the rights of the owner, then the burden of proof is upon the possessor to show that he took it in good faith and for value. Upon making such proof, his title will prevail, unless the true owner can show bad faith on the part of the possessor ; that is, that the possessor has notice, actual or constructive, of the title of the true owner.^ 58. But one need not be the sole and absolute owner of a chattel in order to make pledge of it ; for one having a partial interest may pledge that interest, if he be in a position to make ^ Parker v. Patrick, 5 T. R. 175; 2 Arendale v. Morgan, 5 Sneed White V. Garden, 10 C. B. 919, 926; (Tenn.), 703, per McKinney, J. Jarvis v. Rogers, 13 Mass. 105; Mow- ^ Jarvis v. Rogers, 13 Mass. 105 ; rey v. Walsh, 8 Cow. (N, Y.) 238 ; S. C. 15 Mass. 389. Hoffman v. Carow, 22 Wend. (N. Y.) ^ Mercliants' & Planters' Nat. Bank 285. V. Masonic Hall, G2 Ga. 271; Shelton V. French, 33 Conn. 489. 40 THE TITLE OF THE PLEDGOR. [§§ 59, 60. an effectual delivery of the thing pledged. Thus, by statute in California^ and Dakota ^ one who has a lien upon property may pledge it to the extent of his lien. But inasmuch as the con- tinuance of a lien depends upon the continued possession of the person claiming it, it would follow that, in order to pledge such interest at common law, the person claiming the lien must em- power his pledgee to continue his possession as his servant for the preservation of the lien.^ If an agent or broker having a lien on goods for a general balance tortiously pledges them as his own to secure his own debt, his pledgee cannot hold them as against the principal for even the amount of the lien which the agent had upon the goods.* A mortgagor left in possession of the mortgaged goods, under a mortgage not recorded, may effectually pledge them to one who is ignorant of the mortgage, and has no cause of suspicion or in- quiry as to the pledgor's title.^ If the mortgage be recorded the mortgagor can pledge his equitable interest or right to redeem. 59. One having only a life interest in a chattel can pledge that interest, but only that interest. Thus certain plate was left to trustees for the use of the testator's wife during her widowhood, and she pledged it for value to one who had no notice of her limited interest. At her death the pledgee refusing to deliver the plate to the trustees, who claimed it on behalf of the re- mainder-man, it was held in an action by them that the pledgee had no valid title after the death of the tenant for life, and that he must restore the plate.^ 60. When the pledgor has only a limited interest in the thing pledged, the pledgee cannot, upon default, sell the property ; but if he can sell any right or title to it, it is only the right or title that he derived from the pledgor. "The right of a pledgee to sell the property pledged, on giving reasonable and proper notice to tlui pledgor of the time and place of sale, depends upon circumstances. Sometimes the pledgor has only a ^ Codes and Stats. 1876, § 7990; * M'Combie r. Davics, ,s»y?ra. Civ. Code, § 2990. s Lewis v. Stevenson, 2 Hall (N. ^ R. Codes 1877, § 1761 of Civ. Y.), 63. Code. 6 lloare i;. Parker, 2 T. R. 376. ' M'Conibie v. Davies, 7 East, 5. 41 §§ 61, 62.] OF THE SUBJECT MATTER AND THE PARTIES. limited title to tbe property pledged. He may have only an interest for life, or for a term of years, or lie may have simply a lien, or a right by former pledge ; still he may pledge the prop- erty to the extent of his interest. But the pledgee in all such cases has no right to sell the property on the non-fulfilment of the contract, although he may pursue the proper course for the purpose, for the pledgor has no such right to confer. The pledgee must content himself in such cases with holding the possession of the property till his debt is paid, or the interest of his pledgor in the property has expired." ^ 61. An administrator may pledge personal property be- longing to the estate, and the pledgee dealing with him in good faith will obtain a good title, for the legal title to such property is in the administrator, and the purposes of the estate may re- quire such a use of it. But if the administrator violates his trust in so dealing with the property, and the pledgee has knowledge of such violation, his title may be impeached ; and he has knowl- edge of a misapplication of the trust property when the admin- istrator uses it to secure his own debt to the pledgee.^ 62. A vendor in possession of property may pledge it, though he is under contract to deliver it to a purchaser upon the payment of the purchase money. Upon the payment of the debt for which the pledge is made in such case, the pledgee is bound to deliver the proj)erty back to the pledgor ; and he cannot law- fully deliver the goods to any one else, as, for instance, to one who claims to be a purchaser from Ihe pledgor, unless the latter so direct." The pledgor is entitled to a return of the goods, and a delivery of them to any one else, though he has a contract for their purchase, may defeat the pledgor's rights, and deprive him of his security for the purchase money. Not only is the pledgee bound to return the goods to the pledgor, but he is equally bound to defend the interests of the latter in an action brought by a stranger to recover the property, when he is not entitled to the possession of it.^ ^Robertson v. Wilcox, 36 Conn. Armistead, 6 lb. 74; Tyrrell ?;. Morris, 426, 430, per Park, J. 1 D. & B. (N. C.) Eq. 559, 560. 2 See Chapter XII.; Wilson v. Dos- ^ Dean v. Lawbam, 7 Oregon, 422; ter, 7 Ired. (N. C.) Eq. 231; Gray v. Lyle v. Barker, 5 Binn. (Pa.) 457. * Pomeroy v. Smith, 17 Pick, 'i-j (Mass.) 85; Dean v. Lawbam, sujn-a. THE TITLE OF THE PLEDGOR. [§§ 63, 64. 63. A vendee in possession of chattels under a conditional sale cannot make a valid pledge of them, because he is not the owner until he has complied with the condition. But if the sale be subject to a statute, such as exists in several states, which re- quires contracts for conditional sales to be recorded in order to be valid against creditors and subsequent purchasers without notice, the vendee, holding possession under a contract of conditional sale not recorded, can convey a right by pledge superior to that of the vendor. Thus, a manufacturer in Pennsylvania leased a locomo- tive to a railroad corporation in Iowa, where such a statute was in force, by an instrument in writing not recorded, for a sum equal to its value, to be paid in nine months, whereupon a bill of sale should be executed ; otherwise the manufacturer had the right to repossess the locomotive. The locomotive was taken to Iowa, and was there pledged by the railroad corporation as security for a loan. It was held that the pledgee's right was superior to that of the manufacturer.^ But the general rule of law, when not affected by statutory provisions, is, that while an agreement between the vendor and vendee of personal property that the title shall not pass until the property is paid for, is legal and binding between the parties themselves, though possession of the property is delivered to the vendee ; yet as to purchasers and creditors of the vendee such agreement is void, and as to them the property must be consid- ered as belonging to the vendee in possession. And if the ven- dee in possession pledges the property to one who loans him money hond fide, without notice, the latter will acquire a valid and binding lien on the property for the payment of the money loaned, and he will be protected against the vendor's claim for the purchase money. A notice of defective title in the pledgor comes too late to affect the pledgee after he has advanced money secured by the pledge. To be operative, such notice should be prior to the payment of the money .^ 64. A common carrier or other bailee of goods cannot pledge them. Thus where carriers on their way purchased a 1 Pittsbiirf; Looomotive & Car GO III. 100 ; Western Union R. U. Co. WorlcH u. State Nut. Hank, 21 Int. i'. Waj^ner, C) 111. 1 97 ; Ohio and Miss. Rev. Ree. .'MfJ. K. K. Co. v. Kerr, 49 III. 458. 2 Micb. Cent. R. R. Co. v. Phillips, 43 §§ 65, QQ.I OF THE SUBJECT MATTER AND THE PARTIES. boat in order to ascend a river to the place of destination of their goods, and deposited, as security for the boat, a portion of the goods, the owner was held to be entitled to recover against the pledgee.! A master of a ship may, however, hypothecate a por- tion of his cargo, when this is necessary to enable him to con- tinue the voyage ; ^ but in doing this he is regarded, under the general maritime law, as acting as an authorized agent over the cargo, and not in the capacity of a carrier. Moreover, to justify such hypothecation the necessity must be exti-emely clear. It must appear that the vessel was in a foreign port ; that the voyage was unfinished ; and that the pledge was indispensable to enable the ship to complete the voyage.^ 65. One joint owner of a chattel, though in possession of it, cannot pledge the interest of his co-o-wner without his con- sent, and the fact that the pledgee acts upon the supposition that he is acquiring a lien vipon the entire interest does not avail to give him such a lien.^ One joint owner of a chattel may, how- ever, pledge his own interest without the consent of his co-owner, and if the pledgor had the right of possession the pledgee will take the same right of possession as against the other owner ; and in such case the latter cannot maintain replevin against the pledgee for the thing pledged ; nor can both joint owners jointly maintain the action without paying the debt secured.^ One of two joint owners of a chattel, both being in possession, may pledge his share to the other joint owner, and he, by con- tinuing in possession and control, has a valid pledge.'' III. Pledges by Married Women. QQ. Married women, under the statutes now in force in most of the states in regard to their property rights, can make contracts affecting their separate personal property as freely as 1 Kitchell V. Vanadar, 1 Blackf. * pj-ans u. Young, 24 Iowa, 375. (Ind.) 356. s Frans v. Young, sujora, Chief Jus- 2 Freeman v. East India Co. 1 Dow. tice Dillon delivering tlie decision and & Ry. 234; S. C. 10 B. & Al. 617, citing numerous authorities. 621, per Bayley, J. ; The Gratitudine, See Jones on Chattel Mortgages, §§ 3 Rob. Adm. 240, 258 ; The Fortitude, 47, 48. 3 Sumn. 228; United Ins. Co. v. Scott, ^ Thorns v. Southard, 2 Dana (Ky.), 1 Johns. (N. Y.) 106,111. 475, 479. 3 Marziou v. Pioche, 8 Cal. 522. 44 PLEDGES BY MARRIED WOMEN. [§ 67. single women can. The statutes of the several states are not the same, and do not confer the same powers of independent control ; but generalh^ they enable a married woman to hold and dispose of her personal property in the same manner as if she were sole.^ She may make a valid pledge of such property to secure a debt of her own, her husband's debt, or the debt of another person. She may pledge her stock in a corporation to secure such a debt, and may confer upon the pledgee a valid power of sale without notice upon a default in payment of the debt secured.^ A certifi- cate of shares standing in the name of a married woman is evi- dence of her absolute ownership of it ; and in case there is noth- ing in it or connected with it indicating a trust in favor of another person, one loaning money upon her pledge of the shares as security is warranted in making the loan upon the assumption of such ownership. He is not bound to inquire and ascertain how she obtained it.^ 67, A married woman who has pledged, or allowed her husband to pledge, her separate property for his own benefit, is entitled to have the pledge redeemed by him or out of his estate. If her husband become insane and his estate is ample, she may require his guardian to redeem her jewelry and other articles pawned to pay his personal expenses.^ A pledge of a married woman's personal property made by her husband without her authority is of course not binding upon her ; but such a pledge becomes effectual upon her subsequent ratification of it.^ If a married woman authorize her husband to pledge a chattel belonging to her, the presumption is that his authority svas to pledge it in the usual manner of making pledges ; and mere authority to raise money on the property does not authorize him to consent to a sale without notice upon default, or to consent to a sale in any manner except that specified by statute." ^ Upon the general powers of married » Lcitch r. Wells, 48 N. Y. 585. women at common law and by statute 4 Ilanall's Case, 31 N. J. Eq. 101. to cliarge their own pnpertyfor their ^ Merrill i". Parker, 112 Mass. 250. own delits, or the debts of others, see <> Van Arsdale v. Joiner, 44 Ga. 1 Jones on Mortgaj;es, §§ 106-118. 173. " Dando's Aj.p. 'Ji Pa. St. 7G. 45 §§ 68, 69.] OF THE SUBJECT MATTER AND THE PARTIES. The wife of a debtor has no implied authority, in his absence, to pledge any property of his for the payment of his debt.^ 68. A married woman may pledge a policy of insurance for her benefit upon the life of her husband as security for a debt of his.2 It has been objected that such a policy cannot be transferred by a married woman, even with the consent of her husband, because the fund itself, not being payable in the life- time of the husband, is a reversionary interest belonging to the wife, which cannot be lawfully transferred by the husband and wife so as to bar her right of survivorship. But the principle involved in this objection has no application, where the rever- sionary interest secured to the wife is her sole and separate prop- erty ; and therefore her assignment of such a policy, as collateral security for her husband's indebtedness, is valid.^ IV. Pledges hy Partners. 69. One member of a copartnership may make a valid pledge of a chose in action, or other property of the firm, to secure a partnership debt.^ A sole surviving partner may also transfer in pledge a chose in action, or other personal property of the partnership, to secure a partnership debt, and the pledge, if made in good faith, will be effectual against other creditors of the partnership, as well as against the representatives of the de- ceased partner.^ A partner intrusted with winding up the business of his firm, and authorized to trade any part of the assets, and to do all and everything he might deem expedient for settling its affairs, may pledge notes belonging to the firm, to secure not only a loan ob- tained to meet a jjartnership liability, but also a prior indebted- ness of the firm to the same creditor.*^ But under the Code of Louisiana' a partner cannot for his own concerns give in pledge the partnership property without the 1 Swett V. Brown, 5 Pick. (Mass.) ^ Galway v. Fullerton, 17 N.J. Eq. 178, 389, See Jones on Chattel Mortgages, 2 Collins V. Dawley, 4 Colo. 138 ; §§ 45, 46. Pomeroy v. Manhattan Life Ins, Co. ^ Bohler v. Tappan, 1 Fed. Eep. 40 111. 398. 469. 3 De Ronge v. Elliott, 23 N. J, Eq. ^ s„-,itii y. Dennison, 101 111. 531. 486, And see Charter Oak Life Ins, ^ R. Civil Code 1870, p. 374, art. Co. V. Brant, 47 Mo. 419, 351. 46 PLEDGES BY CORPORATIONS. [§§ 70, 71. consent of bis associates. He cannot do it even for the partner- ship concerns without such consent, unless he be vested with the management of the copartnership. This rule admits of excep- tion in matters of commercial partnership. V. Pledges hy Corporations. 70. As a general rule a corporation has the power to pledge any chattel belonging to it, unless expressly restrained by statute, or impliedly restrained by the nature of its under- taking. A corporation has at least the same power to pledge its property that it has to mortgage it ; and this power is unlimited, except in case of corporations which have been given special rights and privileges, from the exercise of which it is expected the public will derive an advantage. Railroad corporations are of this nature. Accordingly it is held that such corporations can- not, without legislative authority, mortgage their corporate fran- chises, or property which is essential to the exercise of such fran- chises.^ This restriction upon the right of alienation by such companies applies with much more force to transfers by way of mortgage than to transfers b}^ way of pledge ; for there is but little property essential to maintaining the business of such a corporation which could be delivered by way of pledge. So far as concerns a pledge of the rolling-stock of a railroad corpora- tion, the same considerations would apply that are applicable to mortgages of such rolling-stock.^ 71. A corporation may pledge unissued stock which has been left in the hands of its directors to be applied to the ad- vancement of its best interests. The directors have in such ease the right to determine how it can be most advantageously used, and it is no proper subject of complaint on the part of any one that they apply it to raising money for the company.'^ Upon the payment of a debt of a corporation secured by a pledge of its own bonds, and the surrender of the bonds to an ^ .Jones on liiiilroad Securities, §§ v. Fisher, 9 N. J. Eq. 6G7, it seems l-2o; Jones on Mortgages, § 124. to have been doubted wlielher a * See Jones on Railroad Securities, debtor's own obligation could be held §§ 146-187. • in pledge for hia debt. But there can ' Combination Trust Co. v. Weed be nociuestion now that such a jjlodgo (C. C. E. D. Pa. 1880), 2 Fed. Kcj). can be made; and, as a matter of fact, 24. In Morris Canal & IJaiiking Co. such pledges are very freijuent. 47 § 72.] OF THE SUBJECT MATTER AND THE PARTIES. officer of the corporation, they are not property of the corpora- tion liable to be reached by garnishment against the officer ; ^ for upon the payment of the debt the bonds, which were merely the corporation's own collateral promises, were discharged. The obligation of the corporation, as witnessed by its bonds, is dis- charged by payment as much as the corporation's note is dis- charged by the same payment. 72. A corporation may, moreover, pledge its unissued stock, or negotiable bonds, to its president or to one of its directors, as security for a loan ; and although the transaction will be looked upon with suspicion, it will be enforced when it is shown to have been made for the benefit of the corporation, and to be just.^ Although a director stands in a fiduciary relation to the corporation, and is within the rule disenabling one intrusted with powers to be exercised for the benefit of others from deal- ing in his own behalf, in respect to matters involving the trust, yet such a transaction cannot be avoided by the corporation with- out restoring what it has received ; and it is immaterial in this respect whether the pledge was taken for a present or a pre- cedent debt.^ A director receiving bonds or other property of a corporation, as collateral security for a debt honestly due him, is 1 Galena & Southern Wis. R. R. Sherwood, C. J., said: "Even if the Co. V. Stahl, 103 III. 67. In this case, order by which the officers and direc- however, the bonds were not actually tors of the company pledged to each in the officer's hands, though he had other nearly a million dollars in bonds receipted for them. The creditor had to secure an indebtedness of less than proved them before a master appointed four per cent, of the face of the col- in foreclosure ^proceedings, and had laterals, can be imagined, considering left the bonds in the master's hands, the great disproportion between the The receipt by the officer was a mere amount of the debt and the value of formality to free the creditor from his the pledge, to have been made bond obligation to return the bonds. But Jide, still the fact that the pledge was aside from this circumstance, the prin- made in favor of themselves, by the ciple stated in the text seems to be fiduciaries of the company's interests, good law, and to be suppoi-ted by the is enough to cause the order to be reasoning of the court. scrutinized with the most rigorous and 2 Combination Trust Co. v. Weed jealous observation. A transaction of (C. C. E. D. Pa. 1880), 2 Fed. Rep. 24. this kind is viewed with greater odium In Chouteau v. Allen, 70 Mo. 290, than a dealing between a trustee and 338, where the directors of a corpo- his beneficiary." ration pledged a large amount of its " Duncomb v, N. Y., Housatonic, assets to themselves, the court, by & Northern R. R. Co. 84 N. Y. 190. 48 PLEDGES BY CORPORATIONS. [§§ 73, 74. not within the rule. " Whei'e the trustee's act consists, not in possessing himself of the property of the beneficiary as owner, but in taking collateral security for a debt honestly due him, or a liability justh' incurred, the rule can have no application, since the payment of the debt, or the discharge of the liability, is an essential prerequisite of the avoidance." ^ 73. A manufacturing or commercial corporation may pledge its mortgage bonds as collateral security for existing debts, and this power is not limited or restrained by a resolution of its stockholders authorizing the use of the bonds in payment, at par value, of any indebtedness of the company, or to raise money for conducting its business. One of the implied powers of such a corporation is to deal on credit, for any proper cor- porate purpose, in the usual and ordinary mode of conducting its business. Such bonds, whether hypothecated as a security for antecedent debts or applied directly to their satisfaction, are used in paying the debts, for the benefit of the corporation, and for the objects specified in the resolution.^ 74. A railroad corporation having power to borrow money for completing or operating its road, and to issue its bonds to secure the jaayment of any debt contracted for that purpose, may make a valid pledge of its bonds, not only for money borrowed at the time, but also for a precedent debt incurred for money bor- rowed for the purposes specified, unless some statute requires that the borrowing and the issuing of the bonds shall be simultaneous.^ Such a corporation may make a valid pledge of its bonds to its president to secure a sura of money fairly due him upon his salary. It may also make a valid pledge of its bonds to secure the rent of offices used in its business ; for such an expenditure is embraced within the authority conferred upon it to issue its bonds.* * Duncoinb r. N. Y., Ilousatonic & a protection into a weapon of offence Xoniiern K. K. Co. 84 N. Y. lUO. and injustice." Per Finch, J. "'I'o clinjj to the fruits of the trustee's '^ Lehman v. Tallassee Alanuf. Co. dealing while seeking to avoid his 6-1 Ala. 6G7. act; to take the benefit of his loan, « Dunconib y. N. Y., Ilousatonic & and yet avoid and reverse its security, Northern R. II. Co. 8-1 N. Y. 190. would be grossly ineciuitable and un- ■• Dunconib y. N. Y., Ilousatonic & just. It would turn a rule designed as Northern 11. K. Co. supra. * 49 §§ 75-77.] OF THE SUBJECT MATTER AND THE PARTIES. VI. Pledges to Corporations. 75. A corporation, whether private or municipal, may take a pledge of any property, unless the pledge come within some positive statutory prohibition. A pledge to a corporation ■which is prohibited from doing a banking business may be en- forced, though the transaction was a discount of a note secured by pledge. The note 7nay be void, but the loan and the security are valid.^ 76. A corporation prohibited by statute from becoming the holder of the stock of another corporation cannot take a pledge of the stock of such other corporation from one of its stockholders. If it attempt to do so, the corporation whose stock is sought to be pledged, hy refusing to transfer the stock upon its books, does not make itself liable to the pledgee for such refusal, because the pledgee, in such case, is not entitled to a transfer.^ Though a corporation take in pledge security which it is prohib- ited by its charter from holding, the contract of pledge is not void, but, at most, only voidable. The title to the security vests in the corporation as pledgee.^ 77. A national bank may take a pledge of chattels as se- curity for a loan of money. The authority conferred by the banking act to make loans on personal security does not restrict them to the security afforded by the names of indorsers or per- 1 Duncomb v. N. Y., Housatonic & seem to be little doubt, either upon Northern R. E. Co. 84 N. Y. 190. principle or authority, and indepen- 2 Franklin Bank v. Commercial dently of express statutory prohibi- Bank, 36 Ohio St. 350. Such a tion of the same, that one corporation statutory prohibition is founded upon cannot become the owner of any por- the reason that if one corporation tion of the capital stock of another could acquire the stock of another corporation, unless authority to be- lt might obtain a controlling interest come such is clearly conferred by in tbe stock of that corporation, and statute." The same view was ex- thus not only interfere with the in- pressed by the Supreme Court of ternal management of the affairs of Maine in the case of Franklin Com- that corporation, but enlarge its own pany v. Lewiston Inst, for Savings, franchise by engaging in business 68 Me. 43, where other cases to the foreign to that for which it was organ- same effect are cited. ized. In the above case there is a ^ Sestare v. Best, 88 N. Y. 527, dictum of the court that ' ' there would 50 PLEDGES TO CORPORATIONS. [§§ 78, 79. sonal sureties, bat they may take pledges of bonds, cboses in action, bills of lading, or other personal chattels ; and this is the universal usage.^ The words "personal security" seem to be used in contradistinction to real estate security. A pledge to a national bank is valid although taken in viola- tion of a provision of the National Banking Act, prohibiting a loan to one individual exceeding one tenth part of the capital of the bank. The penalty for such a violation of the law consists in proceedings against the franchise of the bank, and a liability for damages of its offending officers. ^ A national bank may hold in pledge, as collateral security for a loan made or to be made, shares in the capital stock of another national bank.^ A national bank has no authority to lend its credit on personal security ; and therefore one who knowingly takes as collateral security drafts of a national bank drawn for the accommodation of a customer, cannot recover in a suit against the bank in the hands of a receiver.'^ 78. National banks may take a pledge of the stock of cor- porations whose property is solely real estate, without violat- ing the provisions of the National Banking Act, under which it is held that such banks cannot loan money upon mortgao-es of real estate, if such mortgages are taken as security for loans made at the time, or for future advances; ^ for a pledge of stock of such corporations is in no sense a mortgage of the corporate property. ^ The stock of such corporations is personal property. 79. A national bank cannot make a valid loan on the se- curity of its own stock." It cannot become a holder in any way of its own shares, unless this is absolutely necessary to pre- 1 Pittsburg Locomotive & Car 628; Dayton Nat. Bank r. INIercliants' Works V. State Nat. Bank, 21 Int. Nat. Bank, 37 Ohio St. 208, 21. -J. Itev. Record, 3-19; Shoemaker v. Na- * Johnston v. Charlottesville Nat, tional Mechanics' Bank, 2 Abb. (U. Bank, 3 Hughes, C57; and see Selij^- ^•) '^^''- man v. Charlottesville Nat. JJank, lb. =^ (iold Miiiinf^ Co. V. Nat. Bank, 'JG G4 7. U. S. (MO; Diincoinb v. N. Y., Hoiisa- ^ .loncss on Mortga'j;e.s, § 134. tonic & Northern II. R. Co. 84 N. V. « Baldwin v. Canfidd, 2G Minn. 43; I'^C- S. ('. 1 N. W. Rep. 2G1, .085. » National Bank i'. Case, 99 U. S. '' Act of June 3, 1864. 61 § 79.] OF THE SUBJECT MATTER AND THE PARTIES. vent a loss on a debt previously contracted.^ It cannot acquire a lien on its own stock held by persons who are not debtors, even" by force of direct by-laws, or articles of association framed for that purpose. Such a lien is against the spirit and policy of the statute, and a bank has no right to make a by-law giving such a lien. 2 1 Bank v. Lanier, 11 Wall. 369; Ha- " Bullard v. Bank, 18 Wall. 589. gar V. Union Nat. Bank, 63 Me. 509. 52 CHAPTER III. PLEDGES OF NEGOTIABLE PAPER. I. Delivery and possession, 80-88. I III. Collateral for a preexisting debt, 107- II. Bonajide holder for value, 89-106. | 133. I. Delivery and Possession. 80. Delivery and possession are essential to a valid pledge of negotiable paper, in the same way that they are essential to a valid pledge of a corporeal chattel. In a recent case before the Supreme Court which arose in Louisiana, and was governed by its Code, it was held that a pledge of negotiable paper without an actual transfer or delivery of it to the pledgee, it never having been out of the pledgor's actual possession, but always subject to his disposal by way of collection, sale, substitution, or exchange, was not valid as against the pledgor's creditors.^ A bank of New Orleans, organized under the National Banking Act, obtained a loan of a million francs from the Credit Mobilier of Paris, upon an agreement to deposit bills and notes with the president of the bank and his partner, Cavaroc & Son. Certain securities were selected and placed in an envelope and handed to the president, for Cavaroc & Son. He handed them to the cashier of the bank for safe keeping. Soon after- wards the securities were handed to the discount clerk, for the purpose of his conveniently attending to their collection and renewal. When any of the notes were paid, the money was taken and used b}'^ the bank, and other notes were substituted in their place. Many of the notes were exchanged, because more available to the bank in some qther transaction. So far as those with whom the bank dealt could perceive, the bank continued to have pos.session and control of all tlie securities in its own right, and they all appeared to be equally liable with the other assets to the claims of all the creditors. It was held that there was not 1 Casey u. Cavuroc, 90 U. S. 4G7; lb. 492; Casey v. Scliiiciianli, II). followed in C;u. Fourth Nat. Bank, 7 liob. ball, 6 Cush. 469; Fisher v. Fisher, (N. Y.) 479; Easter v. Minard, 26111. 98 Mass. 303; Wheeler v. Guild, 20 494. And see Casey v. Cavaroc, 96 Pick. 545. Other States: Iowa Col- U- S. 467. lege v. Hill, 12 Iowa, 462; Blake v. 2 Dunn V. Meserve, 58 N". H. 429. Buchanan, 22 Vt. 548 ; Valette v. 3 New York: Ballard v. Burgett, Mason, 1 Ind. 288; Coit v. Humbert, 40 N. Y. 314; McNeil v. Tenth Nat. 5 Cal. 260 ; Kobinson v. Smith, 14 lb. Bank, 46 N.Y. 325; overruling .S. C. 94; Matthews v. Rutherford, 7 La. 55 Barb. 59; Moore U.Miller, 6 Lans. Ann. 225; Patterson v. Deering, 1 396. Massachusetts: Sargent u. IMet- Marsh. (Ky.) 326. 64 BONA FIDE HOLDER FOR VALUE. [§ 96. taining the principal note, the transfer as between liim and the pledgor operates jt?ro tanto as payment of the original debt ; ^ and it is immaterial in this respect whether the collateral note be over- due or not. If, after such transfer of the collateral note, the pledgee transfer the principal note to another person, and this note be overdue at the time, the assignee takes it subject to the equities existing between the pledgor and pledgee in regard to the collateral note; that is, the assignee takes it subject to a credit pro tanto, or subject to payment, according to the amount of the collateral.^ If the principal note be transferred before its maturity, but after a transfer of the collateral note, and the trans- feree take it for value without notice of the collateral note, he acquires a title to it subject to no equities existing between prior parties. In such case the loss would fall upon the pledgor, who had by his negligence enabled the pledgee to transfer both notes, and to give good title to both without notice that one was col- lateral to the other. If the original note be first transferred, the assignee is entitled to the collateral note, if this be still in the hands of the pledgee.^ 96. An agent holding negotiable paper for collection or safe keeping can effectually pledge it for his own debt, in fraud of the true owner, if it be in such form that the title will pass by delivery. Thus, if a note or bill of exchange be indorsed in blank by the owner, and placed in the hands of a banker for collection, the latter can pledge it for a debt of his own.* In some cases it has been sought to make a distinction between a pledge and a sale of such paper by the agent ; but there is no such distinction, and the courts have refused to recognize one.^ 1 Cocke V. Chaney, 14 Ala. 65; and N. H. Sav. Bank, 58 N. H. 83 ; Mor- see Harris v. Johnston, 3 Cranch, 311. ris v. Preston, 93 111. 215. 2 Ware V. Russell, 57 Ala. 43. 5 <. xij^ peculiar doctrine, as e.\- 8 Ware v. Russell, Hupra. pressed in Jenness v. Bean, 10 N. H. * Treuttel v. Barandon, 8 Taunt. 266, and Williams y. Little, 1 1 N. H. 66, 100; Lloyd v. Sigourney, 5 Bing. 525; that negotiable paper, pledged to the Sigourney v. Lloyd, 8 B. & Cr. 622; holder as collateral security, is not, Goodman v. Harvey, 4 Ad. & E. 870; in the hands of an innocent pledgee, Wookey i-. Pole, 4 B. & Aid. 1; exonerated from defences or delec- Brandao i;. Barnett, 2 Scott N. R. 96; tive title, is not recognized outside (iorgicrt). Mieville, 3 B. & Cr. 45; Col- of New Hampshire, and within this lins V. Martin, 1 B. & P. G48; Clement state has been so limited as not to in- V. Leverett, 12 N. 11. 317; Tucker i'. elude cases like the one under consid- 5 Qh § 07.] PLEDGES OF NEGOTIABLE PAPER. The agent's breach of confidence is as great in one case as in the other. " He may sell because the property has been intrusted to him, and he may pledge for the same reason ; for he who has the property has a disposing power, and tjie law has not limited it to be used in any particular manner." ^ 97. Misapplication by debtor's agent. — Neither is the lender of money upon collateral securities, whether negotiable or not, bound to see that an agent or other person, acting for the borrower, applies the money to the use of his principal. Thus, the owner of a bond and mortgage, wishing to obtain a loan upon them, placed them in the hands of an agent, wlio gave a receipt that be had received the same to raise money upon ; or if he should give the money to the owner, or pay it for him at liis request, he should hold the same as security until repaid. The agent procured the money from a third person, and as- signed him the bond and mortgage ; and it was held that such lender was not bound to see what disposition the agent made of the money. The borrower, having given credit to the agent, must look to him for the money, and not to the lender dealing with the agent in good faith.^ And so where the payee of certain notes secured by mortgage indorsed them in blank and placed them in the hands of a banker as his agent, to collect the interest and to eration. In Clement v. Leverett, 12 earlier application, and of paramount N. H. 31 7, an agent of the defendants, influence in this case (Clement v. Lev- intrusted by them with bills drawn by erett). The defendants intrusted Bur- him payable to his own order, and by ley (their agent) with these bills, ac- them accepted to enable him to raise cepted by them, and thereby enabled money for them, pledged the bills to a him to hold himself out as the owner bond Jide holder to secure money bor- of them. . . . Assuming that Burley rowed for his own use. It was held abused the confidence reposed in him, that the defendants, having enabled the defendants, who intrusted him with their agent to hold himself out as these negotiable evidences of debts owner, were bound by the pledge, and against themselves, must bear the loss. liable to the pledgee. Parker, C. J., ... The plaintiff is a bona fide holder delivering the opinion, says, of Jen- without notice.' " Tucker r. New ness V. Bean and Williams v. Little, Hampshire Savings Bank, 58 N. H. that the court advanced the doctrine 83, 85, per Allen, J. of those cases, because the general i Per Eyre, C. J., in Collins v. Mar- ownership or property of the bill or tin, 1 B, & P. 648. note pledged as collateral security re- 2 Westervelt v. Scott, 11 N. J. Eq. mained in the indorser. 'But,' he re- 80. marks, ' there is another principle, of 66 BONA FIDE HOLDER FOR VALUE. [§§ 98-100. sell them for his benefit, and the agent pledged them to secure a debt of his own, it was held that the owner of the notes could not invalidate the title of the pledgee, who had acquired the notes in the usual course of business from one who apparently had the absolute title. ^ 98. A statute declaring the assignment of collateral se- curity before the debt secured is due a criminal offence - does not affect the title of an innocent assignee, who takes such se- curity for value, and without notice of the fraud of the assignor.^ 99. A note founded upon a consideration made illegal by statute — as, for instance, a note given for liquors sold in viola- tion of law, but not declared void by the express terms of the enactment — is not open to defence in the hands of one to whom the payee has indorsed it before maturity as collateral security for a preexisting debt. Mere illegality of consideration does not extend to, or affect the rights of, an indorsee for value and with- out notice.'* 100. Notice of equities. — Actual knowledge on the part of one taking negotiable paper before maturity, that the assignor held it as collateral security, would, of course, subject the as- signee to the equities of the owner of such security.^ Such knowledge might be shown by circumstances ; but the circum- stances must be such that actual knowledge can be inferred from them. Thus, in a modern case,^ two circumstances were relied upon to subject a note so assigned to the equitable rights of tiie pledgor. The first was that the assignee of the note knew that the assignor was a broker. But the court said it is no ground to presume or suspect that, merely because a man is a broker, he has no negotiable paper in his hands except such as he liolds as collateral security, and has no right to transfer. The next cir- cumstance was that, when the pledgee transferred the note, he 1 Morris v. Preston, 93 111. 215. * Cobb v. Doylc, 7 R. I. 550; T:iy- ^ As does Cien. Sts. of Mass. c. ICl, lor r. Page, 6 Allen Mass.), 8G. § 64; P. S. 1«82, c. 203, § 72. ^ PatU;rson v. Deeriiij; 1 .Marsh. 8 Draper v. Sa.xton, 118 Mass. 427; (Kv.) .•}2(;. Gardner v. Gager, 1 Allen (Mass.), " Gardner v. Gager, siijn-a. 502. G7 § 101.] PLEDGES OF NEGOTIABLE PAPER. stated to tlie assignee that at or before its maturity he should wish to change it, and substitute other security ; and it was con- tended that this request indicated that he had no right to trans- fer it. But in this case the pledgee borrowed of the assignee upon the note only a part of the amount which the note was given fo^, and he borrowed it for a time extending beyond the maturity of that note. Therefore, the request would indicate that the pledo-ee owned the note, and desired to collect it and use the money at its maturity. At least, it did not indicate the contrary. 101. The fact that a note taken as collateral security bears no indorsement of several instalments of interest that have fallen due does not render it subject to equities existing be- tween the original parties to it.^ Even if failure to pay interest amounted to a dishonor of the note, it would only affect one who has knowledge of the fact. " Payment of interest," say the court, " is not always indorsed, and other evidence is often relied on to prove it. Want of indorsement does not apprise the party to whom such note is transferred that there has been no payment ; and when the note is only taken as collateral, and accuracy is not lequired in ascertaining the amount due for interest, the fact that overdue interest is not indorsed might have slight influence in putting the purchaser upon his inquiry. It has, indeed, been held by this court that a note, the principal of which is payable by instalments, is overdue when the first instalment is overdue and unpaid, and is thereby subject to all equities between the original parties.^ Such a note is a single contract, and the party to whom it is transferred must take it with notice that, as to the overdue instalment, the maker may have a justifiable cause for withholding payment, which may affect the whole contract. But in its eifect upon the credit of a note it is manifest that a failure to pay interest is not to be ranked with a failure to pay principal. Interest is an incident of the debt, and differs from it in many respects." But the court, while refusing to hold that the non-payment of interest upon the collateral note was not sufficient to discredit the note, and subject the holder to antecedent equities, held that it 1 National Bank of N. A. v. Kirby, 2 Vinton v. King, 4 Allen (Mass.), 108 Mass. 495. 562. 68 BONA FIDE HOLDER FOR VALUE. [§ 102. was a fact proper to be considered by the jury, in connection with other circumstances, on the question whether the holder took the note in good faith and without notice of existing defences. 102. A note which states that it is to be held as collateral security is not negotiable.^ And so a memorandum put upon a promissory note, by the maker of it, before delivery, that it is given as collateral security, destroys its negotiability ; for the words indicate that there may be a contingency, namely, the per- formance of the undertaking to which it is collateral, in which the note would not be payable ; and so it lacks that element of nego- tiability which requires that at all events a sum certain shall be payable at a time certain. Therefore an action cannot be main- tained upon such a note by an indorsee, nor can an indorser of it be charged and held liable as an indorser of negotiable paper. A memorandum on the back of a promissory note, signed in the name of a partnership, that the note was given as security for another note of the same date and amount, and payable at the same time, made by a third person, is sufficient to charge a bank taking both notes as security for a loan with notice that the partnership note was given as security only for the payment of the other note. In an action by the bank against the partner- ship, the burden is upon the bank to show that the note was given with the consent of all the partners, or in payment of a debt contracted in the course of the partnership business; and, therefore, if it appear that the note was fi'audulently signed by one of the partners without the knowledge of the other partners, the bank cannot recover upon it.^ Parol evidence is admissible to show what debts are secured by a note which contains upon its face a memorandum that it is "to be used as collateral security " to notes of a person named. The purpose of such evidence is to correctly ap{)ly the note to the transactions the note itself indicated it was intended to cover, and coiifiiii; it to the very claims it purported to secure, and not to alter its terms.* * Haskell v. L:unbert, IG Gray ^ National Security Hank v. Mc- (MaHs.), i,'J2; liohiiis o. May, II Ad. Donald, 127 Mass. 82. & K. 2i;j. ■• (liirton V. Union City Dank, 34 ^ CoMtclo r. Crowcdl, 127 Mass. 2'J3; Mich. 279. Haskell V. Laniburt, nupra. 69 § 103.] PLEDGES OF NEGOTIABLE PAPER. 103. But a recital in a negotiable note that the maker has deposited collateral security for its payment, and given au- thority to sell the same on non-payment of the note, does not destroy its negotiable character.^ "The only contract as to col- lateral security, recited in this note, relates to what shall be done after the note becomes due, if it is unpaid. If, as between the maker and the original holder who received the collateral security, there has been any payment before the note became due, by the receipt of sums collected upon the security, that cannot affect one to whom the note has been transferred before maturity, without notice. It will have been done in pursuance of some agreement which does not appear on the face of the note, and of which, therefore, he bad no notice. He is entitled to occupy the same position that he would if the holder of a negotiable note in the ordinary form had received a sum which, as between himself and the maker, should be applied to the note, and had afterwards transferred it to them without notice and before maturity. Nor does the fact, if this note is unpaid, that the amount due after maturity will depend upon the action of the holder of the collat- eral securities, by reason of his option to sell and realize such se- curities, and will thus be uncertain, destroy its negotiable char- acter before maturity. After a negotiable note has become due it is still transferable, although it has lost the great characteristic which gives value to it as commercial paper. The pui'chaser, although he may sue upon it in his own name, then receives it with full notice of all defects, and subject to every equitable defence which the promisor may make against the promisee. If the note embodies a promise to pay money, definite as to time, person, and amount, it is not the less negotiable, because, if un- performed at maturity, certain collateral securities, the proceeds of which will then be applicable to the note, may be realized, and when realized, will affect the amount which will thereafter be due on it." 2 And so a promissory note which recites that the maker has deposited bonds as collateral security for its payment, with power to sell them in a certain manner and upon specified notice upon the non-payment of the note at maturity, is negotiable, although it also contains an agreement that the maker will pay any de- 1 Towner. Rice, 122 Mass. 67. 2 Towne v. Rice, supra, per Dev- ens, J. 70 BONA FIDE HOLDER FOR VALUE. [§ 104. ficiency necessary to satisf}^ the note after such sale.^ Such a note is payable absohitely, without any contingency, and is not payable out of a particular fund. " It is not the less a promis- sory note from a memorandum of another kind being added, im- porting that a collateral security has also been given." ^ The collateral contract relates solely to the money promised to be paid, is additional to the principal contract, and is not, in terms or legal effect, a modification of it. It merely provides a security for the payment of the money, and prescribes the extent of the maker's liability after the securit}^ has been exhausted. But the law would have implied the same liability without any special contract. " Such an instrument is quite different from one which, in addition to a note perfect in form, should contain a contract having no relation to the money promised to be paid, and wholly independent of it. If the additional contract was for the sale or leasing of land, or the sale or exchange of personal property, or related to any other distinct and independent subject, there would be many reasons for declaring the instrument not negotiable, which can have no application to that under consideration."^ 104. Even gross negligence on the part of one taking ne- gotiable paper as collateral security is not alone sufficient to defeat his title. He is not bound to make inquiry as to the au- thority of the person offering the paper to pledge it. Nothing less than proof of knowledge of facts that show want of such au- thority will invalidate the pledgee's title. Gross negligence, not amounting to wilful and fraudulent blindness, while it is evi- dence of mala fides, is not the same thing.* Nothing short of 1 Arnold v. Rock River Valley considered; ISIaitland t\ Citizens' N;it. Union R. R. Co. 5 Duer (N. Y.), 207. Bank of Baltimore, 40 ]\Id. .540 ; Cit- 2 Wise V. Charlton, 4 Ad. & E. 786, izens' Nat. Bank of Baltimore v. 791, per Coleridge, J. See, also, Fan- Hooper, 47 lb. 88; Iowa College r. court w. Thorne, 9 Q. B. 312. Hill, 12 Iowa, 462; Jolins.m v. ' Arnold v. Rock River Valley Way, 27 Ohio St. 374 ; Smith v. Union R. R. Co. supra, per Bos- Livinj^ston, 111 Mass. 342; Belmont worth, J. Branch Bank v. Iloge, 35 N. Y. 65; * Goodman v. Harvey, 4 Ad. & Woolfulk v. Bank of America, 10 E. 870; Uther v. Rich, 10 lb. 784; Bush (Ky.), 504 ; Benoir v. Paciuin, Raphael v. Bank of Eng. 17 C. B. 40 Vt. 199; Comstock v. Hannah, 76 161; Murrayv. Lardner, 2 Wall. 110; III. 530; Shreeves v. Allen, 79 111. Goodman v. Simonds, 20 How. 313, 553. These cases in Illinois accept where the subject is fully and ably the doctrine abovcd Btated, and limit 71 § 105.] PLEDGES OF NEGOTIABLE PAPER. fraiul, or oross negligence attended with mala fides on the part of the taker of the instrument, will invalidate his title. Actual knowledge on his part of facts and circumstances which show tliat the holder did not act in good faith in taking the security must be proved to defeat his title ; and the question whether he lias such knowledge is a question of fact for the jury.^ 105. Knowledge of want of authority. — But if one taking negotiable paper, by way of collateral security, has knowledge that the person offering it has no authority to pledge it, or has knowledge of facts from which a jury might find such knowl- instrument, or to use the same for his own benefit, then the holder, as against the acceptor or maker, is not entitled to recover. Gill v. Cubitt, 3 B. & Cr. 4G6. " For a brief period that rule was followed, but it was never satisfactory, and at the end of twelve years was dis- tinctly overruled in the tribunal where it was first promulgated. Goodman v. Harvey, 4 Ad. & E. 870 ; Arbouin v. Anderson, 1 Ad. & E.N. S. 498. We must hold, said Lord Denman in the case last cited, that the owner of a bill of exchange is entitled to recover upon it if he has come by it honestly, and that that fact is implied prima facie by possession, and that, to meet the inference so raised, fraud, felony, or some such matter, must be proved. " Abundant authority to support the proposition, that the case which for a period relaxed that rule has been over- ruled for more than half a century, is found in the reported cases already cited ; and Mr. Chitty says that the old rule of law, that the holder of a negotiable security transferable by de- livery can give a title, which he him- self does not possess, to a person tak- ing the same bond fide for value, is by those decisions again reestablished in its fullest extent. Chitty Bills (13th ed.), 257; Worcester County Bank v. Dorchester & Milton Bank, 10 Cush. (Mass.) 491." or disapprove of the earlier cases in that state, wliich seem to adopt the contrary doctrine, such as Russell v. lladduok, 3 Gilm. 233; Sturges v. Metropolitan Nat. Bank, 49 111. 221 ; Taylor r. Atchison, 54 111. 196. ^ Railroad Co. v. National Bank, 102 U. S. 14, 39, per Clifford, J. " In- dorsers of negotiable securities enjoyed the protection of that rule for ages be- fore any successful attempt was made to annex to it any qualification, un- less it appeared that the consideration was illegal, or that the instrument was fraudulent in its inception, or that it had been lost or stolen before it came to the possession of the holder. Hin- ton's Case, 2 Show. 235 ; Anonymous, 1 Salk. 126; Miller v. Race, 1 Burr. 452; Grant r. Vaughan, 3 lb. 1516; Peacock ?». Rhodes, 2 Doug. 633; Lawson r. Weston, 4 Esp. 56. " Throughout the whole period cov- ered by those decisions, it was uni- versally understood that the title of the hand fide holder was unaffected by any equities between the antece- dent parties ; but it was subsequently decided that if the indorser of the in- strument had no valid title to the same, and that such facts and cir- cumstances were known to the in- dorsee, at the time of the transfer, as would have caused a person of ordi- nary prudence to suspect that the in- dorser had no right to transfer the 72 BONA FIDE HOLDER FOR VALUE. [§ 106. edge, his taking of tlie paper as security for a loan actually made imparts no title as against the real owner.' Thus, if a bill-broker offer a note for sale at his own bank, and states that he is limited to a certain rate of discount, and the bank declines to purchase at that rate, and the same day the broker pledges the note to the bank as collateral security for a loan, a jury would be authorized to find that the bank had knowledge that the broker had possession of the paper only for the purpose of selling it, and had no authority to pledge it.^ Whether the holder of such paper had notice at the time of taking it of want of authority in the payee to use it as his own is a question of fact for the jury ; but the burden of proof is upon the defendant who seeks to impeach the plaintiff's title by alleg- ing notice of the fraud or breach of duty by the payee.^ The transfer of negotiable paper before maturity raises the presump- tion of the want of notice of any defence to it ; and this pre- sumption prevails until overcome by proof.* 106. For future advances. — A promissory note pledged be- fore maturity, as collateral security for future advances, is good in the creditor's hands for all advances made before he has notice of equities between the original parties ; but not for advances made after such notice,^ unless the creditor at the time of taking the security bound himself to make advances to a definite amount. Accommodation paper may be pledged for future advances, and may be enforced under tlie same circumstances that other paper would be enforced ;^ and it is no defence that the pledgee had knowledge at the time of taking the notes that they were made for accommodation.'' One receiving a promissory note as collateral security for in- dorsements afterwards to be made is a bond fide holder in the 1 Citizfiis' Nat. Bank of I};iItimore * Carpenter v. Loiij^an, 16 Wall. V. Hooper, 47 Md. 8S; Maitland v. 271. Citizens' Nat. Hank of Baltimore, 40 ^ Kerr v. Cowen, 2 Dev. (N. C.) II). ."i 10, 508; Patterson v. Deering, 1 Eq. .3.01;. Marsh. (Ky.) 326. o Buehanan v. International Bank, 2 Citizens' Nat. Bank of Baltimore 78 III. 500. V. Hooper, .supra. ^ Buclianan v. International Bank, 8 Goodman v. .Simonds, 20 How. .viz/^my JMattliews t-. Rntln-rfonl, 7 J.,a. 34.3; Maitland v. Citizens' Nat. Bank Ann. 22'); .Maitland v. Citizens' Nat. of Baltimore, 40 Md. 540. Bank of Baltimore, supra. 73 § 107.] PLEDGES OF NEGOTIABLE PAPER. commercial sense ; but he can, of course, recover upon it only the amount clue on the indorsements against which it was designed to secure him.^ Of course, paper taken as collateral security after its maturity is subject to any defence which the maker of it could have set up to it if it had remained in the hands of the payee.^ III. Collateral for a Preexisting Debt. 107. Whether a previous debt is suflBcient to constitute a holding for value of collateral paper is a question upon which there has been a conflict of authority in this country since the decision in Bay v. Coddington.^ This decision introduced an exception in the general rule of law respecting negotiable paper, that one who has taken it before maturity in the usual course of business, for a valuable consideration, is a bond fide holder, and is protected against equities existing between the antecedent parties, of which he had no notice. The great au- thority of Chancellor Kent,* who rendered the first decision in the case which has led the way in establishing this new doc- trine, has served to obtain full recognition of it in nearly half of the states in which the point has arisen and been decided, not- withstanding the high authority of the Supreme Court of the United States has uniformly been against it. In Swift v. Tyson ^ that court declined to follow the New York rule in a case arising in that state, inasmuch as it related to a matter of general com- ^ Williams I'. Smith, 2 Hill (N. Y.), the erroneous doctrine, having the 301. start by a score of years, had taken 2 Lane v. Padelford, 14 Me. 94; root in New York, and had spread Kelly V. Ferguson, 46 How. (N. Y.) thence to other states. Pr. 411. "There is, perhaps, no question 8 5 Johns. (N. Y.) Ch. 54 (1821) ; connected with the mercantile law affirmed 20 .Johns. (N. Y.) 637; fol- which is of more importance, and lowed by Stalker v. M'Donald, 6 Hill upon which, at the same time, there (N. Y.), 93 (1843); Comstock u. Hier, is a more distressing conflict of au- 73 N. Y. 269, and numerous other thority." Per Moncuve, J., in Davis cases in that and other states. v. Miller, 14 Gratt. (Va.) 1, 14. * It is to he noticed that Chancellor ^ 16 Peters, 1 (1842); followed in Kent, in his Commentaries, vol. iii. p. Bank of Metropolis v. N. E. Bank, 1 81, note />, in noticing the cases of Bay How. 234; Goodman v. Simonds, 20 r. Coddington and Swift V. Tyson, says lb. 343; McCarty i>. Roots, 21 lb. of the latter: " I am inclined to con- 432; Gates v. National Bank, 100 U. cur in that decision, as the plainer S. 239; Railroad Company «;. National and better doctrine." Unfortunately, Bank, 102 U. S. 14. 74 COLLATERAL FOR A PRE-EXISTING DEBT. [§ 108. merciul law, and therefore the local law was not binding upon the Supreme Court. Mr. Justice Story, speaking for the court upon the general subject of the true commercial rule applicable to the case, said : " We have' no hesitation in saying that a pre- existing debt does constitute a valuable consideration, in the sense of the general rule already stated as applicable to negotiable in- struments. Assuming it to be true (which, however, may well admit of some doubt from the generality of the language) that the holder of a negotiable instrument is unaffected with the equi- ties between the antecedent parties, of which he has no notice, only where he receives it in the usual course of trade and busi- ness, for a valuable consideration, before it becomes due, we are prepared to say that receiving it in payment of, or as security for, a preexisting debt is according to the known usual course of trade and business. And why, upon principle, should not a pi'eexist- ing debt be deemed such a valuable consideration? It is for the benefit and convenience of the commercial world to give as wide an extent as practicable to the credit and circulation of nego- tiable paper, that it may pass not only as security for new pur- chases and advances made upon the transfer thereof, but also in payment of, and as security for, preexisting debts. The creditor is thereby enabled to realize or to secure his debt, and thus may safely give a prolonged credit, or forbear from taking any legal steps to enforce his rights. The debtor also has the advantage of making his negotiable securities of equivalent value to cash. But establish the opposite conclusion, that negotiable paper cannot be applied in payment of, or as security for, preexisting debts, with- out letting in all the equities between the original and antecedent parties, and the value and circulation of such securities must be essentially diminished, and the debtor driven to the embarrass- ment of making a sale thereof, often at a ruinous discount, to some third person, and then by circuity to apply the proceeds to the payment of his debts." 108. The courts of the United States have uniformly held a preexisting debt to be a sufficient consideration for a pledge of collaterals ; declining to follow the decisions of state courts, which have adopted the rule that the holder of ncgotiablo ])aper, trans- ferred merely as collateral security for an antecedent debt, is not a holder for value. It has been urged that uii(hM- the .Judiciary 75 § 109.] PLEDGES OF NEGOTIABLE PAPER. Act,^ the national courts are obliged to follow the decisions of the state courts in all cases where they apply. To this contention the Supreme Court replied, in the case of Swift v. Tyson,^ that " it has never been supposed by us that the section did apply, or was de- signed to apply, to questions of a more general nature, not at all dependent upon local statutes or local usages of a fixed and per- manent operation, as, for example, to the construction of ordinary contracts or other written instruments, and especially to questions of general commercial law, where the state tribunals are called upon to perform the like functions as ourselves ; that is, to ascer- tain upon general reasoning and legal analogies what is the true exposition of the contract or instrument, or what is the just rule furnished by the principles of commercial law to govern the case. And we have not now the slightest difficulty in holding that this section, upon its true intendment and construction, is strictly lim- ited to local statutes and local usages of the character before stated, and does not extend to contracts and other instruments of a com- mercial nature, the true interpretation and effect whereof are to be sought, not in the decisions of the local tribunals, but in the general principles and doctrines of commercial jurisprudence." 109. To this doctrine the Supreme Court has steadily ad- hered.^ In a very recent case, the parties to which were citizens of New York, where the contract was also made, it was again claimed that the decisions of that state, that negotiable paper transferred merely as collateral security for an antecedent debt, is subject to the equities of prior parties existing at the time of the transfer, should be followed."* But the court say of its own doctrine : " We perceive no reason for its modification in any de- gree whatever. We could not infringe upon it, in this case, with- out disturbing or endangering that stability which is essential to be maintained in the rules of commercial law. The decisions of the New York court which we are asked to follow, in determin- 1 The thirty-fourth section of this 2 ig pgt_ ^ ^^d see, to like effect, act provides, that "the laws of the Carpenter v. Providence Washington several states, except where the Con- Ins. Co. 16 Pet. 495. stitution,^ treaties, or statutes of the a Oates v. National Bank, 100 U. United States otherwise provide, shall S. 239. be regarded as rules of decision in * Railroad Co. v. National Bank, trials at common law in the courts of 102 U. S. 14, 31. the United States." 76 COLLATERAL FOR A PRE-EXISTING DEBT. [§ 110. ing the rights of parties under a contract there made, are not in exposition of any legislative enactment of that state. They ex- press the opinion of that court, not as to the rights of parties under any law local to that state, but as to their rights under the general commercial law existing throughout the Union, ex- cept where it may have been modified or changed by some local statute. It is a law not peculiar to one state, or dependent upon local authority, but one arising out of the usages of the com- mercial world. Suppose a state court, in a case before it, should determine what were the laws of war as applicable to that and similar cases. The federal courts sitting in that state possessing, it must be conceded, equal power with the state court in the de- termination of such questions, must, upon the theory of counsel for the pUiintiff in error, accept the conclusions of the state court as the true interpretation, for that locality, of the laws of war, and as the ' law ' of the state in the sense of the statute which makes the ' laws of the state rules of decision in trials at com- mon law.' We apprehend, however, that no one would go that far in asserting the binding force of state decisions upon the courts of the United States, when the latter are required, in the dis- charge of their judicial functions, to consider questions of general law arising in suits to which their jurisdiction extends. To so hold would be to defeat one of the objects for which those courts were established, and introduce infinite confusion in their decis- ions of such questions." 110. That an existing debt is a valuable and suflacient consideration is the established doctrine in all the federal courts.^ "On a subject of such general in)portance, and con- ^ Gates V. National Bank of Mont- son, as well as that of that learned ju- gomery, 100 U. S. 239; Wood i'. rist himself, and tliinkinj^ that the more Seitziriger, 2 Fed. Rep. 843; S. C. reasonable and practieal rule which 14 Am. Law Rev. 503, Jn a note to puts on the circulation of commercial this case in the Review, Mr. Biddle paper as little restraint as possible." carefully and critically examines the National Bank of the Republic v. cases, and in conclusion says : " It is, Brooklyn City & Newtown R. R. Co. perhaps, not for an annotator of a case 14 lilatchf. 24-J. Jn Mack v. Baker, to exi)re8s his oi)iiiion as to what the 5 Weekly Notes Cas. 212, Cadwalader, better rule is, but we cannot help feel- J)i.st. J,, followed the rennsylvaiiia iiijr the weight of the practical reason- doctrine to the contrary, but this de- in;^ of those jiid;,'cs who have followed cision was overruled in the same dis- the dictum of iStory, J., in Swift v. Ty- trict in Wood v. beitzin-rer, supra. 11 § 111.] PLEDGES OF NEGOTIABLE PAPER. cerning which tliere cannot properly be a local rule, and in which the commercial world has a common interest, uniformity and certainty of decision are greatly to be desired ; and since the highest tribunals of this country and in England are ruling in harmony upon the point, a state court can hardly be justified in adopting, if, indeed, in adhering to, a different rule." ^ 111. The rule upon this subject having the preponderance of authority and resting upon the better reasons is, that a person to whom negotiable paper is indorsed before maturity as collateral security is a bond fide holder for value, although he re- ceive it as security for an existing debt.^ The English decisions ^ Straiigban v. Fairchild, 80 Ind. 598, per Woods, J. 2 This is Ihe doctrine in the follow- ing states: — California: Payne v. Bensley, 8 Cal. 260; Robinson v. Smith, 14 Cal. 94; Naglee v. Lyman, 14 Cal. 450; Sackett v. Johnson, 54 Cal. 107; Da- vis V. Russell, 52 Cal. 611; Frey v. ClilTbrd, 44 Cal. 335, 342. Connecticut: Brush v. Scribner, 11 Conn. 388; Savings Bank v. Bates, 8 Conn. 505, 507 ; Bridgeport City Bank v. Welch, 29 Conn. 475; Rob- erts y. Hall, 37 Conn. 205; Osgood V. Thompson Bank, 30 Conn. 27. Delaware : Bush v. Peckard, 3 Harr. 385. Georgia: Gibson v. Conner, 3 Ga. 47; Bond r. Central Bank, 2 Ga. 92, lOG; Meadow v. Bird, 22 Ga. 246. Illinois : Hancock v. Hodgson, 3 Scam. 329 ; Mayo v. Moore, 28 111. 428; Manning v. McClure, 36 111. 490 ; Butters v. Haughwout, 42 111. 18; Bowman v. Millison, 58 111. 36; Doolittle V. Cook, 75 111. 354, 359; Worcester Nat. Bank v. Cheeney, 87 111. 602 ; Mix v. National Bank, 91 111. 20. Indiana : Straughan v. Fairchild, 80 Ind. 598; S. C. 14 Cent. L. J. 413; Wiley, in re, 4 Biss. 171 ; Valette v. Mason, Smith, 89; S. C. I Ind. 288; 78 Work V. Brayton, 5 Ind. 396; Rowe ?'. Haines, 15 Ind. ^445; Babcock v. Jordan, 24 Ind. 14; McKnight v. Knisely, 25 Ind. 336. Louisiana: Giovanovich v. Citi- zens' Bank of La. 26 La. Ann. 15; Succession of Dolhonde, 21 lb. 3 ; Louisiana State Bank v. Gaiennie, lb. 555 ; Smith v. Isaacs, 23 lb. 454. Maryland : Maitland v. Citizens' Nat. Bank of Baltimore, 40 Md. 540; Cecil Bank v. Heald, 25 Md. 563. Massachusetts : Blanchard v. Stevens, 3 Cush. 162; Chicopee Bank V. Chapin, 8 Met. 40 ; Culver u. Bene- dict, 13 Gray, 7 ; Stoddard v. Kim- ball, 6 Cush. 469 ; Jewett v. Warren, 12 Mass. 300 ; Merriam v. Granite Bank, 8 Gray, 254; Gardner v, Gager, 1 Allen, 502; Paine v. Furnas, 117 Mass. 290; Fisher v. Fisher, 98 Mass. 303 ; Le Breton v. Pierce, 2 Allen, 8 ; Woodruff u. Hill, 116 Mass. 310. Michigan: Bostwick v. Dodge, 1 Doug. 413 ; Outhwite v. Porter, 13 Mich. 533. Mississippi : In Fellows v. Harris, 12 S. & M. 462, the court approved the reasoning in Swift v. Tyson, but stated in the case before them that there was a new consideration. Missouri : Boatman's Sav. Inst. v. Holland, 38 Mo. 49 ; Grant v. Kid- well, 30 lb. 455 ; but co)ilra, see Good- COLLATERAL FOR A PRE-EXISTING DEBT. [§ 112. seem to be unanimous in holding that current negotiable paper, taken as collateral security for a prior debt, is taken for value, and in the usual course of business ; ^ Lord Campbell, in giving the opinion in Poirier v. Morris, said : " There is nothing to make a difference between this and the common case, where a bill is taken as security for a debt due ; and in that case an an- tecedent debt is a sufficient consideration." 112. The ground upon which one taking negotiable paper as collateral security for a preexisting debt becomes a holder for value may be stated to be, that he becomes such a holder by the very act of receiving of the paper, and becoming a party to it in such a way that the duty is imposed upon him of making presentment and giving notice of dishonor.^ Thus, where a promissory note was pledged to a bank to secure an existing debt, the Supreme Court of the United States upon this point, through Mr. Justice Harlan, said : ^ " The bank did not take the note in suit as a mere agent to receive the amount due when it suited tlie convenience of the debtor to make payment. It received the note under an obligation imposed by the commer- cial law to present it for payment, and give notice of non-pay- man r. Simonds, 19 Mo. IOC ; Brain- 28 Vt. 209; Russell v. Splater, 47 lb. ard I'. Reavis, 2 Mo. App. 490. 273 ; Quinn v. Hard, 43 lb. 375. New Jersey: Allaire v. Harts- i Poirier r. Morris, 2 El. & Bl. 89; home, 1 Zab. 665; Armour v. McMi- -S- C. 20 L. & £([. 103; Percival v. chael, 36 N. J. L. 92. Frampton, 2 Cronip. M. & R. 180 ; North Carolina : Reddick v. liosan(iuet v. Dudnian, 1 Stark. 1 ; Jones, C) Ired. 107. Hey wood v. Watson, 4 Bing. 496; S. Rhode Island: Bank of Republic C. 1 M. & P. 268; Price v. Price, 16 V. Carrington, 5 R. I. 515, 523; Cobb M. & W. 232; Carrie v. Misa, L. K. j;. Doyle, 7 lb. 550. 10 Ex. 153. In Swift v. Tyson, 16 South Carolina: I5ank of Charles- P«t. 1, the Supreme Court, after re- ton V. Chambers, 1 1 Rich. 657. viewing the Knglish cases, say: " They Texas : In Greneaux v. Wheeler, directly establis-h that a bond fide 6 Texas, 515, part of the considera- holder, taking a negotiable note in tion was an antecedent debt, and the payment of, or as security for, a pre- court saiil that the current of author- existing debt, is a holder for a val- ities went to show that a note was uable consideration, entitled to pro- taken in the bond fide course of trade tection against ail tiie ecpiities between ■when transferred on such considera- the antecedent parties." lion. '^ See Massachusetts, Rhode Island, Vermont : Atkinson v. Brooks, ^6 ami otlier cases, before cited. Vt. 569; Dixon r. Dixon, 31 lb. 4.0O; ^ Railroad Co. v. National Bank, Michigan Slate Bank v. Leavenworth, 102 U. S. 11,27. 79 § 113.] PLEDGES OF NEGOTIABLE PAPER. ment, in the mode prescribed by the settled rules of that law. We lire of opinion that the undertaking of the bank to fix the liablHty of prior parties by due presentation for payment and due notice in case of non-payment, — an undertaking necessarily implied by becoming a party to the instrument, — was a suffi- cient consideration to protect it against equities existing between the other parties of which it had no notice. It assumed the duties and responsibilities of a holder for value, and should have the rights and privileges pertaining to that position." Taking this broad ground, it is not necessary to resort to any express or implied condition on the part of the creditor to suspend the remedy upon his debt. 113. It is true, also, that forbearance on the part of the creditor to act is a good consideration. If the creditor had not taken the collateral note, he might have pursued other remedies to enforce the payment of the debt; or he might have obtained other security, or perhaps the money. It is a fallacy, therefore, to say that if the creditor be not allowed to enforce his collateral note, he is nevertheless in as good a situation as he would have been in if the collateral had not been transferred to him. " That fact is assumed, and not proved, and from the very nature of the case is a matter of entire uncertainty. The convenience and safety of those dealing in negotiable paper seems to require and justify the rule, that when a person takes a negotiable note not overdue, or apparently dishonored, and without notice, actual or constructive, of the want of considera- tion, or other defence thei'eto, whether in payment for a pre- cedent debt, or as collateral security for a debt, the holder should have the legal right to enforce the same against the parties thereto, notwithstanding such defence might have been efiectual as between the original parties." ^ Tliere are cases which seem to rest on the ground that the taking of a negotiable security payable at a future day implies an agreement by the creditor to suspend his remedies during that period, and that this implied agreement constitutes the true consideration for the taking and holding of the collateral paper.2 1 Blanchard v. Stevens, 3 Cush. Buooks, 26 Vt. 569. Kedfield, C. J., (Mass.) 162, 169, per Dewey, J. said: "It seems to me, the ordinary 2 See, for instance, Atkinson v. case of takino- such a security as 80 COLLATERAL FOR A PRE-EXISTING DEBT. [§ 114. But it is conceived it is not necessary to resort to this ground to find a suflBcient consideration to support a valid title in a creditor who has taken a bill or note as security for an existing debt. 114. The taking of negotiable paper as security for an ex- isting debt is as much in the usual course of trade and busi- ness, and as much for a valuable consideration, as is an absolute transfer of such an instrument in payment of such a debt, or in payment or security of a debt created at the time. " It certainly would seem that payment of existing debts should be in the usual payment, or as collateral to the prior defence that he could have made debt, is the same in principle. One against the payee. This is the chief ■whose debt is due, in the commercial argument of those authorities wliich world, must pay it instantly, or he decide against the claim of the indor- becomes a bankrupt. If, instead of see. But is this true, as a matter of money, he gives a bill or note, either fact? If the indorsee expressly give on time or at sight, whether this is in further time on his original debt, it is form in payment, or collateral to his admitted he is to be protected. But debt, he gains time, and saves the it is assumed that, if he does not ex- disgrace and ruin consequent upon pressly agree to give time, lie does stopping payment. And, in either not in fact give it, — he does not for- case, there is an implied undertaking bear to use remedies that he Avould that he shall wait upon his debtor till have used but for the security. Now, the result of the new security can be the question is one of presumption, known; and in both cases, when that and that presumption must be drawn proves unproductive, the creditor may from tlie experience of society. The pursue his original debt; . . . and it question is, in the absence of any ex- is scarcely supposable that one so tak- press agreement, what we must pre- ing security for a debt will not con- sume to have been the implied under- duct differently on account of the se- standing of the parties, at the time of curity. It is of necessity he should, the indorsement, in regard to further if he puts any confidence in its ulti- forbearance, to be inferred from the mate availability. And one would nature of the transaction, and the ob- Bcarcely part with sucli security, un- jects which both parties had in view, less lie expected more or less indul- We have no hesitation in saying that gence on account of it." These views the assumption that time is not in fact were, however, criticised and rt-jected given, because it is not expressly in the later case of Austin v. Curtis, 31 agreed to be given, and that therefore Vt. C4, in a careful opinion by Bun- the indorsee is not placed in a worse nett, J. In Manning v. McClure, 3G position by letting in the latent equi- 111.490-490, Lawrence, J., said: "Jt is ties than he would have occupied if urged that in the absence of such new he had not received the note, is at consideration, or any such agreement, variance with the general experience the indorsee is in no worse condition of all men whose business makes than he would have been if he had them cognizant of affairs of this char- not received the note, even though acter." See, also, Currie r. Misa, L. the maker is permitted to set up any 11. 10 Ex. 153, 1G3. 8 81 § 115.] PLEDGES OF NEGOTIABLE PAPER. course of business ; and where it is inconvenient that debts shall be paid, it ought not to be out of the usual course of business that such debts should be secured, if security be asked. The in- dorsing over of a note for the purpose of paying a debt ought to be held as much for valuable consideration as the transferring it for a new purchase ; and the indorsing over of such a note for securing a debt heretofore contracted, as for one presently in- curred. . . . On the ground of importance for commercial pur- poses, we do not see why negotiable instruments should not have credit and currency for the payment of and for securing debts, as well as for the purchasing of goods or the raising of cash." ^ 115. In some American courts a distinction is taken be- tween a note taken in payment and one indorsed as security for a preexisting debt ; moreover, a distinction is taken between paper taken in absolute payment of a preexisting debt, and paper taken in nominal payment of such a debt. The equities of antecedent parties do not prevail against the holder in the former case, but they do prevail against the holder in the latter case. Generally when paper is spoken of as received in pay- ment of a debt, it is meant that it is received in conditional or nominal payment; for it is regarded as so received when there is no evidence of an intention to receive the paper in absolute discharge and satisfaction, beyond what may be inferred from the ordinary transaction of accepting or receipting it in payment, or crediting it on account. The payment under such circum- stances is regarded as conditional only, and the right of the creditor to proceed upon the original indebtedness after the ma- turity of the paper is unimpaired.^ But the surrender by a creditor of the past due notes of a debtor upon receiving from him, in good faith, before maturity, the note of a third person, 1 Bank v. Carrington, 5 R. I. 515, case of an antecedent indebtedness, is per Bosworth, J. To same effect, see not a payment of the indebtedness. Roberts v. Hall, 37 Conn. 213, per In the absence of a special agreement, Carpenter, J. it must be considered as a conditional 2 Phoenix Ins. Co. v. Church, 81 N. payment or as collateral security. Y. 218; Potts y. Mayer, 74 N.Y. 594; The debtor continues liable for his Hunter v. Moul, 98 Pa. St. 13. Mer- own debt in the event of a failure of cur, J., in this case said : " The mere payment of the note thus given or acceptance, from a debtor, of his own transferred." Citing several Penn- note, or the note of a third person, in sylvania cases. 82 COLLATERAL FOR A PRE-EXISTING DEBT. [§ 115. in place of the note surrendered, constitutes the creditor a holder for value of the note thus taken, and protects him against the defences and equities of the antecedent parties ; and it is im- material whether the note surrendered was given to the creditor for goods sold, or money loaned, or under circumstances which would leave the original debt, represented by the note in exist- ence, enforcible against the debtor, or whether, by surrendering the note, the creditor parted with his entire right of action.^ It may indeed be considered as settled, except in New York,^ 1 Such is the result of the Kew York cases, as stated by Andrews, J., in Phoenix Ins. Co v. Church, 81 N. Y. 218, 225, after a review of a long line of authorities. 2 Turner v. Tread way, 53 X. Y. 650; Lawrence r. Clark, 36 lb. 128; Weaver v. liarden, 4D lb. 286, per Allen, J.; Fis-her v. Sharpe, 5 Daly, 214 ; Ayres v. Leypoldt, 6 lb. 91 Buhrman v. Bay lis, 14 Hun, 608 Rosa V. Brotherson, 10 Wend. 85 Payne r. Cutler, 13 lb. 605; Stalker I'. M'Donald, 6 Hill, 93; White v. Springfield Bank, 1 Barb. 225; S. C. 3 Sandf. 222. But one receiving a note indorsed without recourse, in pay- ment of a precedent debt which is at the same time discharged, is a botid Ji'Je holder for value, not subject to any equities between the original par- ties. Bank of St. Albans v. Gilliland, 23 W'end. 311; Bank of Sandusky v. Scoville, 24 lb. 115; Mohawk Bank V. Corey, 1 Hill, 513 ; Youngs v. Lee, 12 N. Y. 551; Brown v. Leavitt, 31 lb. 113; Chrysler v. Griswold, 43 lb. 209; Gould v. Segee, 5 Duer, 260; Purchase v. Matlison, 6 lb. 587; S. C. 3 Bosw. 310; White i'. Springfield Bank, 3 Sandf. 222 ; Stettheimer v. Meyer, 33 Barb. 215. See, also, llo)t V. lloyt, 8 Bosw. 511 ; Paddon V. Taylor, 44 N. Y. 371 ; Pratt v. Coiiian, 37 N. Y. 440 ; Brown v. Leavitt, 31 N. Y. 113 ; Bigelow Bills ami Notes, 499, where the result of the New York cases on this point is fully stated. And so one taking a note in exchange for a note not then due, which is thereupon surrendered, is a holder for value. Youngs v, Lee, 12 X. Y. 551. But the old note must be surrendered absolutely be- fore maturity. Bright v. Judson, 47 Barb. 29. Later cases establish the doctrine that it is immaterial whether the surrendered note be past due or not. Phoenix Ins. Co. v. Church, 81 N. Y. 218; Pratt v. Coman, 37 N. Y. 440 ; Clothier v. Adriance 51 N. Y. 322; Paddon v. Taylor, 44 N. Y. 371; Brown V. Leavitt, 31 X. Y. 113; Day V. Saunders, 1 Abb. App. Dec. 495. But this distinction is not a sound one. On the contrary, when paper is taken in conditional payment of an existing debt, if an agreement be not necessarily implied to forbear the col- lection of the existing debt until the maturity of the new paper, the con- dition that the debt shall revive if the new paper be not paid amounts to the same thing. Upon this point see Carrie v. Misa, L. It. 10 Ex. 153, 163, where the title of a creditor who had taken a check on account of an existing debt was held to be indefeasible, on the ground that it was a conditional pay- ment. JyUhh, .L, said: " Tiie title of a creditor to a bill given on account of a preexisting debt, ami payal)le at a future day, does not rest upon the im- plied agreement to suspend his reme- dies. The true reason is that given 83 § 115.] PLEDGES OF NEGOTIABLE PAPER, that, when a negotiable instrument is taken in payment of a pre- existing debt, it is held discharged of equities existing between prior parties ; ^ yet some of the courts so holding also hold that a creditor to whom such paper is indorsed as security for a pre- existing debt takes it subject to the equities between the antece- dent parties.^ by the Court of Common Pleas in rights of a holder for value. Iowa Col- Belshaw v. Bush, 11 C. B, 191, as the lege v. Hill, 12 Iowa, 462 ; Ruddick v. foundation of the judgment in that Lloyd, 15 lb. 441. So in Kentucky: case; namely, that a negotiable se- Alexander y. Springfield Bank, 2 Mete, curity given for such a purpose is a 535; Lee ;;. Smead, 1 lb. 628, 634; conditional payment of the debt, the May v. Quimby, 3 Bush, 96 ; Greenwell condition being that the debt revives v. Haydon, 78 Ky. 332; and Pennsyl- if the security is not realized. This vania : Bardsley v. Delp, 88 Pa. St. is precisely the effect which both par- 420; Dovey's App. 97 Pa. St. 153; ties intended the security to have; Muirhead v. Kirkpatrick, 21 lb. 237; and the doctrine is as applicable to Kirkpatrick v. Muirhead, 16 lb. 117, one species of negotiable security as 123; Bell, J., in the latter case, say- to another, — to a check payable on demand, as to a running bill or prom- issory note payable to order or bearer, whether it be the note of a country bank which circulates as money, or the note of the debtor, or of any other person. The security is offered to the creditor, and taken by him as money's worth, and justice requires that it should be as truly his property as the money which it represents would have been his had the payment been made in gold or a Bank of Eng- land note. And, on the other hand, until it has proved unproductive, the creditor ought not to be allowed to treat it as a nullity, and to sue the debtor as if he had no security." ^ Bank of the Republic v. Carring- ton, 5 R. L 515, per Bosworth, J.; Conkling v. Vail, 31 111. 166; Foy v. Blackstone, 31 111. 538; Draper v. Cowles, 27 Kans. 484. 2 Thus, in Iowa, it is held that a note transferred in satisfaction of a preexisting debt is transferred for a valuable consideration ; Johnson v. Barney, 1 Iowa, 531 ; while one trans- ferred as collateral security for such a debt does not give the indorsee the 84 ing, "Whatever contrariety of opin- ion may have existed elsewhere on this subject, it is the undoubted law of Pennsylvania that though the holder of a negotiable instrument received in jMyment of a preexist- ing debt, before maturity, cannot be subjected to equities which might have furnished a defence as between the original parties, and of which he had no notice, yet, if the paper be taken as collateral security merely, for the payment of a debt, or for protec- tion against previously assumed lia- biliiies, the defendant may aver any ground of defence which would have been competent between antecedent parties to the bill or note; unless, in- deed, there was some new and dis- tinct consideration moving between the parties to the transfer, — such as giving up some other aVfiilable se- curity, releasing another party, drawer or indorser, conceding further time for payment, and the like." And see Struthers v. Kendall, 41 Pa. St. 214. So in Maine: Korton v. Waite, 20 Me. 175; Homes t'. Smyth, 16 lb. 177; New Hampshire : Williams v. Little, 11 N. H. 66 ; Wisconsin: Heath r. COLLATERAL FOR A PRE-EXISTING DEBT. [§§ 116, 117. 116. This distinction seems shadowy and pernipious. "• The indorsing over of a note for the purpose of paying a debt ought to be held as much for vahiable consideration as the trans- ferring it for a new purchase ; and the indorsing over of such a note for securing a debt heretofore contracted as for one pres- ently incurred. It is held by the courts, with scarcely any ex- ception, that the transferring of a note to secure payment for a present purchase is in the usual course of business. And why is it not so when transferred to secure a debt due, and which ought to be paid or secured before new liabilities are contracted ? On the ground of importance for commercial purposes, we do not see why negotiable instruments should not have credit and cur- rency for the payment of, and for securing debts, as well as for the purchasing of goods or the raising of cash. It is often quite as important to business men in commercial transactions that they should be able to pay or secure their debts, and make use of current paper for these purposes, as it is that they should make new purchases, or sell such paper sometimes at ruinous sacri- fices, for the purpose of raising money with which to pay their debts." 1 There is, in fact, no difference in principle between a note indorsed in payment and one indorsed for the security of a pre- existing debt ; and the courts generally place them upon the same footing. ^ 117. The doctrine that an assignee of negotiable paper as collateral security for a preexisting debt is not a holder for value,^ stated at length, is as follows: The assignee of nego- Silverthorn Lead Mining and Smelt- on this point are wholly unsustainable. ing Co. 39 Wis. 14G ; Bange v. Flint, The payment of a debt, it is to be 25 lb. 544 ; De Witt v. Perkins, 22 hoped, has not yet become an act ' out lb. 473; Stevens v. Campbell, 13 lb. of the ordinary course of business.' " 375 ; Cook v. Helms 5 lb. 107 ; Knox And see Carlisle v. Wishart, 11 Ohio, V. Cliflrord, 38 lb. 651; Atchison i'. 172. Davidson, 2 Pinney, 48 ; Shufehlt v. ^ See cases supra, and Meadow v. Pease; IG Wis. 659 ; and Alabama : Bird, 22 Ga. 24C, 254 ; Gibson v. Con- Mayberry v. Morris, 62 Ala. 113. ner, 3 lb. 47; Butters v. Ilaughwout, 1 Bank of the Republic v. Carring- 42 111. 18; Giovanovich v. Citizens' ton, 5 It. I. 515, 521, per Hosworth, J. Bank of La. 26 La. Ann. 15; Atkinson In Riley v. Anderson, 2 McLean, 589, v. Brooks, 26 Vt. 569, 576, per Red- Judge McLean said : " On principle Geld, C. J. and authority, the New York decisions ' This doctrine prevails in — _ «;3 § 117.] PLEDGES OF NEGOTIABLE PAPER. liable paper, receiving it in good faith from the payee, without notice, and before maturity, as collateral security for a preexist- Alabama : Fenouille v. Hamilton, 35 Ala. 319, 322; Boyd v. Beck, 29 lb. 703 ; McKenzie v. Branch Bank, 28 lb. 606 ; Connerly v. Planters' & Mercliants' Ins. Co. 66 Ala. 432. Arkansas : Bertrand v. Barkman, 13 Ark. 150. lovira: Iowa College v. Hill, 12 Iowa, 462; Ruddick v. Lloyd, 15 lb. 441; Davis v. Strobm, 17 lb. 421; Ryanr. Chew, 13 lb. 589. Kentucky: Lee v. Smead, 1 Mete. 628; Alexanders. Springfield Bank, 2 Mete. 534 ; May v. Quimby, 3 Bush, 96 ; Breckinridge v. Moore, 3 B. Mon. 629. Maine : Branihall v. Beckett, 31 Me. 205 ; Nutter i'. Stover, 48 lb. 163. Minnesota : Becker v. Sandusky City Bank, 1 Minn. 311, 319. Mississippi: Brooks v. Whitson, 7 S. & M. 513. New Hampshire : Williams v. Little, 11 N. H. 66 ; Jenness v. Bean, 10 lb. 266; Fletcher v. Chase, 16 lb. 38; Rice v. Raitt, 17 lb. 116. New York : Coddington v. Bay, 20 Johns. 637 ; S. C. 5 Johns. Ch. 54 ; Francia v. Joseph, 3 Edw. Ch. 182; Stalker v. M'Donald, 6 Hill, 93; Warden v. Howell, 9 Wend. 170; Lawrence v. Clark, 36 N. Y. 128; Weaver v. Barden, 49 lb. 286, 294, per Allen, J.; Beers v. Culver, 1 Hill, 58^; Scott f. Betts, Hill & Den. 363; Stewart v. Small, 2 Barb. 559 ; Far- rington v. Frankfort Bank, 24 lb. 554 ; S. C. 31 lb. 183; Prentiss v. Graves, 33 lb. 621 ; Am. Exch. Bank v. Cor- liss, 46 lb. 19 ; Furniss v. Gilchrist, 1 Sandf. 53; Skilding v. Warren, 15 Johns. 270; Small v. Smith, 1 Denio, 583 ; Turner v. Treadway, 53 N. Y. 650; Moore v. Ryder, 65 lb. 438; Comstock V. Hier, 73 lb. 269. North Carolina : In Reddick v. Jones, 6 Ired. 10 7, Ruffin, C. J., who delivered the opinion of the court, 86 was somewhat doubtful as to what the rule should be, but intimated that the holder of a note as collateral was not a bondjide holder for value. Ohio : Roxborough v. Messick, 6 Ohio St. 448; recognized in Rezner V. Hatch, 7 Ohio St. 248, 255; Geb- hart V. Sorrels, 9 Ohio St. 461, 466; Cleveland v. State Bank, 16 Ohio St. 236, 269; Copeland v. Manton, 22 Ohio St. 398, 402 ; Pitts v. Foglesong, 37 Ohio St. 676, 680; S. C. 41 Am. Rep. 540. Pennsylvania : Ashton's Appeal, 73 Pa. St. 153 ; Royer v. Keystone Nat. Bank, 83 lb. 248; Depeau v. Waddington, 6 Whart. 220; Cum- mings V. Boyd, 83 Pa. St. 372 ; Kirk- patrick v. Muirhead, 16 lb. 117, 123 ; Lord V. Ocean Bank, 20 lb. 384; Sit- greaves v. Farmers' & Mechanics' Bank, 49 lb. 359 ; Lenheim v. Wil- marding, 55 lb. 73 ; Pratt's Appeal, 77 lb. 378; Petrie v. Clark, 11 S. & R. 377; Oakford v. Johnson, 2 Miles, 203; Jackson v. Polack, lb. 362; Maynard V. Sixth Nat. Bank, 98 Pa. St. 250. Tennessee : Wormley v. Lowry, 1 Humph. 468; Kimbro v. Lytle, 10 Yerg. 417; Nichol v. Bate, lb. 429; Napier v. Elam, 6 lb. 108; King v. Doolittle, 1 Head, 77. Virginia : Prentice i\ Zane, 2 Gratt. 262. This case is referred to in the later case of Davis v. Miller, 14 Gratt. 1, 15, as the only case in that state bearing upon this subject, and seems to have been based upon the supposed correctness of the New York rule. " The note in that case was made in Philadelphia; and the decision con- formed to the well settled law of the place of the contract. AVhether the case would have been decided in the same way if the note had been a Virginia contract is uncertain. The question may therefore be considered COLLATERAL FOR A PRE-EXISTING DEBT. [§ 118. ing debt, in the absence of any new consideration, stipulation for delay or credit given, or right parted with by the creditor, is not a holder of the collateral paper for value, in the usual course of trade, but takes it subject to all the equities which may exist against the payee in favor of the maker at the time of the assign- ment.^ This doctrine has no application when any new consid- eration enters into the transaction ; such, for instance, as an additional loan or advancement made at the time, a new respon- siblity incurred, or a stipulation for delay or credit, or a change of securities. In all such or similar cases the holder of the col- lateral security is protected from infirmities affecting the instru- ment before it was thus transferred.^ 118. This doctrine rests upon two objections : 1. That a creditor who has paid no new consideration for his collateral note is not injured by an impeachment of his title to it. 2. That the collateral note is not one made in the usual course of business. Both of these objections have been repeatedly and conclusively answered. They were answered by Mr. Justice Story in Swift V. Tyson,^ one of the earliest of the American cases upon this subject ; and they were answered again in the latest case involv- ing this subject in the same court ;* and these answers cannot be better stated than in the authoritative language of the judges •who delivered the opinions in those cases. 1. " Transfers of negotiable securities for the purpose supposed are seldom made, except in the execution of some agreement or understanding by which the transferrer is to be benefited, as by delay or forbear- ance or further credit, or the giving up of other collaterals, or the substitution of one collateral for anothei', or the promise to forego the means of obtaining other indemnity or security. Few cases, it is presumed, arise where the interest of the debtor is not consulted ; so that, if the rule should be confined to the cases as still unsettled in this state." Per ^ Ruddick v. Lloyd, 15 Iowa, 441; Moncure, J. Stotts v. Byers, 17 lb. 303; Nelson "Wisconsin: Bowman r. Van Ku- v. Edwards, 40 Barb. (N. Y.) 279; ren, 2a Wis. 209; Body y. Jcwsen, 33 Traders' Bank v. Bradner, 43 lb. lb. 402 ; Jenkins v. Schaub, 14 lb. 1 ; 379; Cherry v. Frost, 7 Lea (Tenn.), Cook V. Helms, .5 lb. 107. 1. 1 Ruddick v. Lloyd, 15 Iowa, 441; » IG Pet. 1. Iowa College r. Hill, 12 lb. 4G2 ; Rox- ■• Railroad Co. v. National Bank, borough V. Messick, G Ohio St. 448. 102 U. S. 14, 51. 87 § 110.] PLEDGES OF NEGOTIABLE PAPER. falling within the abstract theory of such a defence, the question would cease to be of much importance ; nor would it often be true that, if the title of the holder should be impeached, he would be left in as ffood condition as he was before." ^ 2. As to the ob- jection that a transfer of negotiable paper as collateral security for an existing debt is not a transaction in the ordinary course of business, Mr. Justice Harlan, delivering the opinion of the court, said:^ " This objection is not sustained by the recognized usages of the commercial world, nor, as we think, by sound reason. The transfer of negotiable paper as security for antecedent debts constitutes a material and an increasing portion of the commerce of the country. Such transactions have become very common in financial circles. They have grown out of the necessities of busi- ness, and, in these days of great commercial activity, they con- tribute largely to the benefit and convenience both of debtors and creditors." 119. In the exceptional case where no agreement for time can be implied from the taking of a collateral note, we have already seen that the Supreme Court find a sufficient considera- tion to uphold the pledge in the duties and undertakings on the part of the pledgee in becoming a party to the note.^ Mr. Justice Bradley, however, declared that he did not regard the obligation assumed by the pledgee to present the note for payment, and give notice of non-payment, as the only, or the principal, con- sideration of such transfer : " The true consideration was the debt due from the indorsers to the indorsee, and the obligation to pay or secure said debt. Had any other collateral security been given, as a mortgage, or a pledge of property, it would have been equally sustained by the consideration referred to ; namely, the debt and the obligation to pay it or secure its payment. ... But the bond fide transfer of commercial paper before maturity does cut off such equities ; and every collateral is held by the creditor of such title and in such manner as appertain to its nature and qualities. Security for the payment of a debt actu- ally owing is a good consideration, and sufficient to support a 1 Per Clifford, J., in Railroad Co. v. » Railroad Co. v. National Bank, National Bank, 102 U. S. 14. 102 U. S. 14, 58. 2 Railroad Co. v. National Bank, supra. 88 COLLATERAL FOR A PRE-EXISTING DEBT. [§ 120. transfer of property. "When such transfer is made for such pur- pose, it has due effect as a complete transfer, according to the nature and incidents of the property transferred. When it is a promissory note or bill of exchange, it has the effect of givino- absolute title and of cutting off prior equities, provided the ordinary conditions exist to give it that effect. If not trans- ferred before maturity, or in due course of business, then, of course, it cannot have such effect. But I think it is well shown in the principal opinion that a transfer for the purpose of secur- ing a debt is a transfer in due course. And that really ends the argument on the subject." 120. In conclusion, it is to be observed that the innovation in commercial law made by the decision in Bay v. Coddington, and followed to the present time by the courts of several states, seems unlikely to obtain general recognition as a rule founded in sound reason and good pohcy. It has found no recognition in England. Mr. Justice Clifford, of the Supreme Court, in a recent case,^ referring to Bay v. Coddington and other cases in New York, which have followed the rule of law there announced, said : " Sixty years have elapsed since the commercial rule adopted and enforced by that series of decisions was first pro- mulgated, and yet it does not and never has commanded the slightest countenance from any court sitting in Westminster Hall. Earnest differences of opinion existed in that country among judicial men, in respect to the extent of the protection which the commercial law afforded to a bond fide holder of a negotiable security against the equities between the antecedent parties, but there is no authentic evidence that any substantial diversity of opinion ever arose in the courts of that country touching the question under consideration." The Supreme Court, by its recent decisions, has conclusively affirmed its former doctrine upon this subject, and has made this the settled rule of law to be followed by all federal courts, regardless of the local doctrine to the contrary which may prevail in any state where a federal court may be sitting. It is unlikely that the courts of any state notahvady committed to the doctrine of Bay v. Coddington will hereafter adopt it, in opposition to the established doctrine of the federal courts, followed also by the greater number of the 1 Railroad Co. t;. National Bank, 102 U. S. 14, 44. 89 §§ 121, 122.] PLEDGES OF NEGOTIABLE PAPER. state courts. The federal courts will, in fact, sooner or later, compel the general adoption of the doctrine by those courts. 121. Uniformity of rule upon this subject is so important in the every-day business of the people, that the existence of a conflicting rule is an evil which will some day become too great to be longer tolerated ; and uniformity will be reached by legisla- tion, or by adoption of the prevailing doctrine by the courts. In a recent decision by the Supreme Court of Indiana it was wisely said : ^ "If this court were not, as it seems to be, already committed to the doctrine held by the Supreme Court of the United States, we should be much inclined, if not constrained, to follow it. On a subject of such general importance, and con- cerning which there cannot properly be a local rule, and in which the commercial world has a common interest, uniformity and certainty of decision are greatly to be desired ; and since the highest tribunals in this country and in England are ruling in harmony upon the point, a state court can hardly be justified in adopting, if, indeed, in adhering to a different rule." 122. Exception as to accommodation paper. — The doc- trine that a preexisting debt is not a valuable consideration for a pledge of a promissory note is applie<,l by some of the courts which adopt it to accommodation paper, holding that, in a suit by an indorsee of such paper for a precedent debt, the maker may successfully interpose the defence that it was originally given without value.2 But the weight of authority among the courts which adopt this general doctrine is, that the holder of an ac- commodation note, made without restriction as to its use, and taken in good faith as collateral security for an antecedent debt, and without other consideration, is entitled to the position of a holder for value, and is not affected by the defence of want of consideration to the maker.^ It is only where the note has been 1 Straughan f. Fairchild (Ind. Apr. 104 ; East River Bank v. Butterworth, 1882), 14 Cunt. L. J. 413. 45 lb. 476; S. C. 30 How. Pr. 444; 2 Braiuball v. Beckett, 31 Me. 205; 51 N. Y. G37; Grandin v. Le Roy, 2 Connerly v. Planters' & Merchants' Paige, 509 ; Bank of Rutland v. Buck, Ins. Co. 66 Ala. 432. 5 Wend. 66 ; AVhite v. Springfield 8 New York: Grocers' Bank v. Bank. 3 Sandf. 222; Lathrop v. Mor- Penfield, 7 Hun, 279; aff'd. 69 N. Y. ris, 5 lb. 7 ; De Zeng v. Fyfe, 1 Bosw. 502; Cole v. Saulpaugh, 48 Barb. 335; Robbins v. Richardson, 2 lb. 90 COLLATERAL FOR A PRE-EXISTING DEBT. [§ 123. diverted from the purpose for which it was intrusted to the pa^-ee, or some other equity exists in favor of the maker, that it is necessary that the holder should have parted with value on the faith of the note, in order to cut off such equity of the maker.^ Moreover, when the holder of such a note has parted with a val- uable consideration for it, the mere fact that it has been fraudu- lently diverted from the purpose for which it was made is no defence to his action upon it ; to make such defence available, it must be shown that the holder had notice of the restriction im- posed in regard to the use of the note.^ 123. It does not matter that the person who takes nego- tiable paper as collateral security has notice that it was made for the debtor's accommodation. Upon this point the Supren)e Court of Illinois in a recent case said : " Accommoda- tion paper is made for the express purpose that it may be sold or negotiated for the benefit of the person accommodated, and after it has been sold or negotiated in the usual course of busi- ness for value, the maker will not be listened to if he asserts it was without consideration. It is a reasonable rule, that one who puts his note or bill in the hands of another to be sold or nego- 248 ; Grant v. Ellicott, 7 Wend. 227; Agawam Bank v. Strever, 18 X.Y. 502; Youngs V. Lee, 12 lb. 551 ; Ross v. Be- dell, 5 Duer, 462, 467; Purchase v. Mattison, 6 lb. 587 ; Harrington v. Dorr, 3 Rob. 275; Tnglis v. Kennedy, 6 Abb. Pr. 32 ; Seneca County Bank v. Neas8, 5 Den. 329 ; S.C.3 N. Y. 442 ; Ross V. Whitefield, 1 Sweeny, 318; Pettigrew v. Chave, 2 Hilt. 546 ; Mon- tross V. Clark, 2 Sandf. 115; Schepp V. Carpenter, 4 9 Barb. 542 ; S. C. 51 N. Y. G02 ; Freund v. Importers' & Traders' Nat. Bank, 76 N. Y. 352, 358. Ohio : Pitts v. Foglesong, 37 Ohio St. 676, 680. In the case of Powers v. French, 1 Hun (N. Y.), 582; S. C. 4 T. & C. C5, holding that one taking acconinio- dalion paper, knowing it to be .such, an. Prentiss, 3 Denio 410; Carlisle v. Iliil, 16 lb. 398, 40G. (N. Y.), 512. See Cumc i;. Misa, L. 2 Kearslake v. Morgan, 5 T. K. 11. 10 Ex. 153, for the case of a eon- 513; Clark, r. Youn(r, 1 Crancli, 181, dilional payment by check on ac- — the latter not consistent with Weak- count. ly V. Bell, 9 Watts (Pa.), 273, 280. *. Stednian v. Gooch, 1 Esp. 3. 8 Okie V. Spencer, 2 Whart. (Pa.) ^ 31 Vt. 64, 75; overruling the cases 253. The reasoning of Kennedy, J., in of Atkinson v. Brooks, 26 Vt. 569, giving the decision, is open to objec- and Michigan State Bank v. Estate of tion. See Aiislin v. Curtis 31 Vt. 64, 73, Leavenworth, 28 lb. 209, so far as they And see Myers v. Welles, 5 Hill (N. contlict. 7 97 § 133.] PLEDGES OF NEGOTIABLE PAPER. only as a pledge, leaving the creditor with the right to enforce the old security whenever he shall see fit to withdraw any ex- pected indulgence to the principal, and at the same time leaving to the surety the right of coming into a court of equity at any time for relief. ... I apprehend the distinction in the cases is well taken, and that while an agreement to give time may be im- plied in the case where the new security takes the place of, and stands, for the time being, in lieu of the old security ; yet, if the new security is but additional and collateral to the old, I think it may well be said that the fact of taking the new security on time does not prove a promise to give time, but doubtless may furnish ground for an expected indulgence which the principal debtor is bound to treat as being, at all times, countermandable at the will of the creditor." 133. The transaction is governed by the law of the place where the pledge is made. Thus, if a broker in New York, to whom negotiable securities are intrusted to raise money upon for the owner, deliver them, as security for a preexisting debt of his own, in Massachusetts, or any other state, by the law of which the receiving of a negotiable note as security for a preexisting debt excludes all equities between the original parties, the trans- fer must be dealt with according to the law of Massachusetts, or such other state ; and the pledgee taking such securities in good faith before maturity obtains a good title to them to the amount of the debt for which they are pledged.^ If, on the other hand, a negotiable note be delivered in New York as collateral security for a precedent debt, the transaction is governed by the law of that state ; and in a suit upon such note in another state, where the rule is that one taking paper as security for a precedent debt is a holder for value in the usual course of business, the law of New York, that such a transfer does not constitute one a holder for value, must be applied.^ 1 Culver V. Benedict, 13 Gray ^ jjussell v. Buck, 14 Vt, 147. (Mass.), 7. 98 CHAPTER IV. PLEDGES OF NON-NEGOTIABLE CHOSES IN ACTION. I. The effect of such pledges, 134-136. n. Pledges of mortgages, 137-144. in. Pledges of policies of insurance, 145-147. IV. Pledges of savings bank books, 148. V. Pledges of judgments, 149. VL Pledges of land certificates, 150. I. Tlie Effect of such Pledges. 134. Non-negotiable securities are always subject in the hands of a pledgee to existing equities. Thus, a pledgee of a non-negotiable demand, such as a certificate of the amount due a person on account, can transfer to another only the same rights as the owner parted with when he assigned it ; he transfers it subject to all the rights and equities of the owner, unless the latter is by his acts estopped from asserting them. Thus, if the owner of such a demand indorse in blank a certificate of the amount, and pledge it for a loan, and the pledgee sells the certificate in this form to another, the purchaser takes only the interest of the pledgor, and must surrender the claims upon re- ceiving the amount of such loan.^ But in this same case it would seem that if the pledgee had written an absolute assignment of the demand to himself over the blank indorsement of the owner, as he was virtually author- ized to do by an indorsement in this form, and had then himself sold the demand in this form to a purchaser for value in goc»d faith, the latter would have acquired a good title to the whole demand. The owner would have been estopped by his own act from asserting any title as against such purchaser. This estop- pel arises from the well-settled principle that when the owner of property in any form clothes another with the apparent title or power of disposition, and third persons are thereby induced to deal with him, they are entitled to lull protection.^ ^ Cowdrey v. Vaudcnburyh, 101 U. '^ Cowdroy v. Viindcnburgli, siipni, S. 672. per Field, J. 99 § 135.] PLEDGES OF NON-NEGOTIABLE CHOSES IN ACTION. 135. A bona fide purchaser for value of a non-negotiable chose in action, from one upon whom the owner has, by assign- ment, conferred the apparent absolute ownership, obtains a valid title as against the real owner, who is estopped from asserting a title in hostility thereto. Although the pledgor in such case has not transferred a legal title, having conferred the apparent owner- ship, he is precluded from asserting his title against a bond fide purchaser from such apparent owner ; for, the purchase having been made upon the faith of the title which the owner had ap- parently given, it would be contrary to justice and good con- science to permit him to assert his real title against the purchaser. Moreover, it would open the door for fraud upon purchasers of such property, if the owner, after transferring it by an absolute written transfer, were permitted to come in and assert his title against one dealing upon the faith of such transfer : the dishonest might combine and practise the grossest frauds.^ Again, the maxim that, where one of two innocent parties must sustain a loss from the fraud of a third, such loss should fall upon the one whose act has enabled such fraud to be committed, is applicable in such cases.2 Thus, if the payee of a non-negotiable certificate of deposit in- dorse it in blank, and deliver it as security for a loan, the pledgee may make a valid pledge of the certificate to an innocent party, who will hold it without reference to the equities between the payee and his pledgee. The last pledgee is authorized to infer absolute ownership and full right in the holder to pledge the certificate ; though, as against the payee, his recovery would be limited to the amount of his loan upon the certificate.^ A recital, however, in an assignment of a chose in action by the apparent owner, that it was made for value received, is not 1 Moore v. Metropolitan Nat. Bank, set over to Isaac Miller the within-de- 55 N. Y. 41 ; overruling Bush v. La- scribed amount, say ten thousand dol- throp, 22 N.Y. 635. Question raised lars." but not passed upon in Talty v. Freed- 2 Moore v. Metropolitan Nat. Bank, man's Savings & Trust Co. 93 U. S. supra ; Fullertoa v. Sturges, 4 Ohio 321. The chose in action in Moore St. 529. V. Metropolitan Nat. Bank, supra, was s International Bank v. German a certificate of indebtedness of the Bank, 71 Mo. 183; Weirick r. Maho- State of New York for 810,000, as- ning Co. Bank, IG Ohio St. 296; and signed as follows : " For value re- also Combes v. Chandler, 33 Ohio St. ceived, 1 hereby transfer, assign, and 178. 100 PLEDGES OF MORTGAGES. [§§ 136, 137. evidence in favor of the assignee against the real owner that it was for value, although he himself introduce the assignment in evidence. The assignee must prove affirmatively that he is a bond fide purchaser for value.^ 136. The assignment of a chose in action as security is valid without notice to the debtor of the assignment. The assignment is complete upon the mutual assent of the parties to it, followed by a delivery ; and it does not gain additional validity as against third persons by notice to the debtor.^ II. Pledges of Mortgages. 137. A mortgage with the note or bond secured by it may be the subject of a pledge by the mortgagee or holder. Though the transfer be by^n absolute assignment, yet if it be accom- panied by the debtor's note, which gives his creditor authority to sell the mortgage upon the debtor's default in paying his debt, the transaction is a pledge of the mortgage, and not a sale or mortgage of it.^ The assignee in such case has only a special property in the mortgage, and is subject to all the duties and obligations of a pledgee. Thus, if such assignee without demand or notice transfer the mortgage to a third person for a grossly inadequate price, and the latter cancels it, the creditor is liable to his debtor in trover for a conversion of the mortgage.* In some early cases an assignment of a bond or note and mort- gage is spoken of as in itself a mortgage.^ "Whether a par- ticular transaction is a mortgage or a pledge is often a very nice question ; and being a question of difficulty, courts have in many instances used the terms ' mortgage ' and ' pledge ' indilferently, when it was not necessary to observe the distinction between them. But when the real character of the transaction is mani- fested by the language of the parties to the contract, disclosing their purpose and intention, all that a court has to do is to recognize its real and true character, and to carry into effect by 1 Moore v. Metropolitan Nat. Bank, Y.) 322 ; ITaskins v. Kelly, 1 Rob. (N. 55 N. Y. 41. Y.) 1(50 ; S. C. 1 Abb. I'r. N. S. U3. '■* Thayer v. Daniels, 113 Mass. 129. * Campbell v. Parker, supra. Otherwise in England : Dearie v. '' Henry v. Davis, 7 Johns. (N. Y.) Hall, 3 Ru88. 1 ; Loveri(l, 150; Wendell y. New Hampshire that an over prudent and cautious IJank, 'J N. II. 404. person, if his attention had heen ^ Jiriggs r. Rice, 130 Mass. 50, 51. called to the circumstance in ques- " As a prudent man, taking a note tion, would have been likely to seek not yet due, it was suflicient for the an explanation of it." Per Colt, . I. assignee to know that the assi<'nment 103 ' § 142.] PLEDGES OF NON-NEGOTIABLE CHOSES IN ACTION. security, without any written assignment, is a valid equitable pledge of those securities, which courts of law will take notice of and protect.^ A negotiable note may be pledged by delivery without indorsement, in which case the legal title will remain in the payee, but he will hold this title for the benefit of the pledgee, so long as the latter retains possession of the note as security. The payee may, while the note is so held, indorse it, and thereby transfer the legal title to another, who will then hold such title as it was before held by the payee, that is, subject to the equitable claim of the pledgee.^ Non-negotiable paper may, like that which is negotiable, be effectually pledged by indorsement and delivery by the payee or owner 3 of such paper, or b}^ delivery without indorsement. A pledgee of bonds of a corporation which are secured by a mortgage is entitled to a proportionate part of the security ; and though the pledge was made by the corporation itself, the pledgee is entitled, upon a foreclosure of the mortgage, to prove the whole amount of his bonds, and to share in the distribution up to the amount of his debt, and is not limited to proof of an amount simply equal to the amount of his debt.^ A promissory note or a corporate bond made negotiable in form, and delivered before maturity, confers upon the holder a title which is not subject to equities existing between the original parties ; and if such note or negotiable corporate bond be secured by a mortgage, the mortgage being but an incident of the debt, the negotiable character of the latter is imparted to the former, to the extent that the assignee of a mortgage securing such negotiable debt, taking it in good faith before maturity, takes it free from any equities existing between the original parties.^ But if the debt be not negotiable, the pledgee of the mort- gage will take it subject to the equities between the original parties. An ordinary mortgage bond being non-negotiable, a pledgee of a mortgage and mortgage bond will hold his pledge subject to existing equities between the original parties. Thus, a mortgage and bond executed to secure a vendor under a con- 1 Grain v. Paine, 4 Cush. (Mass.) * Duncomb v. N. Y., Housatonic & 483. Northern R. R. 84 N. Y. 190; Lehman 2 Proctor V. Baldwin, 82 Ind. 370. v. Tallassee Manuf. Co. 64 Ala. 567. 8 Norton v. Piscatatjua Ins. Co. Ill ^ JoQes on Mortgages, § 834. Mass. 532; Jones v. Witter, 13 Mass. 304. 104 PLEDGES OF MORTGAGES. [§§ 143, 144. tract for a purchase of land, and not in pa5'ment of an instal- ment of the purchase money, not being negotiable securities, are subject in the hands of an assignee to the equities existing between the original parties ; and upon a rescission by them of the contract of sale, the principal indebtedness is extinguished, and the validity of the bond and mortgage destroyed.^ 143. A mortgage note or bond without the mortgage may- be the subject of a pledge, and will give the pledgee the benefit of the mortgage security .^ It would seem that ordinarily a simple transfer in absolute form of a mortgage note to a creditor, as secu- rity for a debt, is to be regarded as a pledge rather than a mort- gage. Such a transfer carries the legal title to the note and the equitable title to the mortgage property. It carries with it the mortgage lien, as an accessory to the debt ; and it carries with it any other lien which secures such principal obligation. ^ The first pledgee of a mortgage note or bond may repledge it with like effect ; or he may by agreement with the mortgagor transfer the mortgage note to another who advances or pays to the first pledgee the amount due him upon the security, whereupon the latter transferee is subrogated to the rights of the former, and will hold the note and mortgage as security for the money advanced.* 144. A debtor may give his own note and mortgage as collateral security for another note made by him, or for any distinct debt. But there must be a debt to be secured distinct from that created by the note and mortgage, otherwise these create the principal debt. Thus if a note and deed of trust be given, on tlie purchase of land, for a portion of the purchase money, they are not collateral security, but the principal debt ; and they are not converted into collateral security by the vendor's giving the purchaser a written agreement to accept a less sum if paid within a short period, instead of the period expressed in the note, and to assign the note and mortgage to enable the pur- 1 Wanzer ?;. Gary, 76 N. Y. 526. » Kamena v. ITuclhig, 2.3 N. J. Eq. 2 Morris Canal & Hanking Co. v. 78; IMoclianics' HiiiKling Association Fii-licr, 9 N. J. Efj. 66 7; L Hasbrouck v. Vandervooi't, 4 ~ Garlick v. James, 12 Johns. (N. Sandf. (N. Y.) 74; Nabring v. Bank Y.) 146; Evans v. Darlington, 5 of Mobile, 58 Ala. 204; Brewster v. Blackf. (ind.) 320. Hartley, 37 Cal. 15; Dungan v. Mut. 8 Wilson t'. Little, 2 N. Y. 443, 448, Benefit L. Ins. Co. 38 Md. 242; Ede per Riiggles, J. v. Johnson, 15 Cal. 53 ; Smith t'. * Wilson V. Little, supra; Has- Quartz Mining Co. 14 Cal. 242. brouck I'. Vandervoort, 4 Sandf. (N. A few early cases to the contrary Y.) 74, 78; Lewis v. Graham, 4 Abb. are not to be regarded; as Huntington (N. Y.) Pr. 106; Mechanics' Building v. Mather, 2 Barb. (N. Y.) 538. & Loan Ass. v. Conover, 14 N. J. Eq. 219. • 114 ABSOLUTE TRANSFER SHOWN TO BE A PLEDGE. [§ 155. cannot be held to be a pledge. Thus, if a contract with an in- surance company be to subscribe for certain shares of its stock, and to pay therefor in certain instalments, the company giving the subscriber the option to resell the stock to it within a given time, the transaction is an actual subscription for stock, and not a loan upon the stock as collateral security. The option is a right secured by contract, and a right in addition to the absolute title to the stock taken by the subscriber. The latter cannot, therefore, after taking the stock and paying certain instalments, surrender the stock to the company, and reclaim the payments made thereon, thus avoiding responsibility as a stockholder to the detriment of the other stockholders of the company and of its creditors.^ And so a customer of a bank having overdrawn his account, and having transferred stock at a fair price " in payment " of the debt, " subject to his right of redemption in two years," it was held that the transaction was neither a pledge nor a mortgage, but a sale of the stock in discharge of the debt. The over-draft was not a loan, and the stock was not transferred as security ; and so the transaction did not come within the rule which pre- vents the conversion of a security for a loan into a sale. After the expiration of the two years the title of the bank to the stock was absolute.2 II. Parol Evidence to show an Absolute Transfer to he a Pledge. 155. An absolute transfer of stock may be shown by parol evidence to be really a pledge of it as collateral security for a debt.3 Perhaps an informal transfer not under seal might be shown by parol evidence to have been so intended, even in an action at law, just as a bill of parcels, as distinguished from a formal bill of sale under seal, may be shown in an action at law to have been intended only as collateral security.* But however this may be, it is a settled rule in equity that oral proof as to the consideration and purpose of an absolute transfer of stock is * Melvin v. Lamar Ins. Co. 80 111. hon v. Macy, 51 N. Y. 1.'55; Burgess 44C- V. Seli^riiian (U. S. Sup. Ct. Jan. '20, 2 Lauman's Appeal, 68 Pa. St. 88. 188.']), 2 Sup. Ct. lie]). 10. » Brick V. Brick, 98 U. S. .014; * Newton v. Fay, 10 Allen (Mass.), Ginz i;. Stumph, 73 Ind. 209; McAIa- 505. See §16. 115 § 156.] PLEDGES OF CORPORATE STOCKS. admissible.^ The rule which excludes such evidence to contra- dict or vary a written instrument has reference to the language of the parties ; it does not forbid an inquiry into the object of the parties in executing and receiving the instrument. For this purpose a court of equity will look beyond the terms of the in- strument to the real transaction.^ Consequently, upon proof that an absolute transfer was intended only as collateral security, a bill in equity may be maintained to redeem the stock.^ But, while this rule of equity protects a debtor from loss in conse- quence of an apparent sale which was really only a transfer to secure a loan, it will not be applied to defeat an absolute or con- ditional sale of stock when the transaction is clearly established to be of that character.* A statute requiring the collateral character of a transfer of stock to be expressed in the transfer itself, or in the certificate issued to the holder of such stock, does not exclude other evi- dence that the transfer was intended merely as collateral secu- rity.^ The purpose of such a provision is to enable the pledgee to hold the security without being liable for the debts of the corporation or to taxation for the property. Though the by-laws of a corporation or the rules of an associa- tion require all transfers to be made absolute in terms, a transfer so made may be shown by parol evidence to have been made as collateral security.^ 156. A sale of stock accompanied by an agreement on the part of the vendor to repurchase the same within a specified time, differs very little from a loan of money upon a pledge of the property as collateral security. If stock of a corporation be sold upon such an agreement to repurchase within a year upon the written request of the vendee, his option to regard the stock 1 ]S"ewton V. Fay, 10 Allen (Mass.), the same should become due ; but it 505; Stamford Bank v. Ferris, 17 was held that the lender did not get Conn. 259. an absolute title to the stock by mere 2 Brick V. Brick, 98 U. S. 514, per default in the payment of the debt. Field, J. It would be immaterial in this respect 8 Smith V. Quartz Mining Co. U whether the instrument be regarded Cal. 242. In this case the instrument as a mortgage or a pledge, of transfer contained a provision that * Laumau's Appeal, 68 Pa. St. 88. the sale should be absolute if the bor- ^ Newton n. Fay, sujva. rower failed to repay the loan when * Ginz v. Stumph, 73 Ind. 209. 116 EFFECTUAL TRANSFER AT COMMON LAW. [§§ 157, 158. merely as collateral security for a loan is sufficiently exercised by causing a written notice that he requested the vendor to buy back the shares according to the terms of the agreement, to be left at the vendor's house before the end of the year. In a suit upon such agreement, after the end of the year, it is sufficient to entitle the plaintiff to recover, that, from the time of giving such notice, he had the shares in his control and possession, and was ready to transfer them before taking judgment.^ 157. Parol evidence is not admissible to contradict the contract of pledge such as a statement in a promissory note that certain stock had been transferred as collateral security. It cannot be shown that the note was a mere memorandum ; and that it was agreed between the parties to it that the stock de- scribed as collateral security should operate as payment of the note at its maturity, if it were not previously paid.^ The rule that oral evidence cannot be admitted to alter a written contract is applicable and must prevail. III. What constitutes an Effectual Transfer of Stock at Com- mon Laiv. 158. What constitutes an effectual transfer of stock is one of the first questions that concerns one who is taking it as secu- rity. May he safely hold a certificate issued to his debtor with a transfer indorsed upon it, or accompanied by a power of attor- ney authorizing a transfer upon the company's books ; or is it essential that the shares be actually transferred upon the books before the security is complete ? By general statute, or by pro- vision of charter, or by-law of business corporations, it is gener- ally declared in some form that stock is transferable only on the books of the company. While it is generally conceded that un- der such a provision a valid transfer of stock may be made as between the parties themselves, by merely delivering a certificate properly indorsed, or accompanied by a power of attorney, au- thorizing a transfer u[)on tiie company's books, there is a wide difference of opinion as to the effect of such a transfer as against the assignor's creditors. ^ Doynton v. Woodbury, 101 Mass. * Perry v. Bi;,a'low, 128 Mass. Vl'i. 31G. 117 §§ 159, 160.] PLEDGES OF CORPORATE STOCKS. 159. In the absence of legislative regulation transfers of stock are governed by the general principles of the common law. Shares of stock are the private property of the owner, and he may sell them or transfer them as security in any way he chooses, provided he makes such a delivery of them as the com- mon law requires.! The by-laws of the corporation may provide that all transfers shall be made upon its books, and shall not be complete, or shall not pass the title until so made ; but they do not control the legal effect of an assignment and delivery of the certificate by the owner. The legal effect of the owner's assign- ment may be controlled by legislative enactment ; for the legis- lature has the right to declare Avhat forms shall be observed in the transfer of property. But in the absence of any legislative regulation, either by general law or by special charter, the mode of transferring stock should be determined by general principles of law based upon sound reason and public policy. " The right to dispose and transfer the title being a recognized and universal incident to ownership of property, the exercise of that right should not be trammelled by any restrictions except such as grow out of the nature of the property or the demand of a sound policy." 2 160. Statutes of doubtful meaning relating to transfers of ^ Cornick v. Richards, 3 Lea to pay what it calls for, receiving a (Tenn.), 1 ; Board of Commissioners certificate of the fact of such purchase V. Reynolds, 44 Ind. 509 ; S. C. 13 and ownership from the corporation. Am. L. Reg. N. S. 376, 380. When the stock is so purchased, how- 2 Cornick v. Richards, supra, per ever, as we have seen, it is his private Freeman, J. individual property, and he may sell The learned judge continuing, said: it as such or assign it with or without " The books are not public records in a consideration, and no one can object, any proper sense of our law. Why creditors and innocent purchasers un- one private individual should be re- der other rules of law not being af- quired to effectuate the sale of the fected, for reasons of public policy, in property of another in which he has case the transfer is voluntary without no title or interest as property by en- value paid for it. It would seem to tering the fact dn his books, it is not follow that whenever the title passed easy to see, — not even if the fact be out of the party himself by a fair con- that the party selling had originally tract of transfer, no registration law purchased the property from him. being in the case, and no fraud pur- Yet this fairly represents the fact in posed as against a creditor of the the case of stock in a corporation, party selling, that his right as against The original owner purchases it from the property ought to end." the corporation by paying or agreeing 118 EFFECTUAL TRANSFER AT COMMON LAW. [§161. stock in corporations will not be construed to control the recog- nized rules of the common law in regard to the mode of transfer of such pi'operty. Thus in a recent case in Massachusetts it was contended that by force of various statutes authorizing the attach- ment of shares, requiring returns to the secretary of the common- wealth, and imposing a personal liability on stockholders for the debts of the corporation, there could be no transfer of stock valid against an attaching creditor, unless the transfer had been re- corded in the books of the corporation ; that although the stat- utes have not provided in express terms that transfers shall not be valid as to creditors until they are so recorded, yet such is the necessary implication, for otherwise the design of the statutes, requiring registration, and making the shares liable for debts, would be defeated. But the court overruled this objection, say- ing : ^ " This consideration is not sufficient to control the law as long since settled by the decisions of this court. It requires a clear provision of the charter itself, or of some statute, to take from the owner of such property the right to transfer it in ac- cordance with known rules of the common law ; and by those rules the delivering of a stock certificate, with a written transfer of the same to a bond fide purchaser, is a sufficient delivery to transfer the title as against a subsequent attaching creditor. It would not be in accordance with sound rules of construction to infer, from the provisions of several different statutes passed for the purpose of obtaining information needed to secure the taxa- tion of such property, or for the purpose of subjecting stockhold- ers to a liability for the debts of a corporation, or for protecting the corporation itself in its dealings with its own stockholders, that the legislature intended thereby to take from the stock- holder his power to transfer his stock in any recognized and law- ful mode. If a change in the mode of transfer be desirable, for the protection of creditors, or for any other reason, it is for the legis- lature to make it by clear provisions, enacted for that purpose." 161. The convenience of unrestricted transfers of stock is so great that it may be said that such transfers are now a nc^ces- sity. Transfers of stock, not only for purposes of speculation but also for the purposes of security, hav(i now become so imjiorlant an element in tlie business transacted every day in all th(^ centres 1 Boston Music Hall Asso. v. Cory, 129 Mass. 435, per Colt, J. 110 § 161.] PLEDGES OF CORPORATE STOCKS. of commerce and trade that it is almost a matter of necessity that the mere delivery of the certificate with a power of transfer should be effectual, not only as between the parties to the trans- action, but also as against the assignor's creditors. This practical necessity for an unrestricted transfer of shares of stock has been generally recognized by the courts, in the absence of statutes making a transfer upon the books of the company requisite to the validity of the transfer. Thus, in a recent case in Louisiana the court say:^ "There is an immense amount of the wealth of the country invested in stocks of* the numberless corporations, which have sprung into existence within a few years past. These stocks afford a most convenient and valuable basis of credit ; and they are sold to a large amount daily, at all the great commercial centres. The holder who does not wish to sell may pledge his certificates for loans and discounts to an amount approximating their market value, with a reasonable margin for possible depre- ciation. The pledgee does not desire to become the owner of the stock ; and he would not think it necessary, nor would he have the right to surrender the pledged certificates and have the stock transferred to him on the books of the corporation. Nor do we think the validity of the pledge could be made to depend on the giving of notice to the corporation, because the corporation has no power or authority to dispose of the stock, or to transfer it, so long as the certificates are not produced and surrendered. If the pledgee were required to have the transfers made on the books of the corporation or to give notice, the value of these cer- tificates as a basis of credit would be greatly impaired, particu- larly where the pledge is made at a distance from the domicil of the corporation." There is a very great convenience, not only to persons dealing in stocks, but to merchants and bankers who have occasion to use them as collateral, to be able to give or take an indisputable title without an actual transfer of the shares upon the books of the corporation.^ The office of the corporation may be far away from the place at which the transaction is had ; or the transaction may be one for a temporary purpose, such as a loan for a few days upon stock as security. Then, again, it is customary with all large corporations to close the transfer books whenever divi- dends are declared, and to keep them closed, perhaps, for weeks 1 Smith V. Slaughter House Co. 30 ^ Cornick v. Richards, 3 Lea La Ann. 1378, 1383. (Tenn.), 1. 120 EFFECTUAL TRANSFER AT COMMON LAW. [§ 162. at a time ; and consequently, during such periods, all transac- tions must necessarily be had without an actual transfer of the shares. The latest decisions, as well as those having the highest author- ity, establish the rule, that in the absence of legislative enactment restricting the transfer of stock to a particular mode, a transfer is complete on delivery of the certificate with a power to transfer, not only between the parties themselves, but when the corpora- tion has unjustifiably refused to make the transfer on its books, against a creditor of the vendor, who, without notice of the trans- fer, has attached the stock. ^ 162. A mere rule of a corporation not authorized by stat- ute cannot affect the rights of purchasers or pledgees of stock. Thus an unauthorized by-law of a corporation, forbidding a transfer of stock when the holder is indebted to the corporation, does not relieve the corporation from the dutj'^of making a trans- fer upon its books upon the request of one to whom the certifi- cate, accompanied by a power of attorney, has been assigned.^ " There is no presumption in favor of the right of a corporation to refuse to transfer on its books stock of the company which the shareholder has sold to a bond fide purchaser. The certificate rep- resents the property, and if any secret lien upon the property exists, such lien must be shown. The burden is on him who as- serts the peculiar privilege to prove it, as restrictions on the free transfer of personal property are not favored, especially as against an innocent purchaser who has paid for the certificate. At com- mon law, and independently of positive provisions of the legis- lature granting or authorizing the exercise of the power, a cor- 1 Merchants' Nat. Bank v. Richards, tion gives express power to the direc- 74 Mo. 77; affirming ,S'. C. 6 Mo. App. tors to make by-laws for the transfer 454; and cases cited in §§ 159-161. of its shares of stock; Mechanics' Bank ■■^ Carroll r. Mullanpliy Savings v. Merchants' Bank, 45 Mo. 513 ; or Bank, 8 Mo. App. '249,2.^2. where a company's charter provided In tills case the by-law under which that its stock should be transferable the corporation refused to make the according to such restrictions as the transfer was one adopted by the di- board of directors should establish, rectors, and not one made by the cor- subject to the laws of the state; St. poration. The by-law was considered Louis Ins. Co. v. Goodfellow, 9 Mo. as of no effect, because the power to 14'J. And see Spurlock v. Pacific make by-laws ordinarily resides solely K. K. Co. CI Mo. 32G, where the ill the corporation. It would be other- jjower to make by-laws was general, wise where the charter of the corporar liil §*163.] PLEDGES OF CORPORATE STOCKS. poration cannot pi-ohibit the transfer of its shares on account of the indebtedness of the shareholder to the corporation. Where the stock is personal property, restrictions upon its transfer must have their source in legislative action, and the corporation itself cannot create these impediments." ^ IV. Transfers in Blank. 163. By general cominercial usage a transfer of a stock cer- tificate may be made in blank. An indorsement in blank of the certificate, or a signing in blank a power of attorney to make a transfer upon the company's books, authorizes any subsequent holder to fill up the assignment or the power of attorney .^ This right to fill up the blank is not limited to the first taker of the instrument, but may be exercised by any one into whose hands the certificate may come in this way. The blank in the assign- ment or power may be subsequently filled up by the holder with his own name, so as to entitle him to a transfer upon the books of the company, although the assignment or power be executed under seal.^ The commercial usage to this effect is well es- tablished and judicially recognized in this country.* But even without the aid of this usage, assignments in this form would doubtless be upheld b}^ some courts. In a leading case upon this subject it appeared that the owner of certain shares of bank stock, which were transferable only upon the books of the bank, sent his certificate with a blank power of attorney under seal, and his own promissory note, to an agent to use in obtaining a loan. Subsequently this agent obtained a 1 Carroll v. Mullanpby Savings J. Eq. 117; Otis v. Gardner (111. Bank, 8 Mo. App. 249, per Hayden, J., 1883), 15 Rep. 332. citing Chouteau Spring Co. v. Harris, ^ Bridgeport Bank v. N. Y. & N. H. 20 Mo. 382, 387; Moore v. Bank, 52 R. R. Co. 30 Conn. 231, 273; Strange Mo. 377, 379 ; Bank of Attica v. Manu- v. H. & T. C. R. R. Co. 53 Texas, 162; ■ facturers' Bank, 20 N. Y. 501, 505 ; Ro- Sewall v. Boston Water Power Co. 4 senbackr. Bank, 53 Barb. 495; Steam- Allen (Mass.), 277; Walker v. Detroit ship Dock Co. v. Heron, 52 Pa. St. 280. Transit Co. 47 Mich. 338. 2 Kortright v. Commercial Bank of ^ ^Vhen a general usage has been Buffalo, 20 Wend. (N. Y.) 91; S. C. judicially ascertained and established, 22 lb. 348 ; Leavitt v. Fisher, 4 Duer it becomes a part of the law mer- (N. Y.), 1 ; Persch v. Quiggle, 57 Pa. chant, which courts of justice are St. 247; German Union Building Asso. bound to know and recognize." Bran- V. Sendmeyer, 50 Pa. St. 67; Mount dao v. Barnett, 12 CI. & F. 787, 805, Holly Turnpike Co. v. Ferree, 17 N. per Lord Campbell. 122 TRANSFERS IN BLANK. [§ 164. large loan upon these securities and absconded with the money. The pledgee filled up the blank transfer and power of attorney and demanded a transfer of the shares to himself upon the books of the bank ; but the bank refused to allow this. In a suit by the pledgee against the bank for such refusal the pledgee was held to be entitled to recover. Chief Justice Nelson, in denying a motion for a new trial, said that the filling of the blanks in the transfer and in the power of attorney was in strict conformity with the universal usage of dealers in the negotiation and trans- fer of stocks, according to the proof on trial.^ " Even without the aid of this usage there could be no great difficulty in uphold- ing the assignment ; the execution in blank must have been for the express purpose of enabling the holder, whoever he might be, to fill it up. If intended to have been filled up in the name of the first transferee, there would have been no necessity of its execu- tion in blank : the owner might have completed the instrument. The usage, however, is well established, and was fully understood by the owner, as he made the transfer in conformity to it, and he, or those setting up a claim under him, should not now be per- mitted to deny its validity. The filling up is but the execution of an authority clearly conveyed to the holder, is lawful in itself, and convenient to all parties, as it avoids the necessity of need- lessly multiplying transfers upon the books." ^ 164. The decisions of the English courts to the contrary have been influenced chiefly by a rigid adherence to the tech- nical rules of the common law in relation to instruments under seal, though the policy of the stamp laws ia said to have had some influence in the same direction. It is an ancient rule of the common law that an instrument under seal must be wholly written before sealing and delivering it. No blanks in any essential part of such an instrument can be filled in after tlie delivery of it. Lord Mansfield attempted to break down this rule in the case of Texvia v. Evans ; ^ but half a century after- wards this case was overruled, and the ancient rule reestablished. 1 Kortrij^ht v. Coinmorcial Bank of ^ ,9 q^ q^ appeal, 22 Wend. 318. Buffalo, 20 Wend. (X. Y.) 94, per 8 Cited and stated l)y Wilson, J., in Nelson, C. .T.; approved in Matthews Master v. Miller, 1 Anstr. 225. V. Mass. Nat. Bank, I Holmes, 396, 407. 123 § 164.] PLEDGES OF CORPORATE STOCKS. This still remains the rule in England, and is adopted in the greater number of states in this country.^ But while in this country, even in those states in which this rule of the common law prevails, transfers of shares by assign- ments or powers of attorney in blank are allowed by virtue of the general commercial usage, in England no general exception in regard to such transfers has been made. The case in which Lord Mansfield's new doctrine was finally repudiated arose in re- gard to the validity of a transfer of shares by an assignment in blank, which was afterwards filled up by inserting the purchaser's name.2 The charter of the corporation required a conveyance of its shares to be made by an instrument under seal. Baron Parke, delivering the judgment of the court, said: "There is no au- thority that shows that an instrument which, when executed, is incapable of having any operation, and is no deed, can after- ward become a deed, by being completed and delivered by a stranger, in the absence of the party who executed it, and un- authorized by instrument under seal." In a later case the owner of various securities, who kept his certificates in his brokers safe at a London bank, was fraudulently induced by the broker to execute and deliver to him several deeds of transfer in blank. The broker filled up two of the deeds, making each of them transfer to a confederate five hundred shares of stock in the defendant railway company. The company having transferred the shares to the transferee named, the owner brought suit against the company ; and it was held that the transfers were void, and the company was held liable, though the plaintiff had been guilty of culpable negligence.^ But if the company's articles of association do not require transfers to be made by deed, they may be executed in blank and the holder may afterwards fill them up.* The validity of transfers in blank seems also to be recognized, so far as to impose upon the holder the obligation to pay calls upon the shares.^ ^ See, on this subject, 1 Jones on Langston, 7 M. & W. 517; Eagleton Mortgages, § 90. v. Gutteridge, 11 M. & W. 465. 2 Hibblewhite v. M'Morine, 6 M. & 3 g^an v. N. B. A. Co. 8 Jur. 940. "W. 200. The principle of this de- * In re Tahiti Cotton Co. L. R. 17 cision has been affirmed in Davidson Eq. 273; Ex parte Swan, 7 C. B. (N. V. Cooper, 1 1 M. & W. 7 78, 793 ; Entho- S.) 400. ven V. Hoyle, 13 C. B. 373; Humble v. s Walker v. Bartlett, 18 C. B. 845. 12-1 TRANSFERS IN BLANK. [§ 165. 165. A power of attorney to transfer stock, though under seal, may be executed in blank, just as the assignment upon the back of the certificate may be executed in tins way. Such a power of attorney, delivered with the certificate, is evidence of an implied authority to fill up the power with the name of an attorney to make the transfer upon the books of the corporation. It is customary to make the power in this form, and there is no question in regard to the validity of such a power, when it has been filled up according to the intention of the owner.^ But when the blank has been once filled, the instrument becomes complete ; and the holder of the power has no authority to alter or erase the name inserted and insert another. Thus, if the owner of a certificate of stock intrusts it to another, with a power of attorney in blank, to enable him to make a specific loan, and the loan is made and afterwards is paid, and the stock is returned to the borrower, who then erases the name of the pledgee, and inserts the name of a creditor to whom he was already indebted to a large amount, upon the application of the original owner of the shares, the creditor was enjoined from transferring the shares to his own name.^ An assignment of the certificate, and a power of attorney to transfer the stock, may both be executed in blank ; and if the owner of the certificate insert his name in that, and in the power the name of another, an effectual demand upon the corporation for a transfer of the stock can be made by the owner, without the attorney's joining in it.^ ^German Union Building Asso. r. of convenience are suflicient to justify. Sendmeyer, 50 Pa. St. 67; Persch v. Malus usus abolendus est. A power of Quiggle, 57 Pa. St. 247. attorney, signed, generally sealed, and In an earlier case in this state, how- duly delivered, what is it but a finished ever (Denny i'. Lyon, 38 Pa. St. 98), legal instrument ? Who may alter that this commercial usage was condemned, paper writing to the prejudice of an- AVooflward, J., saying : " The cashier other, without incurring liability to of the Inuik swears that the name of the charge of forgery ? ]f commer- the transferee is usually not inserted cial usage permits the insertion, eras- in the power of attorney, and that it ure, and subsequent reinsertion here, is more convenient not to iiaveitin- what other legal instrument may not serted. We know that this is com- commercial usage tamper with in like mcrcial usage; it was probably origi- manner? " nated by the banks ; iJ not, they have - Denny v. Lyon. 38 Pa. St. 98. countenanced it, and thus brought ^ Cushman v. Tliayer, Manufactur- people to practise it, and yet it is a ing Jewelry Co. 70 N. Y. 3(15. vicious usage, which no considerations 125 §§ 166, 167.] PLEDGES OF CORPORATE STOCKS. 166. The death of the pledgor of a certificate indorsed by him in blank does not revoke the authority of the pledgee to fill up a written transfer of the certificate to himself or to another ; and it does not matter in this respect that the certifi- cate, by its terms, is transferable only at the office of the cor- poration by appearance of the holder in person, or by attorney .^ 167. The signing of a transfer in blank on a certificate of stock is a warranty of the genuineness of the certificate. The rule is the same, and rests upon the same grounds, as that established with reference to negotiable instruments, to the effect that every indorser holds himself out as possessing a clear title to the papei', and as conferring such a title upon his indorsee. It becomes of importance, therefore, that one taking a certifi- cate in his own name, as security for a loan, should know the genuineness of the certificate, not only with a view to the security of the loan, but with a view to avoiding a loss greater, perhaps, than the whole of the loan, through putting the certificate in cir- culation after the payment of the loan, by indorsing a transfer of it in blank. This point is forcibly illustrated in the case of Mat- thews V. Massachusetts National Bank.^ This bank made a loan upon a certificate of stock issued as collateral directly to the bank for two shares of the stock of the Boston and Albany Railroad Company, which certificate the borrower, before delivering to the bank, fraudulently altered, so as to purport to be for two hundred shares. The bank received the certificate in good faith as security for a loan, and upon the payment of the loan the bank, by its cashier, signed a transfer in blank upon the back of the certificate, and delivered it to the borrower. A short time afterwards the same borrower obtained from a third person an- other and larger loan, upon a pledge of the certificate, still having the bank's assignment in blank upon it. This lender took the certificate in good faith, supposing it to be genuine, but very soon discovered the fraudulent alteration, and brought suit against the bank for the recovery of the damages he had sustained. The question presented was whether the bank had, by signing the blank transfer, so far warranted the genuineness of the certificate 1 Fraser 17. Charleston, 11 S. C. 486; ^ 1 Holmes, 396. See note to this Leavitt v. Fisher, 4 Uuer (N, Y.), 1, case, 14 Am. Law Reg. N. S. 153. per Duer, J. 126 TRANSFERS IN BLANK. [§ 167. that it was estopped from setting up the forgery as a defence to the action, and the bank was held liable. It was contended in behalf of the bank that the transfer created no liability to any subsequent holder of the certificate, because the circumstances under which it was taken and surrendered in- dicated that the transfer was made solely for the purpose of restoring the pledge to the borrower after he had paid this loan. But the court replied that there was nothing to show that the subsequent lender had any knowledge of any such intention on the part of the bank ; that although the certificate purported that the bank held the shares as collateral, it did not show for whose debt they were collateral ; that such a certificate, with a transfer in blank, might, in the ordinary course of dealing, pass through the hands of many successive purchasers, and the pos- session of it would afford no indication that the holder of it was the person who had originally transferred it to the bank as col- lateral ; that if the bank had enforced payment of the loan by a sale of the stock, and had assigned the certificate in this form, the purchaser would have been in the same condition as the sub- sequent pledgee ; and if this pledgee had dealt with the pur- chaser, he would have received no better evidence of title against the bank than he in fact received from the borrower himself. The mere words " as collateral " in the instrument do not tend to put the purchaser on inquiry, except so far as relates to the authority of the bank to dispose of the collateral as between the bank and its debtor. If inquiry had been made of the bank, it would only have resulted in the information that the bank had made a loan upon the certificate, and the loan having been paid, the assignment was made in blank by the joint act and consent of the debtor and the bank. There would have been nothing in this information to lead the inquirer to doubt the genuineness of the certificate to which the bank had given currency by its signa- ture. Neither could the bank contend, with any show of reason, that the subsequent pledgee was negligent in not inquiring at the office of the railroad corporation. If the duty of making such inquiry was incumbent on any one, it was incumbent on the bank to ascertain the genuineness of the instrument before giving currency to it, and lulling suspicion and doubt by the responsi- bility of its signature. One taking the certificate in this form might reasonably suppose that the bank had obtained the certifi- cate itself from the railroad company in the usual way, thus 127 § 168.] PLEDGES OF CORPORATE STOCKS. preventing the possibility of fraud or forgery. The bank, in fact, negligently placed confidence in the borrower to obtain a transfer from the railroad company, instead of obtaining it directly. But the negligent act, which especially imposed upon the bank a lia- bility in this case, was that it delivered the forged instrument to the borrower, assigned in blank, and authenticated by the signa- ture of its proper officer, thus giving it a currency which it would not have possessed had the transfer been made directly to the borrower. If the bank had intended merely to revest in the borrower whatever it acquired from him, it would have been perfectly easjj^ to have limited the transfer to that extent only. If the conditions upon which the ap|)arent right of control which the bank conferred upon the borrower were not expressed upon the face of. the instrument, but remained in confidence between the bank and the borrower, the case is not distinguishable in principle from that of an agent who receives secret instructions qualifying or restricting an apparently absolute power. One of two innocent parties must suffer ; and the courts have repeatedly held that the party must suffer who has exhibited the greater de- gree of negligence. V. Transfer hy Delivery of Certificate as bettveen the Parties. 168. The effect of a transfer of stock by delivery of the certificate with a power of trjansfer is, therefore, to be consid- ered : 1. As between the parties to the transfer ; 2. As between them and the corporation itself ; and 3. As between them and attaching creditors. Whatever be the view taken of the necessity of a transfer upon the books of a corporation in order to protect the title of such as- signee as against subsequent attaching creditors of the assignor, it is agreed that, as between the parties themselves, the title passes by indorsement and delivery of the certificate, without any entry of the transfer upon the books of the corporation ; ^ or even with- out fining up the transfer where this has been signed in blank.^ 1 Johnston v. Laflin, 103 U. S. 800 ; Fitchburg Savings Bank v. Torrey, Bank v. Lanier, 11 Wall. 369; National 134 Mass. ; S. C. Mass. Law Rep. Bank v. Watsontown Bank, 105 U. S. May 3, 1883 ; Cherry v. Frost, 7 Lea 217 ; Ex parte Dobson, 2 Mont., D. & (Tenn.), 1, per Cooper, J. De G. 685; Dickinson t;. Central Bank, 2 Otis v. Gardner (111. 1883), 15 129 Mass. 279 ; Sibley v. Quinsiga- Rep. 332 ; Ross v. Southwestern R. mond Nat. Bank. 133 Mass. 515 ; R. Co. 53 Ga. 514 ; Comeau v. Guild 128 TRANSFERS AS BETWEEN THE PARTIES. [§ 169. A by-law requiring a transfer to be made upon the books of a corporation does not restrict the owner in his right to transfer his stock, or give the corporation the power to refuse to register a bond fide transfer. As between the parties, the sale is complete when the certificate is assigned with power to make a transfer upon the books of the corporation. ^ 169. By a delivery of a stock certificate with a power of transfer, the title passes as between the parties to the trans- action ; and in this respect, it matters not whether such transfer be deemed to pass a legal or ain equitable title.^ In a case relat- ing to such a transfer of shares of a national bank, Mr. Justice Field in delivering the judgment of the Supreme Court, said : ^ " The entry of the transaction on the books of the bank, where stock is sold, is required, not for tlie translation of the title, but for the protection of the parties and others dealing with the bank, and to enable it to know who are its stockholders, entitled to vote at their meetings and receive dividends when declared. Farm Oil Co. 3 Daly (N. Y.), 218; Smith V. Crescent City Stock Landing Co. 30 La. Ann. 1378. ^ Johnson v. Laflin, 5 Dill. 65 ; S. C. 103 U. S. 800 ; 17 Albany L. J. 146 ; a. C. Thompson's Nat. Bank Cases, 343 ; Bank v. Lanier, 11 Wall. 3G9. Georgia : Ross v. Southwestern R. R. Co. 53 Ga. 514 ; Railroad Co. v. Thomason, 40 Ga. 411. Massachu- setts : Dickinson c. Cent. Nat. Bank, 129 Mass. 279 ; Sibley v. Quinsiga- mond Nat. Bank, 133 Mass. 515 ; Sargent i'. Franklin Ins. Co. 8 Pick. 90; Fitchburg Savings Bank v. Tor- rey, 134 Mass. ; S. C. Mass. Law Rep. May 3, 1883. Missouri: Mer- chants' Nat. Jiank v. Richards, 6 Mo. App. 454 ; Moore i-. Bank, 52 Mo. 377; Carroll v. MuUanpliy Sav. Hank, 8 Mo. Ai)p. 241^. Rhode Island : Hoppin i\ Buduiii, !i R. L 513 ; Beck- with V. Burrough, 13 R. J. 294. Pennsylvania: German Union Asso. V. Sendmeyer, 50 Pa. St. 67 ; United States V. Vaughan, 3 Binn, 394. New- York : Leavitt v. Fi.slier, 4 Duer, 1 ; 9 Munn V. Barnum, 24 Barb. 283 ; Orr V. Bigelow, 20 Barb. 21. Texas: Strange v. Houston & Tex. Cent. R. R. Co. 53 Tex. 162 ; S. C. 10 Rep. 28. Other States : Kellogg v. Stockwell, 75 111. 68 ; Baldwin v. Canfield, 26 Minn. 43 ; Fraser v. Charleston, 11 S. C. 486 ; Baltimore City Passenger Ry. Co. V. Sewell, 35 Md. 238 ; Noyes V. Spaulding, 27 Vt. 420; Cornick v. Richards, 3 Lea (Tenn.), 1 ; Bank of America v. McNeil, 10 Bush (Ky.), 54. 2 National Bank v. Watsontown Bank, 105 U. S. 217 ; S. C. 4 Morri- son's Trans. 400 ; Johnson v. Laflin, 103 U. S. 800 ; Carroll v. MuUanphy Savings Bank, 8 Mo. App. 249; Mer- chants' Nat. Bank r. Richards, 6 Mo. 454; Jolinson v. Underbill, 52 N. Y. 203; McNeil v. Tenth Nat. Bank, 46 N. Y. 325. 8 Johnson r. Laflin, xuprn ; and see National Bank v. Watsontown Bank, supra; Sibley v. Quinsigamond Nat. Bank. 133 Mass. 515. 129 § 170.] PLEDGES OF CORPORATE STOCKS. It is necessary to protect the seller against subsequent liability as a stockholder, and perhaps also to protect the purchaser against proceedings of the seller's creditors. Purchasers and creditors are only bound to look to the books of registry of the bank. But as between the parties to a sale, it is enough that the certificate is delivered with authority to the purchaser, or any one he may name, to transfer it on the books of the company, and the price is paid." 170. Some authorities hold that, as between the parties, the delivery of the certificate, with assignment and power indorsed, passes the entire title, legal and equitable, in the shares, notwithstanding that, by the terms of the charter or by- laws of the corporation, the stock is declared to be transferable only on its books ; ^ that such provisions are intended solely for the protection of the corporation, and can be waived or asserted at its pleasure, and that no effect is given to them except for the protection of the corporation ; that they do not incapacitate the shareholder from parting with his interest, and that his assign- ment, not on the books, passes the entire legal title to the stock, subject only to such liens or claims as the corporation may have upon it, and excepting the right of voting at elections. In the case of Kortright v. Commercial Bank of Buffalo,^ Chancellor Walworth, in a dissenting opinion, strenuously maintained, in conformity with his previous decision in Stebbins v. Phoenix Ins. Co.,^ that by a transfer not on the books, the transferee acquired only an equitable right to or lien on the shares ; and that, hav- ing but an equitable right or lien, he took subject to all prior equities which existed in favor of any other person from whom such assignment was obtained. But his view was ovei-ruled by the majority of the court. The action was at law in assumpsit, brought by the holder of the certificate and power, for a refusal 1 New York: Cusliman ?;. Thayer In Holbrook v. N.J. Zinc Co. 57 Manufacturing Jewelry Co. 76 N. Y. N. Y. 623, it is declared that " one 365, 371, per Miller, J. ; McNeil v. who takes an assignment of a stock Tenth Nat. Bank, 46 N. Y. 325, per certificate, as between him and the Rapallo, J. ; Smith r. Am. Coal Co. 7 transferrer takes the whole title, both Lans. 317; Hill r. Newichawanick Co. legal and equitable." 48 How. Pr. 427; Leitch y. Wells, 48 2 20 Wend. 91; S. C. 22 Wend. N. Y. 585; Grymes v. Hone, 49 N. Y. 348. 17. 83 Paige (N. Y.), 350, 356. 130 TRANSFERS AS BETWEEN THE PARTIES. [§ 171. to permit liim to make a transfer on the books, and the question of his legal title was necessarily involved in the case. The judg- ment therein must therefore be regarded as a direct adjudication that, as between the parties, the legal title in the shares will pass by delivery of the certificate and power. This was reasserted in the New Haven Railroad case,i notwithstanding what was said in the Mechanics' Bank case.^ The Court of Appeals of New York, in a case already cited, say :3 " By omitting to register his transfer, the holder of the cer- tificate and power fails to obtain the right to vote, and may lose his stock by fraudulent transfer on the books of the company by the registered holder to a bond fide purchaser ; * but in this re- spect he is in a condition analogous to that of the holder of an unrecorded deed of land, and possesses a no less perfect title as against the assignor and others. He would have an action against the corporation, for allowing such a transfer in violation of his rights.^ He also takes the risk of the collection of dividends by his assignor, and the risk of any lien the corporation may have on the shares. But in other respects his title is complete." 171. But on the other hand other courts hold that the de- livery of a certificate with a power of transfer, gives the holder nothing more than an equitable title.*^ Such a transfer makes the holder presumptively tlie equitable owner of the shares, and if he has given value for them without notice of any intervening equity, his title as such owner cannot be impeached. " The certificate of stock, accompanied by the power of attorney authorizing the transfer of the stock to any person, is prima facie 1 34 N. Y. 30, 80. America v. McNeil, 10 Bush (Ky.), 2 13 X. Y. 625. 54; see State Ins. Co. v. Sax, 2 Tenn. 8 McNeil V. Tenth Nat. Bank, 46 Ch. 507; United States v. Vaughan, 3 N. Y. 325, 332; per Rappallo, J. Binn. (Pa.) 394, 39« ; WilUs v. Phila. * New York & N. II. R. 11. Co. v. & Darby II. R. Co. 6 Weekly Notes of Schuyler, 34 N. Y. 30, 80. See, also, Cases, 461 ; Bruce v. Smith, 44 Ind. Smith V. Am. Coal Co. 7 Lans. (N. 1,5. In Bank of America u. McNeil, ''•) ^^^' supra, the court spoke of an assign- ^ See, also, Cushman v. Thayer ment of the certificate, with a power Manufacturing Jewelry Co. 76 N. Y. to transfer, where the corporation's .i65, 371. charter provides for a transfer upon ' Black V. Zacharie, 3 How. 483; its books, as a syml)olical delivery of Mount Holly etc. Turnjiike Co. v. the stock, edectual against persons I'erree 17 N. J. E4. 117; Bank of having actual notice of it. i:U §§ 172, 173.] PLEDGES OF CORPORATE STOCKS. evidence of equitable ownership in the holder, and renders the stock transferable by the delivery of the certificate. And when the party in whose hands the certificate is found, is shown to be a holder for value and without notice of any intervening equity, his title as such owner cannot be impeached. The holder of the certificate may insert his own name in the power of attorney and execute tlie power, and thus obtain the legal title to the stock, whenever the loan for which it was hypothecated becomes due, or whenever, by the terms of his contract, he becomes entitled to the stock. And such a power is not limited to the person to whom it was first delivered, but enures to the benefit of each bond fide holder, into whose hands the certificate and power may pass."^ VI. Such Transfers as between the Parties and the Corporation. 172. But as against the corporation itself a transfer not entered upon the books of the company is, as a general rule, not binding upon it.^ The corporation is not bound to recog- nize as stockholders any persons who do not appear to be sucli upon the corporation's books. Thus an assignee of shares cannot at law recover a dividend declared by the company until his as- signment has been entered upon the company's books, as required by its charter and by-laws.^ On the other hand until an assign- ment has been made and entered in the manner prescribed, the assignee does not become liable to pay assessments laid upon the shares.* A lien given by the charter and by-laws of a corpora- tion upon the shares of its stockholders, may be enforced by it against the stockholder of record,^ and cannot be enforced against an equitable assignee, no transfer having been executed upon its books.^ 173. An actual transfer upon its books is necessary as against the corporation to make an available and complete 1 Mount Holly, &c. Turnpike Co. v. Manning v. Quicksilver Mining Co. Ferree, 17 N. J. Eq. 117, per Green, 24 Hun. N. Y. 360. Chancellor. ^ Oxford Turnpike Co. v. Bunnel, 2 Stockwell V. St. Louis Mercantile 6 Conn. 552. Co. 9 Mo. App. 133; Becher v. AVells * Marlborough Manuf. Co. v. Smith, Flouring Mill Co. 1 Fed. Rep. 2 76; 2 Conn. 579. Laing v. Burley, 101 111. 591; Otis v. ^ Union Bank v. Laird, 2 Wheat. Gardner (111. 'l883), 15 Rep. 332; 390. 132 6 Helm V. Swiggett, 12 Ind. 194. AS BETWEEN THE PARTIES AND THE CORPORATION. [§ 174. title ; and such a transfer is necessary even in the absence of any provision in the charter, or in the stock certificate requiring such a transfer.! This was the case in Bank of Commerce's Appeal.^ A shareholder in a building association obtained from this bank a loan upon his certificate of stock, accompanied by a power of attorney to transfer it. By the articles of association the share- holder was entitled to a loan from the association of a certain sum upon each share, and he subsequently borrowed from the as- sociation the full amount to which he was entitled, and trans- ferred his stock to it, although the bank still held his certificate. The charter of the association expired while this state of facts continued, and the assets were distributed by the officers amongst the stockholders shown to be such by its books, including the as- sociation itself as pledgee of the stock of this shareholder, with- out notice from the bank. It was held that the bank had no claim under its certificate. The court, by Agnew, Justice, say : " The assignment of the certificate is only an equitable transfer of the stock, and to be made available must be produced to the corporation and a transfer demanded. As between adverse claim- ants of the certificate, the possession of it with the transfer upon it is often the test of title. But when the corporation itself is not dealing with its stockholder on the security of his stock, and is merely performing a corporate duty, its own record is all it needs to consult, for whoever would demand the privileges of a stockholder should produce the evidence of his title and ask to be permitted to participate. The officers acted officially as the trustees of the expired corporation, to settle its affairs under the powers conferred by the law, and in doing so made their distribu- tion, according to the record of the corporation, which exhibited the membership of *the corporation. In doing this, without any notice from the bank of its equitable assignment of the stock, clearly they were not guilty of any negligence, while the loss of the bank was attributable to its own negligence, and negligence on their part is the only ground of its bill." 174. A provision that a certificate of stock shall be trans- ferable only upon the books of the corporation is designed primarily for the safety and security of the corporation, and ^ Denny r. Lyon, 38 Pa. St. 98; Sit- * 73 p^. gt. 59. Rreaves i--. Farmers' & Mechanics' Bank, 49 Pa. St. 359, 365. 133 § 175.] PLEDGES OF CORPORATE STOCKS. incidentally for the safety of purcbasers.i Upon this point the Suj)reme Court of Louisiana say : " The by-law which requires transfers of stock to be recorded on the books of the corporation regulates merely the respective rights of the corporation and the individual stockholders. No one can claim to be a stockholder, and to exercise the rights of a corporator, in virtue of a sale of stock to him, until the corporation has taken cognizance of the sale, and, by transfer on its books, has substituted the purchaser for the seller. Whether one has acquired the character and the rights of a corporator, is a question to be determined by the laws of the corporation. Whether a purchaser has acquired a good and perfect title to any property or thing, tangible or intangible, is a question to be solved by the general laws of the state appli- cable to the sale and transfer of such objects." ^ It has been argued that an actual transfer upon the books of a corporation is not the only and essential evidence of ownership ex- cept for the corporation itself, because the books of a corporation are of a private nature and are not open to public inspection. " It is not, therefore, to apprise the world and prevent it from giving a false credit to the apparent owner of stock that the transfer thereof is required to be made on the books of the bank in the presence of one of its officers. The great object of requir- ing transfers to be made in this manner, is, to prevent all difl&- culty that otherwise might arise with those who have the direc- tion and management of the corporation, in ascertaining the per- sons who are to be regarded and treated by them as the owners of the stock and as corporators. No persons, therefore, are to be regarded by them as such, excepting those in whose names the stock is entered and holden." ^ 175. As against the corporation a transfer upon its books is necessary to confer a legal title. The mere transfer of the certificate, although accompanied by a written direction to the 1 Fraser 17. Charleston, 11 S. C. 486; Dicta to the contrary in White v. Merchants' Nat. Bank V.Richard, 6 Salisbury, 33 Mo. 150, and Boatmen's Mo. App. 454; Insurance Co. v. Good- Ins. Co. v. Able, 48 Mo. 136, are not fellow, 9 Mo. 150; Johnson v. Laflin, considered as law. 103 U. S. 800; Carroll v. Mullanphy ^ Smith v. Slaughter-House Co. 30 Sav. Bank, 8 Mo. App. 249; Chouteau La. Ann. 1378, 1382. Spring Co. V. Harris, 20 Mo. 382; ^ Commonwealth v. Watmough, 6 Moore' v. Bank, 52 Mo. 377, 379. Whart. (Pa.) 117, 139. 134 AS BETWEEN THE PARTIES AND THE CORPORATION. [§ 176. secretary of the corporation to make the necessary transfer upon the books, gives the assignee an equitable title only, so far as the corporation is concerned, until the transfer is actually made upon the books.i " The certificates do not constitute property in the corporation : they are the muniments of title, bat it is the shares of stock which constitute the property, and the persons whose names appear upon the books of the corporation are presumed to be the stockholders ; they have the right to vote and participate in directing the policy of the company." ^ Until the transfer is made upon the books the corporation does not recognize an as- signee as a stockholder. If an assignee having the proper muni- ments of title should make a demand upon the proper officers of the corporation for a transfer upon the books, and the corporation should neglect or refuse to make it, relief could be had by proper legal proceedings. 176. A transfer of shares upon the books of a corporation without a surrender of the outstanding certificate is ineffec- tual when the certificate issued by the corporation formally pro- vides that the shares are transferable on the books of the corpo- ration, in person or by attorney, only on the surrender of the certificate. A national bank having issued such certificates, made a loan to a stockholder upon a transfer of shares to the bank without his producing or surrendering his certificate, which he had already sold and assigned to a purchaser for value with a power of attorney to transfer ; but the purchaser delayed obtain- ing a transfer upon the books of the bank until the bank in the mean time made the loan to the stockholder and in fact sold a part of the stock upon the borrower's default. In a suit by the purchaser of the stock against the bank for refusing to transfer the stock to him upon the books, the Supreme Court of the United States held the bank liable.^ The bank in allowing a transfer to itself of the stock upon its books while the certificate was outstanding in the hands of a bond fide purchaser, was guilty ^ Beclier v. Wells Flouring Mill Thayer Manufaoturing Jewelry Co. Co. 1 Fed. Rep. 27G. 76 N. Y. 3C5; Hall v. Rose Hill, &c. " Beoher v. Wells Flouring Mill Road Co. 70 111. G 73; Johnson r. Laf- Co. supra, per Nelson, J. lin, 5 Dill. G."}, aflirmed, 103 U. S. 800 ; ' Bank V. Lanier, 11 Wall. 369. Strange v. Houston & Tex. Cent. R. And .see N. Y. & N. II. R. R. Co. v. R. Co. 53 Tex. 162. Schuyler, 34 N. Y. 30 ; Cushtnan v. 135 - § 176.] PLEDGES OF CORPORATE STOCKS. of a breach of corporate duty, and must render satisfaction to the purchaser. " He is told, under the seal of the corporation," said Mr. Justice Davis, delivering the opinion of the court, " that the shareholder is entitled to so much stock, which can be trans- ferred on the books of the corporation, in person or by attorney, when the certificates are surrendered, but not otherwise. This is a notification to all persons interested to know, that whoever in good faith buys the stock, and produces to the corporation the certificates, regularly assigned, with power to transfer, is entitled to have the stock transferred to him. And the notification goes further, for it assures the holder that the corporation will not transfer the stock to any one not in possession of the certifi- cates." This decision was made not upon the ground of the negotiabil- ity of the certificate, but upon the ground that the corporation was guilty of a breach of corporate duty in allowing a transfer to be made without a surrender of the certificate which in terms provided that the shares should be transferable on the books of the bank, in person or by attorney, only on the surrender of the certificate. " The power to transfer their stock," say the court,^ is one of the most valuable franchises conferred by Congress on banking associations. Without this power, it can readily be seen the value of the stock would be greatly lessened, and, obvi- ously, whatever contributes to make the shares of the stock a safe mode of investment, and easily convertible, tends to enhance their value. It is no less the interest of the shareholder, than the public, that the certificate representing his stock should be in a form to secure public confidence, for without this he could not negotiate it to any advantage. It is in obedience to this re- quirement, that stock certificates of all kinds have been con- structed in a way to invite the confidence of business men, so that they have become the basis of commercial transactions in all the large cities of the country, and are sold in open market the same as other securities. Although neither in form or charac- ter negotiable paper, they approximate to it as nearly as practi- cable.' 1 Bank v. Lanier, 11 Wall. 369, 377, per Davis, J. 136 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§§ 177, 178. VII. Such Transfers as hetiveen the Parties and their Cred- itors. 177. "Whether an unregistered transfer passes the legal title to the stock as well as the equitable, is a question upon which the decisions are not in harmony. This question is one of practical importance, because upon the answer to this depends the sokition of the practical question whether such a transfer is effectual against the creditors of the assignor before the transfer is recorded upon the books of the company. If the legal as well as the equitable title passes by a delivery of the certificate, with a power of transfer, then of course the stock is not subject as the property of the assignor to attachment or levy of execution. But if such a transfer passes only the equitable title, while this may be good as between the parties, it is not good as against creditors of the assignor until the transfer is registered upon the books of the corporation, or at least until notice has been given it of such transfer. 178. What is the eflfect of a sale of stock on execution against the registered owner, and the issuing of a certificate by the corporation to the purchaser at such sale without notice that the registered owner had already transferred his certificate in pledge for a loan ? Such a case was before the Circuit Court of the United States for the Southern District of New York, which lield that the corporation was not liable for the value of the stock to the prior pledgee of the certificate. Stock of a bank in Connecticut was registered in the name of a resident of New York, who pledged it to a bank in the latter state for a loan made to him by an unregistered transfer of the certificate. A creditor of the registered owner attached the stock and sold it on execution in proceedings regularly conducted in Connecticut. The stock was by the terms of the certificate " transferable at the bank, in person or by attorney." These words were held to mean that tlie stock was transferable only at the bank ; and the transfer of tlie certificate was held not to operate as a trans- fer of the stock, except as against the registered owner. The pledgee could obtain a valid title to the stock, except as against the pledgor, only by having it transferred, or, at least, by giving notice to the corporation of the transfer of the stock before it 137 § 179.] PLEDGES OF CORPORATE STOCKS. was sold on execution, and a new certificate issued to the pur- chaser.^ But while in some states a requirement by by-law of the corporation that stock shall be transferred only upon the books of the corporation is deemed sufficient to make that mode ex- clusive except as between the parties themselves, in other states nothing less than a provision of the company's charter, having the force of a public statute, is deemed sufficient to prevent an unregistered transfer from being complete and effectual against every one but the corporation itself. 179. As against creditors attaching stock with knowledge of a prior assignment of the equitable title by a transfer of the certificate, there is no doubt that such equitable transfer will prevail.2 Mr. Justice Story upon this point said : ^ " Courts of law, as well as courts of equity, are constantly, in all states where the common law prevails, in the habit of holding a prior assignment of the equitable interest in stock, as superseding the rights of attaching creditors, who attach the same with a full knowledge of the assignment." It is immaterial in such case that the charter of the corporation provides that no transfer of stock shall be valid until it is entered or registered in a book to be kept by the corporation for that purpose." This is manifestly a regulation designed for the security of the corporation itself, and of third persons taking transfers of the stock without notice of any prior equitable transfer. It relates to the transfer of the legal title, and not of any equitable interest in the stock sub- ordinate to that title." And so a judgment creditor buying stock at an execution sale, which he then knows has been pre- viously transferred by an unrecorded assignment of the debtor, acquires no better title than the debtor himself had.^ The mere fact that a certificate of stock, when offered in pledge, is in the name of another person, is not sufficient to ^ Williams v. Mechanics' Bank of the shares. Bank of America v. Mc- New Haven, 5 Blatchf, 59. Neil, 10 Bush (Ky.), 54 ; Conant v. 2 Black V. Zacharie, 3 How. 483, Reed, 1 Ohio St. 298. 512; Scripture v. Soapstone Co. 50 ^ Black v. Zacharie, supra. N. H. 571. A coi-poration cannot * Newberry v. Detroit & Lake Su- acquire a lien upon the shares of a perior Iron Manufacturing Co. 17 stockholder of record after receiving Mich. 141; Weston r. Bear River Co. notice of an equitable assignment of 6 Cal. 425. 138 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§§ 180, 181. charge the pledgee with notice that the stock belongs to the person in whose name it stands, when the latter has made an assignment of the certificate in blank, or has delivered it with a power of attorney in blank.^ Such a transfer is moreover complete as against a creditor of the pledgor when the corporation has unjustly refused to make the transfer on its books, and the creditor without notice of the transfer has attached the stock.^ 180. As already intimated, transfers of stock are in many- states regulated by statute. These statutes are quite dissimi- lar in their terms. They were not all enacted for the same purpose. In some states transfers are made invalid except as between the parties, unless recorded upon the books of the cor- poration ; while in other states transfers by indorsement and de- livery of the certificates, are made valid, not only between the parties, but as against attaching creditors and the corporation itself. Conflicting decisions in different states are in many cases to be accounted for by dissimilar statutes with reference to which these decisions were made ; though it is true that the decisions upon transfers of stock and their effect cannot always be recon- ciled in this way. Similar provisions are not always construed in the same way. It is necessary, therefore, in order to determine the validity and effect of transfers of stock in the different states, to examine the statutes as well as the decisions of these states. For this reason the statutes relating to transfers of stock which have been enacted in several states, and the judicial interpre- tations of these statutes are stated in detail for the several states. 181. Alabama.3 — When, by the charter, articles of associa- tion, or by-laws and regulations of an incorporated company, the transfer of the stock is required to be made upon the book or books of such company, no transfer of stocks shall be valid as against bond fide creditors or subsequent purchasers without notice, except from the time that such transfer shall have been registered or made upon the book or books of such company. When any incorporated company does not by its charter, by-laws, 1 Folt V. Ileye, 23 How. (N. Y.) ards, 6 Mo. App. 454 ; Stranfje v. H. P""- 3-^9. & T. C. R. R. Co. fyS Tex. icl « Merchants' Nat. Bank v. Rich- » Qq^q i^76, §§ 2013, 2014. 139 §§ 182, 183.] PLEDGES OF CORPORATE STOCKS. or otherwise require the transfer of its stock to be made or regis- tered on the books of the company, such company must forthwith make such provision ; and persons holding stocks not so trans- ferred or registered, or holding any stock under hypothecation, mortgage, or other lien, must have the transfer, hypothecation mortgage, or other lien, made or registered on the books of the company, or upon failing to do so within fifteen days, all such transfers, hypothecations, mortgages, or other liens, shall be void as to lond fide creditors, or subsequent purchasers without notice. In this state it is held that the by-laws of a corporation re- quiring transfers of stock to be entered on its books in the pres- ence of its president or secretary, and declaring a lien in favor of the corporation for all debts of the stockholder to it, are in- tended for the protection of the corporation, and of third per- sons who may in good faith acquire its stock ; but, while the legal title to stock can only be acquired by a transfer made in the mode prescribed, a complete equitable title may be acquired by a transfer in any form or manner appropriate to pass property of this kind, divesting the stockholder of all right and interest, and entitling the transferree to demand that he be invested with the legal title.^ The statute makes unregistered transfers void as against bond fide creditors and purchasers without notice. 182. Arkansas. — Stock shall be deemed personal property, and shall be transferred only on the books of the corporation, in such form as the directors shall prescribe ; and the corpo- ration shall at all times have a lien upon all the stock or prop- erty of its members invested therein, for all debts due from them to the corporation.^ 183. Calif ornia.3 — Whenever the capital stock of any cor- ^ Planters' & Merchants' Mut. Ins. fer of shares of private corporations. Co. V. Selma Sav. Bank, 63 Ala. 585 ; Winter v. Belmont Mining Co. 53 Cal. Duke V. Cahawba Co. Nav. Co. 10 428, 431, per Crockett, J. ■A-la. 82. A mortgage of shares of stock is 2 Dig. 1874, c. 72, § 8348. valid without a transfer on the books * Codes and Stats. 1876, § 5324 ; of the company, as is required by Act § 324 of Civil Code. This provision of 1853, relative to pledges of stock by is substantially a reenactment of the .delivery of certificates. Ede v. John- provisions of the Corporation Acts of son, 15 Cal. 53. 1850 and 1853, regulating the trans- 140 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§ 183. jDoration is divided into shares, and certificates therefor are is- sued, such shares of stock are personal property and may be transferred by indorsement by the signature of the proprietor, or his attorney or legal representative, and delivery of the certifi- cate ; but such transfer is not valid except between the parties thereto, until the same is so entered upon the books of the cor- poration, as to show the names of the parties by and to whom transferred, the number or designation of the shares, and the date of the transfer. The courts construing this provision have held that althouo-h stock may be attached as the property of the registered owner, after the certificate has been pledged by him, yet if the pur- chaser at the execution sale buys with notice of the prior hypoth- ecation, he acquires no rights as against the pledgee ; If on the other hand the purchaser has no notice of the prior hypotheca- tion, his title will prevail against the pledgee.^ The provisions of the statute, in the language of the court, apply only to trans- fers and purchases in good faith without notice. The result is that while an assignment of shares of stock by a mere delivery of the certificate without a transfer upon the books of the cor- poration, is invalid as against an attaching creditor of the regis- tered owner, yet the rights of the latter may be defeated by giv- ing him notice of such prior transfer of the certificate after his lien has attached, or by giving bidders at the sale such notice. This illogical construction, though not fully approved by later cases, has been acquiesced in upon the principle of stare decisis.'^ As against all the world except subsequent purchasers and at- ^ Weston V. Bear River and Au- was not called to the foregoing deci- burn Water and Mining Co. 5 Cal. sions, nor to the statute regulating the 186; S. C. 6 Cal. 425; Strout v. Na- transfer of stocks in private corpora- toma Water and Mining Co. Cal. tions. Without referring to these de- ''^- cisions or to the statute on which they 2 Naglee v. Pacific Wharf Co. 20 were founded, counsel in the Sher- Cal. 529, 533; People v. Elmore, 35 wood case discussed the sole proposi- Cal. 653 ; Winter v. Belmont Mining tion whether a certificate of this char- Co. 53 Cal. 428, 432. And see Brew- acter, on general principles of com- 8ter r. Sime, 42 Cal. 139; Thompson mercial law, was negotiable in the V. Toland, 48 Cal. 99, 112. sense in which bills of exchange and In Winter v. Belmont Mining Co. other similar instruments are nego- supra, Crockett, J. said: "In the tiable, and we held they were not, case of Sherwood v. Meadow Valley which was the only point decided in Mining Co. 50 Cal. 412, our attention that case." 141 §§ 184, 185.] PLEDGES OF CORPORATE STOCKS. taching creditors without notice, a transfer not entered upon the books is valid.^ * 184. Colorado. 2 — Corporations other than railroad and tele- graph companies, are required to keep a book containing the names of stockholders and the number of shares held by them, open for the inspection of the stockholders and creditors of the company ; and no transfer of stock shall be valid for any purpose whatever, except to render the person to whom it shall be trans- ferred liable for the debts of the company, unless it shall have been entered upon such book, within sixty days from the date of such transfer, by an entry showing to and from whom transferred. 185. Connecticut.^ — Shares of stock in any corporation or- ganized in this state under the laws of this state, or of the United States, may be pledged by executing and delivering a power of attorney for its transfer, with the certificate of stock therein men- tioned, to the party to whom the pledge is made ; but no such pledge, unless consummated by an actual transfer of the stock to the name of such party, shall be effectual to hold such stock against any person but the pledgor, and his executors and ad- ministrators, until a copy of said power of attorney shall be filed with the cashier, treasurer or secretary of said corporation. A pledge of stock is ineffectual where a certificate is merely handed over without a power to transfer the stock, although there be a written declaration attached to the certificate, that the stock was thereby pledged for a debt described.* Before the passage of this statute it was held in actions at law that the legal title to stock in a corporation could be transferred only in the mode prescribed by the company's charter or by its by-laws ; and if the stock was made, transferable only on the books of the corporation, a transfer upon the books was essential, not merely as giving notice, but as the ,act itself which changes the title ; ^ so that even an entry by the clerk of the corporation upon the deed of assignment that it has been received for record 1 Parrott v. Byers, 40 Cal. 614. * pj^tt v. Hawkins, 43 Conn. 139; 2 G. L. 1877, p. 154, § 222. and see Dutton v. Conn. Bank, 13 3 G. S. 1876, 279, § 9; Pub. Acts Conn. 493; Shipman r. ^tna Ins. Co. 1871, c. 15. See First Nat. Bank v. 29 Conn. 245. Hartford Life and Annuity Ins. Co. ^ Marlborough Manufacturing Co. 45 Conn. 22. v. Smith, 2 Conn. 579; Northrop v. 142 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§§ 186, 187. was not sufficient to protect the stock from attachment as the property of the assignor.^ But in equity the structure of this rule at law was somewhat modified. If a good reason for failure of an assignee of stock to procure a transfer on the books of a corporation could be shown, and he had done all that it was possible for him to do by giving notice of the assignment to the corporation, he was protected against subsequent attachments of the stock as the property of the assignor. It was said that the ground upon which stock sold but not legally transferred was open to attachment by the credi- tors of the vendor, was the same as that upon which personal chattels sold, but retained in the possession of the vendor, are li- able to attachment as the property of the latter ; and that the same circumstances which would excuse failure to take possession in the one case, would excuse a failure to perfect the transfer in the other. Therefore where a secretary of a company refused to allow a transfer of shares upon the company's books because the shares were already subject to attachment, and the owner made in good faith a written assignment of the stock, and lodged the instrument with the company, it was held that the title of the vendee was good against later attachments of the stock by the vendor's creditors.^ 186. Dakota Territory.^ — Whenever the capital stock of any corporation is divided into shares, and certificates therefor are issued, such shares of stock are personal property, and may be transferred by indorsement by the signature of the proprietor, or his attorney or legal representative, and delivery of the certifi- cate ; but such transfer is not valid, except between the parties thereto, until the same is so entered upon the books of the corpo- ration as to show the names of the parties by and to whom trans- ferred, the number, designation of the shares, and the date of the transfer. 187. District of Columbia.* — No transfer of stock shall be valid for any purposes whatsoever, except to render the person Curtis. 5 Conn. 21C; Oxford Turnpike ^ Colt i'. Ives, 31 Conn. 25. Co. u. I'.iziincl, C Conn. .'■>52; Dutton y. » U. Code, 1877, § 308 of Civil Conn. Bank, 13 Conn. 493, 498; Sliip- Code. man i: yEtna Ins. Co. 29 Conn. 245. * K. S. 1875, p. 70, § 581. ' Nortlirop v. Newton & liridj^eport Turnpike Co. 3 Conn. 544. 143 §§ 188-190.] PLEDGES OF CORPORATE STOCKS. to whom it shall be transferred liable for the debts of the com- pany, until it shall have " been entered, in a book to be kept by the treasurer or secretary thereof, by an entry showing to and from whom transferred. 188. Florida.^ — The stock of every corporation shall be deemed personal estate, and shall be transferable in the manner prescribed in the by-laws or regulations of the company ; but no shares shall be transferred until all previous assessments thereon have been fully paid in. 189. Idaho Territory.^ — The stock of the company shall be deemed personal estate, and shall be transferable in such manner as shall be prescribed by the by-laws of the company ; but no transfer shall be valid except between the parties thereto, until the same shall have been so entered on the books of the com- pany as to show the names of the parties by and to whom trans- ferred, the number and designation of the same, and the date of the transfer. Any stockholder may pledge his stock by a delivery of his certificate or other evidence of his interest, but may nevertheless represent the same at all meetings, and vote accordingly, as a stockholder. 190. In Illinois it is held that a transfer in pledge of certifi- cates of stock in a company, whose by-laws provide that a transfer of stock shall only be made upon the books of the secretary on the presentation of the stock certificate, is not effectual as against a levy of execution by a creditor of the pledgor, made before the pledgee has obtained a transfer to himself upon the company's books. The decision is partly based upon a requirement of statute, that, in levying upon the shares of a stockholder, the sheriff shall leave with the clerk, treasurer, or cashier of the company a copy of the execution ; for it is argued that, unless the books of the company determine who is the owner of the stock, this provision would be useless.^ 1 Bush's Digest 1872, p. 169, § 20 ; ^ People's Bank v. Gridley, 11 Dig. Laws, 1881, p. 231, § 15. Chicago L. N. 332. 2 R. Laws 1875, jjp. 621, 622, §§ 9,12. 14i AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§§191-193. 191. lowa.i — A transfer of shares is not valid except as be- tween the parties thereto, until it is regularly entered on the books of the company, so as to show the name of the person by and to whom transferred, the numbers or other designation of the shares, and the date of the transfer ; but such transfer shall not in any way exempt the person making it from any liability of said corporation created prior thereto. The books of the company must be so kept as to show intelligibly the original stockholders, their respective interests, the amount paid on their shares, and all transfers thereof ; and such books, or a correct copy thereof, so far as the items mentioned in this section are concerned, shall be subject to the inspection of any person desir- ing the same. 192. Kansas.^ — The stock of any corporation created under the general corporation law is deemed personal estate, and is transferable only on the books of the corporation, in such manner as the by-laws may prescribe ; and no person, at any election, is entitled to vote on any stock, unless the same shall have been standing in the name of the person so claiming to vote, upon the books of the corporation, at least thirty days prior to such election ; but no shai-es shall be transferred until all previous assessments thereon shall be fully paid. 193. In Louisiana it is provided by the code that notes, bills of exchange, stocks, or obligations or claims on other persons may be pledged by delivery of the notes, bills, certificates of stock, or other evidences of the claims or rights so pledged ; ^ and it is accordingly held that shares of stock cannot be pledged, unless they be evidenced by certificates, which must be trans- ferred and delivered to the pledgee.* It seems that it is not essential that a note or bill payable to order be indorsed by the payee, if it be delivered, and the pledge be made by notarial act.^ The legal title to stocks in corporations whose charters provide that transfers shall not be valid and effectual until registered 1 Rev. Code 1880, p. 772, § 1078. ^ Ducasse v. Keyser, 28 La. Ann. 2 Laws 1879, p. 220, § 1000. 419. The statute law of the state 8 Civ. Code, art. 5158. left this matter in doubt. Casey v. * Lallande v. Ingram, 19 La. Ann. La Socidte de Credit Mobilier, 2 364. Woods, 77, 83, per Woods, J. 10 145 § 194.] PLEDGES OF CORPORATE STOCKS. upon the books of the corporation, does not pass until such requirement is complied with ; but the equitable title passes without sugIi registration.^ But a sale or pledge of the stock of an incorporated company is complete, even as to third persons, by the delivery to the vendee or pledgee of the certificates of stock, with a power of attorney to transfer it on the books of the company ; and it is not necessary to the perfection of the sale or pledge, or to protect the stock from seizure by the ven- dor's creditors, or from other rights of third persons arising sub- sequently to the sale or pledge, that notice thereof should be given to the corporation, or that an actual transfer of the stock be made on the books.^ Even a by-law of a corporation provid- ing that its stock shall not be transferred while the holder is indebted to the corporation does not prevent an effectual pledge by delivery of the certificate.^ 194. Maine.4 — When the capital of a corporation is divided into shares, and certificates thereof issued, they may be trans- ferred by indorsement and delivery, but such transfer of shares is not valid, except between the parties thereto, until the same is so entered on the books of the corporation as to exhibit the names and residences of the parties, the number of shares, and the date of their transfer. A delivery of a certificate of stock, together with an assign- ment and blank power of attorney from the assignor, does not constitute a transfer effectual against an attachment of the stock made by one who had no notice of the transfer, although notice of the transfer had been given to the bank before the attachment. No transfer of stock will secure it from attachment, until it is 1 Black V. Zacliarie, 3 How. 483. The corporation when about to permit 2 Blouin V. Hart, 30 La. Ann. 714; a debt to be contracted by a holder of Smith V. Slaughter-house Co. 30 La. its stock, for which it desires the pro- Ann. 1378; Factors' & Traders' Ins. tection of the clause in its charter, Co. V. Dry Dock Co. 31 lb. 149; Pitot may secure the same by requiring the V. Johnson, 33 lb. 1286; New Orleans holder to produce his certificates of Nat. Banking Asso. v. Wiltz (C. C. stock. The pledgee, when about to La. 1881), 10 Fed. Rep. 330. advance on the pledge and delivery of 3 Blouin V. Hart, supra; Pitot v. the certificates, may apply to the cor- Johnson, supra. Fenner, J., said : poration for information as to the in- " Practically, it lies within the power debteduess of the pledgor to it." of either party to protect himself. * R. S. 1871, c. 4(), § 11. 146 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§§ 195, 196. entered upon the books of the corporation in the manner pre- scribed by the statute.^ 195. Maryland.2 — The stock of any corporation shall be deemed personal estate, and shall be transferable as shall be pre- scribed by the by-laws of the corporation. 196. Massachusetts.^ — No sale, assignment, or transfer of stock in a corporation shall affect the right of the corporation to pay any dividend due upon the same, or affect the title or rights of an attaching creditor, until it is recorded upon the books of the corporation or a new certificate is issued to the person to whom it has been transferred ; btit no attachment of such stock as the property of the vendor, made after such sale, assignment, or transfer, shall defeat the title or affect the rights of the vendee, if such record is made or a new certificate issued within ten days after such transfer is made. Previous to the enactment of this statute it had been deter- mined by the Supreme Court of the state that a sale of stock in a corporation is valid against a subsequent attaching creditor of the seller, although no transfer of stock is made on the books of the corporation, in the absence of an express provision of statute, or of the charter of the corporation, requiring such transfer to be made.* When, however, the charter of a corporation, and not merely its by-laws, provided that its shares should " be transferable only at its banking-house and on its books," it had been held that the mode of transfer pointed out by the company's charter was the only mode of passing the legal title to its shares, or of transfer- ring the attachable interest in it.^ It is to be observed, however, ^ SkowLegan Bank v. Cutler, 49 legal title, — whether it occurs when Me. 315. the instrument of transfer is received 2 R. Code 1878, p. 322, § 58. for record by the clerk of the corpora- ' P. S. 1882, c. 105, § 24; Act of tion, which seems to have been the 1881, c. 302, § 1. view taken in Brown v. Adams, 5 Biss. * Boston Music Hall v. Cory, 129 181, or whether this occurs only when Mass. 435 ; Dickinson v. Central Nut. an assignment has actually been made Bank, 129 Mass. 279. See § 160. upon the company's books. Chief ' Fisher v. Essex Bank, 5 Gray Justice Shaw, upon this point, said : (Mass.), 373. " I do not stop to ask precisely what One of the questions discussed in particular act would constitute such a i was what effects a change of transfer, — wliethcr it must l)e actu- 147 § 197.] PLEDGES OF CORPORATE STOCKS. that this decision turns upon the language of the charter of the corporation which in Massachusetts is regarded as a public act. In an earlier case in this state, where the by-laws of a corporation required all transfers of shares to be made on the books of the company by the treasurer, it was held that an assignment by deed, accompanied by a delivery of the shares, was valid without a transfer on the books of the company, not onl}'^ as between the parties, but as against the creditor of the vendor who attached the shares before any notice of the sale had been given to him- self or to the treasurer of the company.^ And in a recent case in this state this distinction between a requirement of the charter and a requirement of the by-laws of a corporation is adopted ; and it was held that a pledge of its stock by delivery of the cer- tificate with a power of attorney authorizing the pledgee to trans- fer it, was good as against the pledgor's assignee in bank- ruptcy, although the by-laws of the corporation provided that its stock should be assignable only on its books. ^ 197. Michigan.^ — Whenever the capital stock of any corpo- ration is divided into shares, and certificates thereof are issued, such shares may be transferred by indorsements and delivery of the certificates thereof, such indorsements being by the signature of the proprietor, or his attorney, or legal representative ; but such transfer shall not be valid except between the parties thereto, ally entered on the books, or wlietber seem to us to be going beyond the the delivery of the certificate by the rules of just exposition to hold that a holder ready to transfer, or with a plain provision of statute laws, calcu- written transfer executed, so that lated to promote the seci»-ity of im- nothing remains but the mere execu- portant legal right of parties in im- tive act of the clerk, is sufficient. In portant particulars, should be con- either case, it would show who is at strued to be a regulation made for any time the actual owner by the the convenience and protection of books, and inform a creditor, or other banks." person having occasion to know or the i Sargent v. Essex Ry. Co. 9 Pick, right to inquire. It is necessary to (Mass.) 202, 305 ; Sargent v. Frank- fix some act, and some point of time lin Ins. Co. 8 lb. 90. at which the property changes and 2 Dickinson v. Central Nat. Bank, vests in the vendee ; and it will tend 129 Mass. 279; see also Sibley v. to the security of all parties concerned Quinsigamond Nat. Bank, 133 Mass. to make that turning-point consist in 515. an act which, whilst it may be easily s Compiled Laws 1871, c. 130, § 7; proved, does at the same time give Howell's Annotated Stats. 1882, c. 191, notoriety to the transfer. It would § 7. 148 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§§ 198, 199. until the same shall have been so entered on the books of the corporation as to show the names of the parties by and to whom transferred, the number and designation of the shares, and the date of the transfer. The last clause of this statute is declared to be for the protec- tion of parties having equities. It is accordingly held that a judgment creditor buying at an execution sale with knowledge of a prior transfer of the stock by the debtor, whether such transfer be recorded or not, obtains no better title than his debtor had.i 198. Minnesota.2 — The transfer of shares is not valid, except as between the parties thereto, until it is regularly entered on the books of the company, so far as to show the names of the persons by and to whom transferred, the numbers or other designation of the shares, and the date of the transfer ; but such transfer shall not in any way exempt the person making such transfer from any liabilities of said corporation which were created prior to such transfer. The books of the company shall be so kept as to show intelligibly the original stockholders their respective inter- ests, the amount which has been paid in on their shares, and all transfers thereof ; and such books, or a correct cop}^ thereof, so far as the items mentioned in this section are concerned, shall be subject to the inspection of any person desiring the same. A statutory provision that stock of a corporation shall be trans- ferable only on the books of the corporation, in such form as the directors may prescribe, is held to be intended solely for the pro- tection and benefit of the corporation. It does not incapacitate a shareholder from transferring his stock, in pledge or otherwise, without any entry upon the corporation books. Except as against the corporation, the owner and holder of shares of stock may, as an incident of his right of property, transfer them in the same way that he may transfer any other personal property of which he is owner.^ 199. Mississippi.^ — Stock in all joint stock corporations is 1 Newbury v. Detroit & Lake Su- 2 q g ij^y,^^ p_ scf), § 8. perior Iron Co. 17 Mich, 141. See » Baldwin r. Canfield, 2« Minn. 43. Wiilkeri;. Detroit Transit Ky. Co. 47 * II. Code 1871, § 2413; R. Code Mich, 338 ; Mandlehainn v. North 1880, § 1037. American Mining Co. 4 Mich. 465. 149 §§ 200-202.] PLEDGES OF CORPORATE STOCKS. transferable by the indorsement and delivery of tbe stock certifi- cate, and the registry of such transfer in tbe books of the com- pany. 200. In Missouri^ it is provided by statute that tbe stock of every company formed under tbe general corporation act shall be deemed personal estate, and shall be transferable in the manner prescribed by the by-laws of the company ; but no shares shall be transferred until all previous calls thereon shall have been fully paid in. It is held that inasmuch as the statute does not restrict the transfer of stock to a particular mode, a transfer by delivery of a certificate with a power to transfer, is sufiicient not only as be- tween the parties themselves, but also as against creditors of the assignor who have seized the shares after such transfer, and be- fore the transfer has been entered upon the books of the corpora- tion .^ 201. Montana Territory.^ — The stock of a corporation is deemed personal property and is transferable in such manner as is prescribed by the by-laws of the company ; but no transfer is valid except as between the parties thereto, until the same is so entered upon the books of the company as to show the names of the parties by and to whom transferred, the numbers and desig- nation of the shares, and the date of the transfer. 202. New Hampshire.* — Shares may be transferred by the proprietor, by writing by him signed on the back of the certifi- cate, or by a deed under seal, recorded by the treasurer, cashier, or clerk, in a book kept by him for that purpose ; and the pur- chaser, on producing and delivering to the cashier or treasurer the former certificate and the transfer thereon or deed thereof, with a certificate thereon that the same are duly recorded in the proper office, and at what time, shall be entitled to a new certifi- cate of the date of such record, if no prior lien then existed thereon. 1 R. S. 1879, §§ 739, 714. 8 Laws 1872, p. 408, § 10. 2 Merchants' Nat. Bank v. Rich- * Gen. Laws 1878, p. 355, §§ 11, ards, 74 Mo. 77 ; affirming S. C. 6 Mo. 12. App. 454. 150 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§ 202. In transfers of stock as collateral security, the debt or duty to be secured shall be substantially described in the instrument of transfer ; and the certificate issued to the holder of the stock as collateral security shall express that it is so holden, for whose debt, and to what amount. The pledgor of stock transferred as collateral security shall be regarded as the general owner, and be entitled to the rights and subject to the liabilities of the stock- holder notwithstanding such transfer. No person holding stock as executor, administrator, guardian, or trustee, and no person holding stock as collateral security, shall be thereby personally subject to any liabilities as a stock- holder ; but the person pledging such stock shall be so liable ; and the estate and funds in the hands of such executor, adminis- trator, guardian, or trustee shall be liable to the same extent as a holder thereof in his own right would be liable. ^ In this state it is held that a transfer upon the books of the corporation is requisite to make a pledge of stock effectual against creditors of the pledgor, although there be nothing either in the charter or by-laws of the corporation prescribing or regu- lating the mode of making a transfer.^ A transfer agent is sometimes appointed to act at a distance from the office of the corporation in which its records are kept. He may have authority to receive old certificates and issue new ones ; but the transfer is not ordinarily complete till he has sent proper evidence of it to the keeper of the stock record at the 1 Gen. Laws 1878, p. 358, § IS. or bill of exchange it be retained by 2 Pinkerton v. Manchester & Law- the assignor, a subsequent purchaser rence 11. R. Co. 42 N. H. 424 ; S. C. without notice would acquire a good 1 Am. L. Reg. (N. S.) 96, and note title. Indeed, it may be laid down by Redfield. The certificates issued as a general principle governing the by the corporation were expressed to transfer of every species of personal be transferable by assignment on the property, that, to be good against in- books of the corporation. "We are nocent third persons, such transfer aware," say the court rendering this must be accompanied with such decision, "that choses in action may change of possession and indications be transferred by a simple delivery of of ownership as the nature of the the evidences of indebtedness, with an thing is capable of ; otherwise, the indorsement thereon, in certain cases; seller is enabled, by means of an ap- but it will be observed that, in these parent ownership, to obtain a fictitious cases, all such changes in the indica- credit, and to deceive both creditors tions of ownership, as the nature of and purchasers." See, also, Scripture the case will admit, are recjuired. If, v. Soapstone Co. 50 N. II. 571. therefore, upon the transfer of a bond 151 § 203.] PLEDGES OF CORPORATE STOCKS. home office of the corpoi'ation. If such evidence be transmitted by the earliest mail, it would seem that the transfer would be effectual, though an attachment had intervened. But if a cred- itor taking stock as collateral security do not use due diligence in obtaining a proper transfer of the stock, an intervening attach- ment will take precedence.^ " It seems too clear for argument," say the Supreme Court,^ " that the ownership of the shares passes from the seller to the buyer by force of the contract of sale, and not by operation of law ; and if that be so, the buyer's title, so far as the seller is concerned, attaches the moment this contract is fully consummated between them. This kind of prop- ert}^, being an intangible right, somewhat akin to the right to receive money due upon a bond or other chose in action is inca- pable of actual manual delivery. All the seller can do, that cor- responds at all to the delivery of personal chattels in other cases of sale, is, to hand over to the buyer his certificate, with a suffi- cient assignment by deed or otherwise to entitle him to a trans- fer of the shares on the books of the company. When the seller has done this, his power and duty in the matter are ended, and it is the option of the purchaser whether the transfer shall be re- corded or not. If the purchaser omits to have this record made, he can claim no rights as a member of the corporation ; and he also incurs the further risk of having his title defeated by a sub- sequent attachment or sale to a bond fide purchaser." 203. Nevada.^ — Whenever the capital stock of any corpora- tion is divided into shares, and certificates thereof are issued, the stock of the company shall be deemed personal estate. Such shares maj^ be transferred by indorsement and delivery of the certificate thereof, such indorsement being by the signature of the proprietor, or his or her attorney or legal representative ; but such transfer shall not be valid except between the parties thereto, until the same shall have been so entered upon the books of the corporation as to show the names of the parties by and to whom transferred, the number or designation of the shares, and the date of the transfer. In all cases in which shares of stock in corporations now existing, or hereafter incorporated under any 1 Pinkerton v. Manchester & Law- ^ Scripture v. Soapstone Co. 50 N. rence R. R. Co. 42 N. H. 424. H. 571. 3 Comp. Laws 1873, vol. 2, §§ 3397, 152 3400. AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§ 204. law of this state, are held or owned by a married woman, such shares may be transferred by her, her agent or attorney, with- out the signature of her husband, in the same manner as if such married woman were a feme sole. All dividends payable upon any shares of stock of a corporation held by a married woman, may be paid to such married woman, her agent or attorney, in the same manner as if she were unmarried. And it shall not be necessary for her husband to join in receipt therefor ; and any proxy or power given by a married woman, touching any share of stock of any corporation owned by her shall be valid and be binding, without the signature of her husband, the same as if she were vinmarried. Any stockholder may pledge his stock, by a delivery of the certificates, or other evidence of his interest, but may neverthe- less represent the same at all meetings and vote as a stockholder. 204. New Jersey. 1 — The shares of stock in every corpora- tion of this state shall be deemed personal property, and shall be transferable on the books of such company in such manner as the by-laws may provide ; and whenever any transfer of shares shall be made for collateral security, and not absolutely, the same shall be so expressed in the entry of said transfer. In this state it is held that shares in a corporation, whose charter provides that the capital stock of the company shall be deemed personal estate, and " be transferable upon the books of the corporation," can be effectually transferred as collateral secu- rity for a debt, as against a creditor of the pledgor, who after- wards attaches them without notice of any transfer, by a deliv- ery of a certificate with a blank power of attorney, or with an assignment in blank.^ Upon the policy of so constructing this provision. Chancellor Green, of New Jersey, says : ^ " The pledge of stocks as collateral security has become a prevalent, and, to the borrower especially, an advantageous mode of effect- ing loans. In manufacturing companies especially, where the business of the company is carried on by the stockholder, and where his capital is mainly or exclusively vested in the stock, 1 R. S. 1877, p. 181, § 26. Nassau Bank, 17 N. J. Eq. 496; Rog- 2 Broadwaiy Bank v. McEIrath, 13 ers v. N. -T. Ins. Co. 8 lb. 16 7. N. J. Ya{. 24; Hunterdon Co. Bank v. ^ Broadway Bank v. IMcKlrath, 13 N. J. Eq. 24. 153 §§ 205, 206.] PLEDGES OF CORPORATE STOCKS. and employed in the active operations of business, the pledge of stocks uffords the most ready and advantageous mode of effect- ing loans for the demands of business. To require a transfer of the stock to the lender as security for the loan, against the right of attaching or execution creditors, will at once destroy the value of the security, or compel the borrower to divest himself of his character as corporator, to forfeit his conti'ol of the business of the corporation, of his right to dividends, and of all his other rights as a stockholder in the corporation. Why should the owner of stocks be deprived of the privilege of mortgaging or pledging his stock for the security of a loan, without stripping himself of all his rights of ownership, more than the owner of any other property." 205. New Mexico Territory.^ — No transfer of stock shall be valid for any purpose whatever, except to render the person to whom it shall be transferred liable for the debts of the company, unless the same be so entered on the books of the company as to show the names of the parties by and to whom transferred, the number and designation of the shares, and the date of the trans- fer, within sixty days from the date of the transfer. Any stockholder may pledge his stock by a delivery of the certificates or other evidence of his interest, but may nevertheless represent the same at all meetings, and vote accordingly as a stockholder. 206. In New York it is held that a proTision in a certificate of stock, though in accordance with the by-laws of the corpora- tion, that the shares are transferable only upon the book of the company, means that the company will not recognize any one as owner of the stock, unless it be so transferred ; but that it does not affect the rights which another person may acquire as against the stockholder, by the delivery of the certificate in pledge.^ A 1 G. L. 1880, pp. 205, 206, §§ 9, 12, 22 Wend. 348; S. C. 20 lb. 91 ; Hol- p. 214, § 7 ; Act of 1880, c. 3. brook v. N. J. Zinc Co. 57 N. Y. 516, 2 McNeil V. Tenth Nat. Bank, 46 623; Weaver r. Barden, 49 N. Y. 286; N. Y. 325 ; Smith v. Am. Coal Co. 7 Leitch v. Wells, 48 N. Y. 585, 587, Lans. 317; N. Y. & N. H. R. R. Co. 606; Hill v. Newichawanick Co. 48 V. Schuyler, 34 N. Y. 30; Bank of How. Pr. 427; DriscoU v. West, &c. Utica V. Smalley, 2 Cow. 770 ; Com- Manufacturing Co. 36 N. Y. Superior mercial Bank of Buffalo v. Kortright, Ct. 488 ; Comeau v. Guild Farm Oil 154 Co. 3 Daly, 218. AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§ 207. transfer by delivery of the certificate is nevertheless valid against an attaching creditor of the pledgor, when the attachment is made after such transfer, but before there has been any transfer made on the books of the company .1 " It has also been settled, by repeated adjudications, that, as between the parties, the delivery of the certificate, with assign- ment and power indorsed, passes the entire title, legal and equi- table, in the shares, notwithstanding that, by the terms of the charter or by-laws of the corporation, the stock is declared to be transferable only on its books ; that such provisions are intended solely for the protection of the corporation, and can be waived or asserted at its pleasure, and that no effect is given to them except for the protection of the corporation ; that they do not in- capacitate the shareholder from parting with his interest, and that his assignment, not on the books, passes the entire legal title of the stock, subject only to such liens or claims as the cor- poration may have upon it, and excepting the right of voting at elections." ^ 207. North Carolina. ^ — Certificates of stock shall be assign- able by the indorsement of the owner, or by some writing at- tached thereto; but no assignment of the stock of any company by the registered plan of incorporation, of which the individual stockholders are liable for the contracts of the company, shall be Under a contract to deliver stock; ment and execution. " But this pro- a tender of a certificate with a blank vision of law cannot aid an attach- power to transfer is sufficient without ment against a defendant, who has no an actual transfer to the name of the rights or shares in the stock of a cor- purcliaser. Orr v. Bigelow, 20 Barb, poration. If, previous to the issuing (N. Y.) 21 ; Munn v. Barnum, 24 of the attachment, the defendant has Barb. (N. Y.) 283 ; Driscoll v. West, assigned all his interest in the rights &c. Manufacturing Co. 36 N. Y. Su- or shares, and delivered over the cer- perior Ct. 488 ; S. C. 59 N. Y. 96. tificate with transfer and power, it is ^ Smith V. Am. Coal Co. 7 Lans. thenceforth the holder of these indicia 317; Comeau v. Guild Farm Oil Co. of title who is possessed of the prop- 3 Daly, 218. erty in the shares, and not the origi- By § 647 of Code of Civil Proce- nal stockholder." Smith v. American dure 1880, and § 234 of the previous Coal Co. 7 Lans. 317. Code, it is provided that the rights or 2 isIfNeil v. Tenth Nat. Bank, 46 shares which a defendant may have N. Y. 325, 331, per Rapallo, J. in the stock of any corporation shall « Battle's Revisal 1873, c. 26, § be liable to be attached and levied 16. upon, and sold to satisfy the judg- 155 §§ 208, 209.] PLEDGES OF CORPORATE STOCKS. valid to exonerate the assignor from sucli liability upon contracts made after such assignment, until such assignment shall have been entered on the stock book of the company ; nor shall any company be bound to notice of such assignment until the same, authenticated as may be required by the by-laws, shall be pre- sented to the proper officer for entry on such book. 208. Ohio.^ — It is provided by statute that shares of stock in any company shall be personal property, and when fully paid up shall be subject to levy and sale upon execution against the owner. It seems that a pledge by delivery of the certificate is effectual, though the certificate, in accordance with a by-law and with the articles of association of the corporation, is expressly made " trans- ferable only on the books of the bank, in person or by attorney." ^ 209. Pennsylvania.^ — Certificates or evidences of stock of a corporation shall be transferable at the pleasure of the holder in person, or by attorney duly authorized, as the by-laws may pre- scribe, subject, however, to all payments due, or to become due thereon ; and the assignee or party to whom the same shall have been so transferred, shall be a member of said corporation, and have and enjoy all the immunities, privileges and franchises, and be subject to all the liabilities, conditions and penalties incident thereto, in the same manner as the original subscriber or holder would have been ; but no certificate shall be transferred so long as the holder thereof is indebted to said company, unless the board of directors shall consent thereto. A substantial compliance with a by-law requiring a transfer of stock to be made on the books of the company, and attested by the secretary, is all that is necessary. Thus, when a stockholder empowered the secretary of the company to transfer certain shares, and the secretary in pursuance of such power entered on the books that the stock was transferred, adding " see paper 1 R. S. 1880, §3255. bank assignable only on the books of 2 Lee V. Citizens' Nat. Bank, 2 Su- the corporation, in such manner as its perior Ct. 298. by-laws shall ordain, and providing 3 Brightly's Pardon's Ann. Dig. p. that no transfer shall be made by a 1844, § 19. stockholder indebted to the bank, For a statute making stock of a see Act April 10, 1850, § 10, art. 10. 156 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§ 209. filed," and wafered the power of attorney to the book and at- tested the entry of transfer as secretary, the transfer was held to be good, although the secretary signed no transfer as attorney under the power.^ " The practice was to permit the transfers in the presence of the secretary, who attested them. Everything was done which the by-laws and usage of the company required, except that he did not sign the transfer twice over, as attorney, and then attest his own signature as secretary. But he no doubt thought that attaching the sign manual of the holder, appended to the authority or power, to the books and entry, was higher evidence of the transfer than his own signature would be. The law looks more to the substance of things than to the mere form." In this state an attachment of stock is made in the manner of a proceeding against a trustee or garnishee in a foreign attach- ment, and it is held that assignment of stock by delivery of the certificate with a power to transfer, conveys the real ownership of the stock so that an attachment afterwards made of the stock, as the property of the assignor, before a transfer is made upon the books of the corpoi-ation, is ineffectual.^ The assignee in such case is the equitable owner, or the real owner, and must be treated as such when known, by all the world, excepting the cor- poration itself, which for certain purposes, may refuse to do so. The effect of such an assignment of stock is the same as that of an assignment of a chose in action prior to the service of a trus- tee or garnishee process upon the supposed trustee ; although the trustee may then have had no notice of the assignment, this will prevail against the subsequent attachment. In one case it appeared that the Duchess of Cumberland bought at London in 1794 ten shares of the Bank of the United States, and received therefor a certificate with a blank power to transfer.3 She held this certificate and power until 1804. In ^ Chambersburg Ins. Co. v. Smith, instituted against the party, whose 11 Pa. St. 120, 125. name must necessarily be used at law 2 Finney's Appeal, 59 Pa. St. 398 ; for the recovery of the demand ; and Commonwealth y.Watmough, 6 VVhart. that an attaching creditor can stand (Pa.) 117; United States v. Vaughan, on no better footing than his debtor." 3 Binn. (Pa.) 394. In the latter case And see Early & Lane's App. «9 Pa. Yeates, J., said: "It cannot be de- St. 411; Bank of Commerce's App. nied, that a mere chose in action 73 Pa. St. 59. equitaljly assigned, is not subject to « An assignment of the stock of a the operation of a foreign attachment corporation to itself, as collateral se- lo7 § 210.] PLEDGES OF CORPORATE STOCKS. 1803 the United States attached the stock, which still stood in the seller's name, for a debt due from him. It was proved, under objection, that it had been the course of business in relation to the sale of this stock in England, for the vendor to deliver the certifi- cates to the vendee, together with a power of attorney from him in whose name the stock stood, to a third person, usually an assist- ant cashier of the bank, authorizing him to transfer the same to some person not named, and that by the delivery of the certifi- cate and the blank power of attorney, the shares passed 'from hand to hand, the blank never being filled up until it was for- warded to the United States for transfer. It was held that the purchaser's title was superior to that of the attaching creditor.^ 210. Rhode Island. — The shares into which the capital stock of any corporation shall be divided shall be deemed to be per- sonal estate, unless otherwise provided in the act creating the corporation, and shall be transferable in such manner as shall be prescribed by the by-laws of the corporation. In a recent case in this state ^ it apjoeared that a person own- ing certain corporate shares, transferred them on the books of the corporation as collateral for a loan which he had negotiated for. The arrangements for the loan having fallen through, the person in whose name the certificate had been taken out, at the request of the owner of the shares, indorsed and transferred the certificate of stock to a creditor of the owner. Before a transfer was made on the books of the corporation to this creditor, the shares were attached by another creditor. The charter of the corporation contained no provision as to the transfer of stock, but the by-laws provided that " all transfers of stock shall be made in the books of the company." On a bill in equity brought to establish the lien of the attachment, it was held that in the absence of any fraudulent intent on the part of the debtor in the transfer of the stock, the attachment could not be sustained. Chief Justice Durfee, delivering the opinion of the court, said : " Where the legal and the equitable titles unite in the same per- son, it is well settled that such a transfer carries at least the curity for a loan, divests the title of ^ United States v. Vaughan, 3 Binn. the assignor so far as to prevent a sale 394. of it under a /en /acias against him. ^ q.^ §_ i872, c. ' 139, § 2; P. S. Eby V. Guest, 94 Pa. St. 160. 1882, c. 152, § 2; Beckwith v. Bur- rough, 13 R. 1. 294. 158 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§§ 211, 212. equitable title, even when, by statute, charter, or by-law, the stock is declared to be transferable only on the corporation books. ^ In the case at bar, however, the legal title was in one person and the equitable in another, and the question is what, in such a case, is the effect of such a transfer. It may be that in such a case the equitable title would not always pass ; as for instance, if the transfer were made by the legal owner to pay a debt of his without the consent of the equitable owner. But we have no case like that here. Here the transfer was made not in violation of the trust, but in fulfilment of it. It was made under the di- rection of the equitable owner to secure or pay pro tanto his debt, and when made was delivered by him personally to the transferee. We think the equitable title must be held to have passed. An equitable assignment may be made without deed or writing, by any act intended to operate as such, a delivery of the evidences of title being particularly significant of such an intent .... Without deciding, therefore, whether an unre- corded transfer would avail against an attaching creditor where the stock stood in the name of the debtor, we decide, for the reasons above given, that the complainant has not, independently of his charges of fraud, made out a case which entitles him to relief." 211. South Carolina.^ — The shares in the capital stock of such corporations shall be deemed personal estate ; and the mode of issuing the evidence of stock, and the manner, terms, and con- ditions of assigning and transferring shares, shall be prescribed by the by-laws of each corporation. 212. Tennessee. — According to the earlier decisions in this state, the title of one taking certificates of stock as collateral security was not regarded as complete against the debtor's creditors until notice of the transfer had been given the corpora- tion. If, before such notice was given, such creditor attached the stock, or levied execution upon it, he had the better right to it.^ ^ Lockwood v. Mechanics' National 483; Parrott v. Byers, 40 Cal. C14; Bank, 9 R. I. 308, 331; Broadway Blouin v. Hart, 30 La. Ann. 714; Bank v. Mclillrath, 13 N. J. Eq. 24; Bank of America v. McNiel, 10 Bush, United States v. Vaughan, 3 Binn. 54. 394 ; Grymes v. Hone, 49 N. Y. « g, S. 1882, § 1365. 17; Black v. Zacharie, 3 How. U. S. ® State Ins. Co. v. Sax, 2 Tenn. Ch. 159 §§ 213, 214.] PLEDGES OF CORPORATE STOCKS. This rule was based upon the English doctrine, that notice is necessary to perfect an assignment of any chose in action ; ^ and the policy of the rule, as applied to transfers of stock, was re- garded as obvious, because it afforded a I'eady means of ascer- taining the title to stock, and of preventing the setting up of fraudulent claims under secret transfers of certificates. By giving such notice to the company, the assignee acquired an equity superior to the right of a subsequently attaching creditor, although there be a valid by-law that stock is transferable only on the books of the company .^ But it is now held that an assignment of a certificate of stock with a blank power of attorney to make the transfer upon the books of the corporation passes a complete legal title, and is effectual against the assignor's creditors without any registry upon the books of the corporation, and without notice to it of the assignment.^ 213. Texas.* — The stock of any corporation created in this state shall be deemed personal estate, and shall be transferable only on the books of the corporation in such manner as the by- laws may prescribe. In the absence of a charter or statutory provision requiring a transfer of stock ^n the books of the company, as between the shareholder and his assignee, to pass title as against a creditor, the interest of the creditor is regarded as subordinate to that of a bond fide assignee.^ The true policy of the law is to favor unrestricted transfers of stock. An assignee or purchaser should not be bound to look beyond the certificate, or to examine the books of the corporation, to ascertain the validity of a transfer, as a different rule would impair the value of stock, and seriously disturb the usages of trade and the established order of business. 214. Utah Territory.^ — The stock shall be deemed personal 507 ; Clodfelter v. Cox, 1 Sneed, 330; Cherry v. Frost, 7 Lea, 1 ; Cherry v. and see dissenting opinions of Mc- Frost, 7 Lea, 1; S. C. 21 Am. L. Farland and Cooper, J J. in Cornick Reg. (N. S.) 57. See § 159. V. Richards, 3 Lea, 1. * R. S. 1879, p, 99, § 590. 1 Judson V. Corcoran, 17 How. 612. *• Strange v. Houston & Tex. Cent. 2 State Ins. Co. v. Gennett, 2 Tenn. R. R. Co. 53 Tex. 162. Ch. 100. 6 Compiled Laws 1876, p. 230, § 2 Cornick v. Richards, 3 Lea, 1; 542. 160 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§§ 215, 216. property, and may be transferred in such manner as may be pro- vided in the agreement or by-laws. 215. Vermont. 1 — The capital stock of all private corporations shall be deemed personal estate, for all purposes, and the stock in any such corporation may be transferred in the manner provided by its by-laws. It is held in this state that a delivery of a certificate, with a power of transfer, vests the title in the transferee ; that the object of having the transfer recorded on the books of the cor- poration is notice, and only that ; and consequently that such a transfer, though unrecorded, is good against the party himself, and all those who have notice of the fact of the transfer. Bub such a transfer seems to be regarded as ineffectual as against creditors of the assignor. The stock, while standing in the assignor's name, after his transfer by delivery of the certificate, with a power of transfer upon the books of the company, is probably subject to any attachment at the suit of his creditors, if they have no notice in fact of the transfer.^ " We entertain no reasonable doubt," says Redfield,^ " that the mode of transfer of stock pointed out in the charter is the only mode which the public are bound to regard as conveying the title. All persons unaffected with notice to the contrary are at liberty to act upon the faith of the title being where it appears upon the books of the corporation to be. This view we do not think inconsistent with the notion that any other mode of conveyance may be per- fectly good, between the parties to it, and to all, others having notice of it, the same as an unrecorded deed, or notice of a mere equity." 216. Virginia 4 and West Virginia.^ — Jf any person, for valuable consideration, sell, pledge, or otherwise dispose of any shares belonging to him to another, and deliver to him the cer- tificate for such shares, with a power of attorney authorizing the transfer of the same on the books of the corporation, the title of the former shall vest in the latter, so far as may be necessary to 1 G. S. 1862, C.8G, § 4; R. S. 1880, 3 Sabin v. Bank of Woodstock, 21 c. 152, § 32.^8. Vt. 353, 362. 2 Noyes V. Spaulding, 27 Vt. 420, * Code 1873, c. 57, § 29. 426, per I.sham J. 6 n^ s. 1879, c. 25, § 37. 11 161 §§ 217-219.] PLEDGES OF CORPORATE STOCKS. effect the sale, pledge, or other disposal of the said shares, not only as between the parties themselves, but also as against the creditors of and subsequent purchasers from the former. 217. "Washington Territory.^ — The stock of the company shall be deemed personal estate, and shall be transferable in such manner as shall be prescribed by the by-laws of the company ; but no transfer shall be valid except between the parties thereto, until the same shall have been entered upon the books of the company, so as to show the names of the parties, by and to whom transferred, the numbers and designation of the shares, and the date of the transfer. Any stockholder may pledge his stock by a delivery of the certificate or other evidence of his interest, but may, never- theless, represent the same at all meetings, and vote as a stock- holder. 218. Wisconsin.! — The capital stock of every corporation divided into shares shall be deemed personal property, and when certificates thereof are issued, such shares may be transferred by indorsement of the owner, his attorney, or legal representatives, and delivery of the certificates ; but such transfer shall not be valid, except between the parties thereto, until the same shall have been so entered on the books of the corporation as to show the names of the j)arties by and to whom transferred, the number and designation of the shares, and the date of the transfer, and every person transferring any such certificates or shares of stock shall remain liable to the creditors of the coi'poration to the extent and in the manner prescribed in section seventeen hundred and fifty-six ; and every such corporation shall at all times have a lien upon all shares of stock for all debts due from the owner thereof to such corporation. The stock of every such corporation shall be deemed personal estate, and shall be transferable in the manner prescribed in its by-laws, but no shares shall be transferable until all previous calls thereon shall have been fully paid in. 219. Wyoming Territory .^ — The stock of corporations shall 1 R. S. 1878, p. 510, § 1751; p. 532, ^ Compiled Laws 1876, c. 34, § 10. § 1825. 3 Code 1881, §§ 2429, 2432. 162 AS BETWEEN THE PARTIES AND THEIR CREDITORS. [§ 220. be deemed personal estate, and shall be transferable in such manner as shall be prescribed by the by-laws of the company. 220. Upon a review of the statutes and decisions upon this subject it appears that the courts have taken a much more liberal view of the policy that should govern in the matter of transfers of shares of stock than have the legislatures of the different states ; for it appears that where there has been legisla- tion upon this subject the legislation has generally been for the purpose of restricting transfers of stock by making a registry upon the books of the corporation requisite to the validity of such transfers for any purpose. The courts, on the other hand, have been disposed to allow the utmost freedom in such transfers, when they have not been restricted by public statutes, or by charters having the force of such statutes. The judicial inter- pretation of the common law rights of the parties respecting such transfers seems to have had in view the convenience of owners of corporate stocks, and that of those who purchase them, or take them as security; while legislation upon this subject has served rather for the protection of the creditors of stockholders. The judicial view of this matter is well stated by the Supreme Court of Tennessee, in a recent case.^ " We know, as a matter of well accredited current history, that stocks are used every day in the transactions of our business men, as collaterals, as well as sold, and that the universal practice is to transfer or assign the certificate of the stock, with a power of attorney in blank, to be filled up, authorizing a transfer by the corporation on its books to the purchaser, on the presentation of which power, properly authenticated, the corporation transfers the stock to the purchaser or holder, and when the sale is abso- lute, it is usual to issue new certificates to the party taking up the old. Such a practice facilitates the easy use of this property in commercial transactions. The requirement that the title could alone be transferred on the books of the corporation, or by notice to the corporation, would greatly tend to trammel this use, and, as far as we can see, notice to the corporation can serve no practical end, and has no appropriate place in the transaction, so far as passing the title from a holder to a purchaser, or the right of a creditor as to a purchaser, for he can, as he will always 1 Cornick v. Richards, 3 Lea (Tcnn.), 1, 23. 163 § 221.] PLEDGES OF CORPORATE STOCKS. do, protect himself by requiring an assignment of the certificate, and then a transfer on the books of the corporation. Tlie rule requiring a transfer on the books of the corporation can only- serve to give a creditor who has a judgment or attachment a legal advantage, who has never given credit on the faith of the stocks over the other who has advanced his money on them, and taken the evidence of his security by a transfer of the certificate. In such cases alone will the contest be likely to arise, as the party who intends to trust to the security of such property will always take the assignment. In such a contest the equities are altogether in favor of the assignee who has advanced his money on the faith of the collaterals." VIII. Liens wpon Stock in favor of the Corporation. 221. That a corporation may itself have a lien upon the shares of a stockholder is everywhere conceded ; and for this reason, also,, no one is entitled to regard his security upon stock complete until it.has actually been transferred to him upon the company's books. For instance, if the charter or by-laws of a corporation not only provide that no assignment of stock shall be» valid unless made upon the books of the company, but also pro- vide that the corporation shall have a lien upon the stock of any shareholder indebted to the company for the payment of his debt, any one taking a transfer of the stock by delivery of the certificate without a transfer upon the company's books takes it subject to all the equitable rights of the company against the apparent owner of the stock.i But the corporation has no lien upon the stock of a shareholder merely by virtue of a provision that the stock shall 1 Union Bank of Georgetown v. Bank f. Merchants' Bank, 45 Mo. 513; Laird, 2 Wheat. 390 ; Pendergast v. St. Louis Perpetual Ins. Co. v. Good- Bank of Stockton, 2 Sawyer, 108; fellow, 9 Mo. 149; Cunningham v. Stehbins v. Phenix Fire Ins. Co. 3 Ala. Life. Ins. & Trust. Co. 4 Ala. Paige (N. Y.), 350; National Bank 652; Farmers' Bank of Md. v. Igle- V. Watsontown Bank, 105 U. S. 217 In re Bigelow, 2 Ben. 469; Grant r< Mechanics' Bank of Phila. 15 S. & R, (Pa.) 140; Geyer v. Western Ins Co. 3 Pitts. (Pa.) 41; Vansands v. Middlesex Co. Bank, 26 Conn. 144 Planters' & Merchants' Mut. Ins. Co hart, 6 Gill (Md.), 50 ; Burford v. Crandell, 2 Cranch C. C. 86; Bank of America v. McNeil, 10 Bush (Ky.), 54 ; Peebles, in re, 2 Hughes, 394. As to marshalling as between a cor- poration having a lien upon stock by charter, and the general creditors of V. Selma Sav. Bank, 63 Ala. 585; an insolvent debtor, see German Newberry v. Detroit & Lake Superior Security Bank v. Jefferson, 10 Bush Iron Co. 17 Mich. 141; Mechanics' (Ky,), 326. 164 LIENS IN FAVOR OF THE CORPORATION. [§ 221. be transferable on the books of the company. Such alien cannot be implied^ it must be expressly created ; ^ and there is authority for holding that, under a by-law providing that the shares of a stockholder indebted to the corporation shall not be transferable, and that the certificates should contain notice of this provision, a pledge of certificates containing merely a notice that the stock is only transferable upon the books of the corporation gives to one taking such certificates, without notice of the owner's liability to the corporation or of such by-law, a title paramount to the equities of the corporation.^ It may well be questioned, however, whether any notice of the b^^-law would be necessary, unless the by-law itself made it so. No lien upon stock exists at common law : it exists only b}-- statutory authority, either expressed by general law, or by the act of incorporation, or by by-laws made under such authority.^ Of course a corporation cannot, under such a provision, main- tain a lien for a liability of a stockholder accruing after the ser- vice of an attachment or a levy of an execution upon the stock ; * and no lien can be created by force of a by-law adopted sub- sequently to the issuing of the stock. ^ The taking of collateral security by a corporation is no waiver of a lien which the corporation has by its charter or by-laws upon the debtor's shares in such corporation. Therefore, the lien of the corporation upon the debtor's shares in such case is superior to any which the debtor can give by a transfer to another.^ But where a by-law required the consent of the directors to a transfer of stock by one indebted to the company, but in the practice of the company this requirement was never enforced, a transfer by a stockholder, attested in the usual way by the secretary of 1 Bank v. Lanier, 11 Wall. 369; Bank v. Laird, 2 Wheat. 390 ; New Sargent v. Franklin Ins. Co. 8 Pick. Orleans Nat. Banking Asso. v. Wiltz, (Mass.) 90; Bryon v. Carter, 22 La. 10 Fed. Kep. 330; Bryon v. Carter, Ann. 98; Case v. Bank, 100 U. S. supra; McDowell v. Bank of Wil- 446. As to the effect of a known mington, 2 Del. 1 ; Cuniraings o. Web- usage, see Morgan v. Bank of N. A. ster, 43 Me. 192. 8 S. & R. (Pa.) 73. 4 Gcyer v. Western Lis. Co. 3 Pitts, 2 Lee V. Citizens' Nat. Bank of (Pa.) 41. Piqua, 2 Cin. (Ohio) 298. 6 Bryon v. Carter, supra. 3 Steamship Dock Co. v. Heron, 52 ^ Union Bank of Georgetown v. Pa. St. 280; Leggett v. Bank of Sing Laird, 2 Wheat. 390 ; Peebles, in re, Sing, 24 N.Y. 283; DriscoU v. Brad- 2 Hughes, 394. ley Mauuf'g Co. 59 N. Y. 96; Union 1G5 §§ 222, 223.] PLEDGES OF CORPORATE STOCKS. the company, was held good, although he was indebted to the company.^ A by-law which is not expressly authorized by general law, or by the act of incorporation, is not notice of a lien thereby de- clared upon the stock of any stockholder indebted to the corpora- tion.2 222. In Connecticut it is provided that every corporation shall at all times have a lien upon all stock owned by any person therein, for all debts due to it from him.^ This statute, it was held, immediately upon going into effect, created a lien in favor of a corporation for an old indebtedness, upon stock which had previously been pledged to a third person, if such pledge was made merely by delivery of the certificate of the stock, with a power of attorney for its transfer, and no copy of the power of attorney had been filed with the corporation, or other notice given to it. Since the passage of this statute it is not necessary that the corporation, in order to be able to claim the benefit of it, should issue certificates containing notice of any right of lien on the part of the corporation.* 223. But a corporation having notice that the stockholder has pledged his stock, by a delivery of the certificate with a power to transfer the stock upon the books of the corporation, can- not have a lien upon the stock for a credit afterwards extended to him upon the faith of its charter right to a lien to secure a stock- holder's indebtedness. Such an equitable assignment of the stock affects one who has knowledge of it equally as much as if the transfer had been made upon the books. Notice to the executive officer of a corporation, such as the cashier of a bank, engaged in the active dischai-ge of his duties, is notice to the corporation itself 1 Chambersburg Ins. Co. v. Smith, the statute placed an attachment upon 11 Pa. St. 120. And see Upton v. the stock in behalf of the corporation ; Burnham, 3 Biss. 431. it publicly recorded a completed lien 2 See 59 N. Y. 96. for its security, and that would have 8 Rev. 1875, p. 279, § 8. This been the precise effect of an attach- statute went into operation the first ment. Per Pardee, J. day of January, 1875. First Nat. * First Nat. Bank v. Hartford Life Bank v. Hartford Life & Annuity & Annuity Ins. Co. supra. Ins. Co. 45 Conn. 22. Practically, 166 LIENS IN FAVOR OF THE CORPORATION. [§§ 224, 225. of such an equitable transfer; and such ofiBcer knowing of the pledge of the stockholder's certificate to secure a promissory- note, is presumed to know that it remains in pledge for a renewal of the original note. Knowledge of the original transaction should put the officer upon inquiry as to the state of the stockholder's shares before the corporation gave him credit upon the faith of his having stock upon which a lien could attach in favor of the corporation.^ 224. National Banks cannot claim such a lien. Such banks are prohibited from loaning upon the security of their own stock, and from holding or purchasing their own stock, except when necessary to prevent loss on a debt previously contracted in good faith,^ It is inconsistent with the policy of this act for a bank, by virtue of its articles of association or by-laws, to have a lien upon the shares of a stockholder for his indebtedness to the bank.3 But such a bank may hold a cash dividend upon shares of its stock, as a pledge for the indebtedness of a stockholder to 'the bank ; and a bank may attach the shares of a stockholder for his debt to the bank.* 225. A corporation may waive its lien upon a member's stock. A statute of the state of Pennsylvania provides that 1 Bank of America v. McNeil, 10 security for the payment of any in- Busli (Ky.), 54. " The indebtedness debtedness it may innocently permit this lien is intended to secure," said him to incur; but he may, by bargain Lindsay, J., delivering the opinion of and sale, by gift, devise, or pledge, the court, " is such as may exist at divest himself of title; and when he the time the stockholder attempts to has done so, and notice has been given dispose of his stock. It is manifest to the bank, it has no right to extend that the lien cannot become effectual credit to him upon the faith of his for any purpose until the stockholder charter lien upon his stock." contracts a debt to the bank. Until ^ 12 Stat, at Large, 675, Act of this is done, his power to sell, give, June 3, 1864. devise, or incumber his stock is as ^ Bank v. Lanier, 11 Wall. 369 ; perfect and complete as is his right so Bullard v. Bank, 18 Wall. 589; and to dispose of or incumber any other see Evansville Nat. Bank v. Metro- personal property he may own. He politan Nat. Bank, 2 Biss. 527; Second cannot pass the complete legal title to National Bank v. National State Bank, his stock except by a transfer entered 10 Bush (Ky.), 367. upon the books of the bank, nor can ^ Hagar v. Union Nat. Bank, 63 he by any arrangement not made Me. 509 ; S. C. Thompson's Nat. Bank known to the bank deprive it of the Cases, 523. right to look to his stock as an ultimate 167 § 225.] PLEDGES OF CORPORATE STOCKS. the stock of a bank shall be transferable on the books of the corporation only in such manner as the by-laws shall ordain ; but that stockholders indebted to the bank shall not transfer their stock without paying or securing the debt.^ Certain shares of the stock of a state bank were transferred by a banking firm as collateral security, and the pledgee sent the certificate to the cashier, and requested a new certificate. The cashier of the bank, who was also a member of the banking firm, replied by letter, agreeing to transfer the stock in a short time, and credited the pledgee with the stock an the books of the bank. The firm shortly afterwards failed, with a large indebtedness to the bank, which thereupon refused to transfer the stock. On a bill in equity to compel such transfer, it was held that the act of the cashier, which was within his customary duties, was binding upon the bank, and effected a waiver of its lien upon the stock.^ Mr. Justice Matthews, delivering the opinion of the court, said: " A complete transfer of the title to the stock upon the books of the bank, it is not doubted, would have the effect to vest it in the transferee, free from any claim or lien of the bank. The con- sent of the bank, made necessary to such transfer, is the waiver of its right, as its refusal would be the assertion of it. The transfer, when thus consummated, destroys the relation of mem- bership between the corporation and the old stockholder, with all its incidents, and creates an original relation with the new member, free from all antecedent obligations. This legal relation and proprietary interest, on which it is based, are quite inde- pendent of the certificate of ownership, which is mere evidence of title. The complete fact of title may very well exist without it. All that is necessary, when the transfer is required by law to be made upon the books of the corporation, is, that the fact should be appropriately recorded in some suitable register or stock list, or otherwise -formally entered upon its books. For this purpose the account in a stock ledger showing the names of the stockholders, the number and amount of the shares belonging to each, and the sources of their title, whether by original sub- scription and payment, or by derivation from others, is quite suitable, and fully meets the requirements of the law." Even on the supposition that not the legal title, but only an equity, 1 Act of April 10, 1850, Bank Act, 2 National Bank v. Watsontown art. 10, § 10. Bank, 105 U. S. 217, 222; S. C. 4 Morrison's Trans. 400; 14 Rep. 230. 168 LIENS IN FAVOR OF THE CORPORATION. [§ 226. based on an executory contract for a transfer, passed to the pledgee, it was further held, in the case last referred to, that the bank had, by its own laches, lost the legal right to assert its lien ; for if the bank had intended to insist on its legal rights, and assert its lien, the time to do this was when the pledgee made his claim for a transfer of the stock ; but, so far from doing this, it permitted the pledgee to rest in the belief that the right to transfer the stock would not be questioned, its action being equivalent to a declaration that it had no adverse claim. There- fore, upon the failure of the stockholder, the bank cannot be permitted to assert a lien, the enforcement of which would oper- ate as a fraud upon the pledgee. 226. Damages for refusing to make transfer. — If a pledgee of the stock of a bank applies to the cashier to have a transfer made to himself upon the books, and this officer refuses to allow the transfer, on the ground that the pledgor is indebted to the bank, and it appears that the bank is not en- titled to such a lien, upon its failure, and the appointment of a receiver, the pledgee may recover damages for the loss sustained by him.i 1 Case V. Bank, 100 U. S. 446. 169 CHAPTER VI. PLEDGES OF BILLS OF LADING. I. Bills of lading are symbols of property, 227-232. n. How far negotiable instruments, 233- 244. lU. How far binding upon the carrier, 245- 254. IV. Whether security for acceptance or pay- ment, 255-260. V. How bills of lading may be pledged, 261-265. VI. A pledgee's rights as against the con- signor, 266, 267. VII. A pledgee's rights as against the con- signee, 268-272. Vin. A pledgee's rights as against the car- rier, 273-277. IX. Rights of pledgees of different parts of the same bill of lading, 278, 279. I. Bills of Lading are Symbols of Property. 227. In general. — Bills of lading or receipts for goods by common carriers have become a very important, as well as a very common, form of collateral security. Such bills or receipts repre- sent the goods themselves, and the delivery of such bills or re- ceipts as collateral securit}-^ generally amounts to a symbolical delivery in pledge of the goods themselves ; yet the use of bills of lading and shippers' receipts as security gives rise to many questions and considerations wholly different from those that arise under pledges of goods in the ordinary mode of an actual delivery of the goods to the pledgee ; and therefore this use of the documentary evidence of property in the possession of the carrier is entitled to treatment as a separate branch of the sub- ject of collateral securities. 228. An eflfectual delivery of goods may be made in pledge, by transfer of a bill of lading, or shipping receipt. ^ The trans- fer of a bill of lading as collateral security is regarded not only as passing the legal title to the property, but as constituting an * Lickbarrow v. Mason, 1 H. Bl. 35, 360; 1 Smith's Lead. Cas. 8th Eng. ed. 753 ; Barber r. Meyerstein, L. R. 170 4 H. L. 317; Petitt j;. First Nat. Bank, 4 Bush (Ky.), 334. BILLS OF LADING ARE SYMBOLS OF PROPERTY. [§ 229. actual delivery and change of possession of the property.^ Such bill of lading or receipt may be made out directly to the pledgee, or may be indorsed to him. If not made out directly to him, it should be indorsed to him, for the sending it unindorsed by letter containing no words of transfer, might give the person re- ceiving it no claim to the property .2 A bill of lading properly indorsed to the consignee who has made advances, is evidence of a delivery of the property, although it be signed by one who was not in fact the master of the vessel, and had no authority to sign it, but was supposed by the consignor to be the master, and was personally acting as such.^ 229. The delivery of a bill of lading is a symbolical de- livery of the property represented by it.^ The person who takes a bill of lading for a valuable consideration, whether this arises at the time, or rests upon a previously existing debt, has the right to the property without taking actual possession of it, or doing any further act to perfect this title.^ The bill of lading stands in place of the property covered by it. It represents the property. " When the right of possession is changed by a sale or pledge of the property itself, the transfer of the bill of lading operates as a change of possession of the property, the carrier in the meantime being the custodian for the real owner or party in interest. While a bill of lading is not a negotiable instrument 1 First Nat. Bank of Cincinnati v. 296 ; Petitt v. First. Nat. Bank, 4 Kelly, 57 N. Y. 34. Bush (Ky.), 334; First Nat. Bank 2 Stone V. Swift, 4 Pick. (Mass.) v. Northern R. R. 58 N. H. 203 ; 389 ; and see Merchants' Nat. Bank Farmers' & Mechanics' Nat. Bank V. Bangs, 102 Mass. 291; Forbes v. v. Logan, 74 N. Y. 568; Security Boston & Lowell R. R. Co. 133 Mass. Bank v. Luttgen, 29 Minn. 363 ; 1^4- Holmes v. German Security Bank, 8 Prince v. Boston & Lowell R. R. 87 Pa. St. 525 ; Emery v. Irving Nat. Co. 101 Mass. 542. Bank, 25 Ohio St. 360, 366; Dodge * Barber v. Meyerstein, L. R. 4 H. v. Meyer (Cal, 1882), 10 Pac. Coast L. 317, 326 ; S. C. L. R. 2 C. P. 38, L. J. 169. 661 ; Bank of Rochester v. Jones, 4 ^ Dows v. Nat. Exch. Bank, 91 U.S. N. Y. 497; Cayuga Co. Nat. Bank v. 618 ; Skilling v. Bollinan, supra; Far- Daniels, 47 N. Y. 631 ; Skilling v. mers' & Mechanics' National Bank v. Bollman, 6 Mo. App. 76 ; National Logan, 74 N.Y. 568 ; Grove v. Brien, Bank of Green Bay y. Dearborn, 115 8 How. 429; Adoue v. Seeligson, Mass. 219 ; Forbes v. Boston & Lowell supra; Forbes v. Boston & Lowell R. R. Co. supra; McCants v. Wells, R. R. Co. supra; First Nat. Bank v. 4 S. C. 381 ; Adoue v. Seeligson, 54 Northern R. R. supra. Tex. 593; Taylor v. Turner, 87 111. 171 § 230.] PLEDGES OF BILLS OF LADING. in the sense in wliicli a bill of exchange or promissory note is negotiable, yet as the representative of a valuable commodity it is assignable to the party entitled to control the possession of that commodity, to the same extent and for the same purposes as the property itself would be if corporeally present. Inasmuch, therefore, as these instruments are capable of performing very important functions in commercial transactions, innocent holders thereof for value ought to receive the same protection as if they held possession of the property itself." ^ A cotton factor in Galveston procured an advance of money from a banker on certain cotton in press, for which he gave his order to deliver the cotton to a vessel then in port loading for Liverpool. Notice of the order was given to the press, and the master of the vessel made and delivered to the cotton factor, a bill of lading for the cotton, which the factor indorsed and de- livered to the banker, with a bill of exchange on Liverpool at- tached. While the cotton was still in press an execution against the factor was levied upon it ; but it was held that there had been a constructive delivery of it by the factor to the banker, and that the delivery of the bill of lading was as effectual to transfer the cotton as a manual delivery of it would have been.^ The delivery in this case was held to meet the special requisite of an effectual pledge, which is, that no matter in whose hands the property may be deposited, it shall no longer be subject, in fact or in law, to the dominion, possession or control of the pledgor, but to that of the pledgee. The execution of the de- livery order by the factor to the vessel for the cotton in press, and the recognition and acceptance of it by the press, constituted a delivery of the cotton to the vessel ; and therefore the execution of the bill of lading by the master of the vessel, and the delivery of this to the banker, completed the transfer to him. 230. A bill of lading merely represents the property ; and a transfer of the bill of lading operates merely to transfer the same rights of property that would arise from a transfer of the property itself. One in possession of property can transfer no greater rights than he possesses ; and so one in possession of a bill of lading can transfer no greater rights than he has in that. ■ 1 Stone V. Wabash, St. Louis & ^ Adoue v. Seeligson, 54 Tex. 593. Pacific Ry. Co. 9 Biadw. (111.) 48. 172 BILLS OF LADING ARE SYMBOLS OF PROPERTY. [§ 231. A bill of lading is not like a negotiable instrument which passes by delivery to a bond fide transferee for value without regard to the title of the person who makes the transfer.^ " In the hands of the holder it is evidence of ownership, special or general, of the property mentioned in it and of the right to receive said property at the place of delivery. Notwithstanding it is de- signed to pass from hand to hand, with or without indorsement, and it is efficacious for its ordinary purposes in the hands of the holder, it is not a negotiable instrument or obligation in the sense that a bill of exchange or a promissory note is. Its transfer does not preclude, as in those cases, all inquiry into the transaction in which it originated, because it has come into hands of persons who have innocently paid value for it. The doctrine of bond fide purchasers only applies to it in a limited sense.'' ^ 231. An indorsement or delivery of a bill of lading- as col- lateral security passes a special property in the goods, and not an absolute legal title to them, or the whole and complete ownership of them. The transaction is ordinarily a pledge and not a mortgage, because it is ordinarily the intention of the par- ties to such a contract, either as expressed or to be implied from the transaction itself, that such shall be its effect. The effect of such a transaction is well described by Mr. Justice Field in a re- cent case in the Queen's Bench Division.^ " Now advances 1 Gurney v. Behrend, 3 El. & Bl. possession; and that such indorsement 622; Dows v. Perrin, 16 N. Y. 325 ; has the same effect as a bill of sale Dows V. Greene, 24 N. Y. 638. has by the common law to pass the ^ Pollard V. Vinton, 105 U. S. 7, 8, legal property in goods ; and that the per Miller, J. right of the indorser is an equity mere- 8 Burdick v. Sewell, 10 Q. B. D. ly, though this may be recognized by 363, 366. the common law courts. Upon this The learned judge criticises the Ian- Mr. Justice Field remarks : " I ap- guage of Brett, L. J., in the recent case prehend, however, that the language of Glyn r. East and West India Docks of the learned lord justice in that Co. 6 Q. B. D. 475, 480, where he says case, must be read as applied to the that the legal effect of the indorse- facts of that particular case, and as I, ment of the bill of lading as security on the hearing of that case, which for advances was to transfer the legal was tried before me without a jury, property in the goods to the indorsee, came to the conclusion that the inten- and a consequent right in law of im- tion of the parties and the implica- mediate actual possession against all tion of law from the dealings was that the world, unless some one has an in- the whole and entire property did dependent superior right of temporary pass, I agree in the view of the lord 173 § 231.] PLEDGES OF BILLS OF LADING. against deposit of goods are probably some of the most ordinary- transactions either of common or commercial life, and if there is delivery, and there are no terms expressed either verbally or in vrriting giving any larger effect to the contract, the latter is known as a contract by way of ' pawn or pledge,' the legal effect of which is that only a special property passes from the borrower to the lender, although coupled with the power of sell- ing the pledge and transferring the whole property in it on de- fault in payment at the stipulated time, if there be any, or at a reasonable time after demand and non-payment, if no time for repayment be agreed upon.i Moreover, until such default, al- though the lender may assign the pledge to another to the lim- ited extent of his own interest in it, i. e., as a security for the amount due, he cannot pass the whole and entire property in the goods to another, for by the contract the general property re- mains in the pawnor, who by virtue of that general property may determine the special property by tender of the secured amount, and may immediately recover the pledge on refusal in a possessory action. Delivery is however an essential element of every contract by way of pledge. Such delivery may be actual, as in the every day life transaction with the pawnbroker, or it may be constructive, either by making the custody of the pledgor that of the pledgee,^ or if the goods are still under the opera- tion of a bill of lading, by indorsement of the bill ; and it is the justice thus limited and understood." expressions which appear to be to the Bramwell, L. J., however, considered effect that by the indorsement the the transaction in that case as not whole property passed. But he doubts amounting to anything more than a whether these expressions were in- pledge, giving the indorser of the bill tended to mean anything more than of lading a special property and right that sufficient property passed to en- 01 possession. able the pledgee to maintain an action Mr. Justice Field then proceeds to for conversion, and that the indorse- review some of the cases as to the ment, per se, amounted to a delivery, effect of an indorsement of a bill of He comes to the conclusion as stated lading as collateral security, from the in the text that by such an indorse- leading case of Lickbarrow v. Mason, ment the parties intend nothing more 1 Sm. L. C. 7th Eng. ed. p. 756, down than a pledge : and this is the gen- to Meyerstein v. Barber, L. R. 4 H. L. erally accepted doctrine. 317. In regard to the latter case he ^ Pothonier v. Dawson, Holt N. P. says that while in the court of Com- 383 ; Donald v. Suckling, L. R. 1 Q. mon Pleas and in the Exchequer Cham- B. 585. her everybody treated the transaction 2 Reeves v. Capper, 5 Bing. N. C. as a pledge. Lord Hatherly and Lord 136, 140. Westbury in the House of Lords used 174 BILLS OF LADING ARE SYMBOLS OF PROPERTY. [§ 232. latter form of the transaction which is one very commonly adopted in commerce. As, however, in the case of land, by a conveyance by way of mortgage, so also in that of goods, a more effective security may be created by bill of sale, and by the usual terms of such an instrument the whole and entire property in the goods is assigned and passes to the lender subject to usual stipu- lations as to possession and sale, but leaving nothing in the way of legal property in the borrower, only an equitable right to re- deem. This latter form of security, although very usual in money- lending transactions of a mere individual character, is not, I be- lieve, usually adopted in those purely commercial transactions where advances are obtained against goods represented either by warrants or bills of lading ; these being two of the ordinary modes by which goods are made a security for an advance and within one of which the transaction now in question must be ranged. The question in the present case -resolves itself into whether the security was intended to operate, or by implication of law arising upon the undisputed facts did operate, in the same way as an assignment by bill of sale or as a mere pledge." In this case it was determined that the shipper of goods does not, by simply indorsing the bill of lading, and delivering it to the indorsee, by way of security for money advanced by him, pass the property in the goods to such indorsee, so as to make him directly liable to the shipowner for freight under a statute which transfers the liability for freight from the shipper to the indorsee of a bill of lading. 232. A previously existing debt is a sufficient considera- tion for the delivery of a bill of lading.i There are authori- ties which hold that a consideration paid at the time of the indorsement or delivery of the bill of lading is essential for passing the title to the property as against the consignor's right to stop the goods in transitu, or as against a subsequent pur- chaser of tlie goods for a new consideration.^ ^ Leask v. Scott, 2 Q. B. D. 376; tempts on the part of factors to pledge Skilling t;. Bolliiian, 6 Mo. App. 76 ; their principals' goods for their own Triedemanv. Knox, 53 Md. 612. See debts, and do not support his text. §§ 107-133. Newsom v. Thornton, 6 East, 1 7, was 2 Parsons on Shipping, 193. The decided, not upon the ground that an cases cited by the learned author in assignment for prior advances passed support of this view arose out of at- no title to the bill of lading, but that a 175 ; 233-235.] pledges of bills of lading. But the prevailing rule is, that a delivery of a bill of lading as security for a past debt is equally effectual with a delivery for a present advance to vest the property in the creditor. II. How far Negotiable Instruments. 233. A bill of lading whereby the carrier engages to deliver goods to the shipper or his order is quasi negoti- able ; but not negotiable in the manner that bills of exchange and promissory notes are negotiable.^ They are not negotiable in this sense even when made negotiable in terms by statute,^ unless in express terms made negotiable in the same sense that bills of exchange and promissory notes are negotiable, as is the case in Maryland.^ As the statutes of several states introduce an important qualifi- cation of the common law doctrine upon this subject, and as they are enacted in different terms, a full statement of the statutes is here given. 234. California.* — All the title to the freight which the first holder of a bill of lading had when he received it, passes to every subsequent indorsee thereof in good faith, and for value, in the ordinary course of business, with like effect and in like manner, as in the case of a bill of exchange. When a bill of lading is made to " bearer," or in equivalent terms a simple transfer thereof, by delivery, conveys the same title as an indorsement. 235. Maryland.^ — All bills of lading and all receipts, vouch- factor bad no right to pledge the bill. ^ Rowley v. Bigelow, 12 Pick. The case was, that the bolder of a (Mass.) 307, per Shaw, C. J. ; Allen bill of lading, the factor of the con- v. Williams, lb. 297; Davenport Nat. signor, attempted to pledge the bill of Bank v. Homeyer, 45 Mo. 145; Bai*- lading on condition of advances to be nard v. Campbell, 56 N. Y. 462. made ; the advances were not made ; ^ See § 241. the pledgee claimed to bold the goods ^ See § 235. for former advances made by him to * Codes & Stats. 1876, §§ 7127, the factor, and it was held that the 7128; §§ 2127, 2128 of Civil Code, factor had no power to pledge the ^ Rev. Code 1878, p. 298, art. 35, goods of his principal by indorsement §12; Act of 1876, c. 262. This and delivery of the bill of lading, statute is more comprehensive and Warner v. Martin, 11 How. 209, is a sweeping in its phraseology and effect similar case, and turns altogether upon than the statutes of Missouri and the question of the power of a factor Pennsylvania recently construed by to pledge. Per Bakewell, J., in Skil- the Supreme Court in Shaw v. R. R. ling V. BoUman, 6 Mo. App. 76. Co. 101 U. S. 557. Shortly before 176 HOW FAR NEGOTIABLE INSTRUMENTS. [§ 236. ers, or acknowledgments whatsoever, in writing, in the nature or stead of bills of lading for goods, chattels, or commodities of any kind, to be transported on land or watei', or on both, which shall be executed in this state, or being executed elsewhere, shall provide for the delivery of goods, chattels, or commodities of any kind within this state, and all warehouse, elevator, or storage receipts whatever, for goods, chattels, or commodities of any kind stored or deposited, or in said receipts stated or acknowledged to be stored or deposited for any purpose in any warehouse, elevator, or other place of storage or deposit in this state, shall be, and they are hereby, constituted and declared to be negotiable instru- ments and securities, unless it be provided in express terms to the contrary on the face thereof, in the same sense as bills of exchange and promissory notes, and full and complete title to the property in said instruments mentioned or described, and all rights and remedies incident to such title, or arising under or derivable from the said instruments, shall inure to, and be vested in, each and every hond fide holder thereof for value, altogether unaffected by any rights or equities whatsoever of or between the original or any other prior holders of or parties to the same, of which such bond fide holder for value shall not have had actual notice at the time he became such. Under this statute an antecedent debt is sufficient to constitute a purchase for value of a bill of lading, and a party receiving it in payment of, or as security for, such a debt, becomes a pur- chaser and bond fide holder for value as effectually as if it had been a bill of exchange or promissory note.^ 236. Minnesota.^ — Warehouse receipts, given for any goods, wares and merchandise, grain, flour, produce, or other com- modity, stored or deposited with any warehouseman, or other person or corporation in this state, or bills of lading, or receipts for the same, when in transit by cars or vessels to any such ware- houseman, or other person, shall be negotiable, and may be trans- this statute was passed, the Supreme statute was evidently passed in order Court of Maryland had decided that to change the law as fixed by the de- the law does not regard bills of lading cision, and uses the very language of as negotiable in the same sense in the decision. Tiedeman v. Knox, 53 which a bill of exchange and promis- Md. CI 2. sory note is so (Bait. & Ohio K. R. Co. ^ Tiedeman v. Knox, xupra. V. Wilkins, 44 Md. 11, 27), and the ^ y^ats. 1878, c. 124, § 17. 12 177 § 237.] PLEDGES OF BILLS OF LADING. ferred by indorsement and delivery of such receipt or bill of lading ; and any person to whom the said receipt or bill of lading may be transferred, shall be deemed and taken to be the owner of the goods, wares or merchandise therein specified, so as to give security and validity to any lien created on the same subject to the payment of freight and charges thereon ; provided, that all warehouse receipts, or bills of lading which shall have the words " not negotiable " plainly written or stamped on the face thereof, shall be exempt from the provisions of this act.^ 237. Missouri.2 — All receipts issued or given by any ware- houseman, or other person or firm, and all bills of lading, trans- portation receipts, and contracts of affreightment, issued or given by any person, boat, railroad, or transportation or transfer com- pany, for goods, wares, merchandise, grain, flour, or other produce shall be and ai"e hereby made negotiable by written indorsement thereon and delivery in the same manner as bills of exchange and promissory notes ; and no printed or written conditions, clauses, or provisions inserted in or attached to any such receipts, bills of lading, or contracts, shall in any way limit the negotiability or affect any negotiation thereof, nor in any manner impair the right and duties of the parties thereto, or persons interested therein ; and every such condition, clause, or provision purporting to limit or affect the rights, duties, or liabilities created or de- clared in this act, shall be void, and of no force or effect. Warehouse receipts given by any warehouseman, wharfinger, or other person or firm, for any goods, wares, merchandise, grain, flour, or other pi'oduce or commodity, stored or deposited, and all bills of lading and transportation receipts of every kind, given by any carrier, boat, vessel, railroad, transportation, or transfer company, may be transferred by indorsement in writing thereon, and the delivery thereof so indorsed ; and any and all persons to whom the same may be so transferred shall be deemed and held to be the owners of such goods, wares, merchandise, grain, flour, or other produce or commodity, so far as to give validity to any pledge, lien, or transfer given, made, or created thereby, as on the faith thereof, and no property so stored or deposited, as 1 For construction of this act, see ^ ^ s_ i879, p. 88, §§ 558, 559 ; McCabe v. McKinstry, 5 Dill. 509; Laws 1869, p. 91, § 1. See Central Raliilly v. Wilson, 3 Dill. 420. Savings Bank t'. Garrison, 2 Mo. App. 58. 178 HOW FAR NEGOTIABLE INSTRUMENTS. [§§ 238, 239. specified in such bills of lading or receipts, shall be delivered, except on surrender and cancellation of such receipts and bills of lading ; provided, however, that all such receipts and bills of lading, which shall have the words " not negotiable " plainly written or stamped on the face thereof, shall be exempt from the provisions of this act.^ 238. New York.^ — Bills of lading for any goods, wares, mer- chandise, grain, flour, produce, or other commodity, may be transferred by indorsement thereof ; and any person to whom the same may be so transferred shall be deemed and taken to be the owner of the goods therein specified, so far as to give validity to any pledge, lien, or transfer made or created by such person. But this provision does not apply to bills of lading which shall have the words " not negotiable " plainly written or stamped on the face thereof. 239. Pennsylvania.^ — Warehouse receipts given for any goods, wares, merchandise, grain, flour, produce, petroleum or 1 It is further provided in Missouri (R. S. 1879, vol. 1, c. 24, § 1348), that if any commission merchant, agent, or other person, storing or shipping any grain, flour, or other produce or commodity, or any person to whom any such property is con- Bigned, and who shall come in posses- sion of a bill of lading or warehouse receipt for such property, for or on account of another person, or other persons, shall hypothecate, negotiate, or pledge such bill of lading or ware- house receipt, without the written authority therefor of the owner or consignor of such property ; or if, having so disposed of any such bill of lading or warehouse receipt, shall fail to account for and pay over the pro- ceeds thereof forthwith to his prin- cipal, or the owner of such property, in either or any of such cases, he shall be adjuilgcd guilty of fraud, and shall, on conviction, be punished by fine not exceeding five thousand dollars, or by imprisonment in the penitentiary for a term not exceeding five years, or by both such fine and imprisonment; provided, that nothing herein shall be construed to prevent such consignee or other person lawfully possessed of such bill of lading or warehouse re- ceipt from pledging the same, to the extent of raising sufficient means thereby to pay charges for storage and shipment, or advances drawn for on such property by the owner or con- signor thereof; and a draft or order by such owner or consignor for ad- vances shall be held and taken to be "written authority," within the mean- ing of this section, for the hypotheca- tion of such bill of lading or ware- house receipt, to the extent, and only to the extent, of raising the means to meet such draft, and to pay such freight and storage. 2 3 R. S. 7th ed. 1882, p. 2260. See as to Warehouse Receipts, Ch. VII. 8 Brightly's Purdon's Dig. 1873, p. 114,§1. 179 § 2-40.] PLEDGES OF BILLS OF LADING. other commodity, stored or deposited with any warehouseman, wharfinger or other person in this state, or bills of lading or re- ceipts for the same when in transit by cars or vessels to any such warehouseman, wharfinger, or other person, shall be negotiable, and may be transferred by indorsement and delivery of said re- ceipt or bill of lading ; and any person to whom the said receipt or bill of lading may be so transferred shall be deemed and taken to be the owner of the goods, wares, and merchandise therein specified, so as to give security and validity to any lien created on the same, subject to the payment of freight and charges thereon ; and no property on which such lien may have been created shall be delivered by said warehouseman, wharf- inger, or other person, except on the surrender and the cancella- tion of said original receipt or bill of lading ; or, in case of partial sale or release of the said merchandise, by the written assent of the holder of said receipt or bill of lading, indorsed thereon ; provided, that all warehouse receipts of bills of lading which shall have the words, " not negotiable," plainly written or stamped on the face thereof, shall be exempt from the provisions of this act. 240. Wisconsin.^ — Warehouse receipts, bills of lading, or railroad receipts given for any goods, wares, merchandise, lum- ber, timber, grain, flour, or other produce or commodity stored^ shipped, or deposited with any warehouseman, wharfinger, ves- sel, boat or railroad company or other person, on the face of which shall not be plainly written the words " not negotiable," may be transferred by delivery with or without indorsement thereof ; and any person to whom the same may be so transferred, shall be deemed and taken to be the owner of the goods, wares, and merchandise therein specified, so far as to give validity to any pledge, lien, or transfer made or created by such person or persons ; but no such property shall be delivered except on sur- render and cancellation of said original receipt or bill of lading or the indorsement of such delivery thereon, in case of partial delivery. Any such receipt, bill of lading, voucher, or other document by any warehouseman, wharfinger, master of a vessel or boat, or 1 R. S. 1878, p. 1011, § 4194; p. 1049, § 4425. 180 HOW FAR NEGOTIABLE INSTRUMEN-TS. [§ 241. any officer, agent or clerk of any railroad, express or transporta- tion company shall be transferable by delivery thereof without indorsement or assignment, and any person to whom the same is so transferred, shall be deemed and taken to be the owner of the property therein specified so far as to give validity to any pledge, lien or transfer, made or created by such person, unless such re- ceipt, bill of lading, voucher, or other document shall have the words, " not negotiable," plainly written or stamped on the face thereof. 241. A statute declaring bills of lading negotiable, does not give them all the qualities of negotiable bills and notes.^ Negotiation primarily means a transfer by indorsement and de- livery, giving the indorsee a right to sue upon the contract in his own name. In regard to bills and notes certain other conse- quences generally follow negotiability, such as the liability of the indorser after due demand and notice, and the right of a holder in good faith and for value before maturity to full protection against even the true owner, so that nothing short of mala fides on his part will defeat his right. Bills of exchange and promis- sory notes are contracts exceptional in their character, and have been given their exceptional character because the interests of trade required that they should be fully protected in favor of bond fide holders. But this reason does not apply to bills of lad- ing. " Bills of lading," says Mr. Justice Strong, of the Supreme Court,2 " are regarded as so much cotton, grain, iron, or other articles of merchandise. The merchandise is very often sold or pledged by transfer of the bills which cover it. They are, in commerce, a very different thing from bills of exchange and promissory notes, answering a different purpose and performing different functions. It cannot be, therefore, that the statute which made them negotiable by indorsement and delivery, or negotiable in the same manner as bills of exchange and prom- ^ Shaw V. Railroad Co. 101 U. S. law as it had just previously been es- 557, 565; ,S'. C. 37 Leg. Int. 135 ; 10 tablished by the Supreme Court of N. Y. Weekly Dig. 263 ; 10 Rep. 129. that state in Bait. & Ohio R. R. Co. In Maryland the statute is broader v. Wilkins, 44 Md. 27. See Tiede- in terms, and makes bills of lading man v. Knox, 53 Md. 612, where this negotiable in the same sense as bills of change is commented upon, exchange and promissory notes. In * Shaw v. Railroad Co. supra. this respect the statute changes the 181 § 242.] PLEDGES OF BILLS OF LADING. issory notes are negotiable, intended to change totally their char- acter, put them in all respects on the footing of instruments which are the representatives of money, and charge the negotia- tion of them with all the consequences which usually attend or follow the negotiation of bills and notes. Some of these conse- quences would be very strange, if not impossible ; such as the liability of indorsers, the duty of demand ad diem, notice of non- delivery by the carrier, &c., or the loss of the owner's property by the fraudulent assignment of a thief. If these were intended, surely the statute would have said something more than merely make them negotiable by indorsement. No statute is to be con- strued as altering the common law, further than its words im- port. It is not to be construed as making any innovation upon the common law which it does not fairly express. Especially is so great an innovation as would be placing bills of lading on the same footing in all respects with bills of exchange, not to be in- ferred from words that can be fully satisfied without it. The law has most carefully protected the ownership of personal property, other than money, against misappropriation by others than the owner, even when it is out of his possession. This protection would be largely withdrawn if the misappropriation of its sym- bol or representative could avail to defeat the ownership, even when the person who claims under a misappropriation had reason to believe that the person from whom he took the property had no right to it." Therefore it was held, where a bill of lading of certain cotton was assigned by indorsement to a bank as collat- teral security, and without negligence on the part of the bank, was stolen fom it, and indorsed to a third person for an advance made under circumstances which afforded him reason to believe that the bill of lading had already been pledged to secure the payment of an outstanding draft, that the person so taking it was not entitled to hold the merchandise covered by the bill against its true owuer.i 242. The rights of a pledgee of a bill of lading by in- dorsement or delivery are the rights of a pledgee of the prop- erty itself by a delivery of it. A bill of lading, though nego- tiable in form, is not a negotiable instrument, like a bill of 1 Shaw V. Railroad Co. 101 U. S. 557 ; StoUenwerck v.Thacher, 115 Mass. 224. 182 HOW FAR NEGOTIABLE INSTRUMENTS. [§ 243. exchange, but a symbol or representative of the goods to which it relates ; and the rights arising from a transfer of a bill of lad- ing correspond, not to those arising from the transfer of a nego- tiable instrument, but to those arising from a delivery of the property under like circumstances.^ " I never heard it argued," said Parke, B., in Thompson v. Dominy,^ that a contract was transferable, except by the law merchant, and there is nothing to show that a bill of lading is transferable under any custom of merchants. It transfers no more than the property in the goods ; it does not transfer the contract." In the same case, Alderson, B., added : " I am of the same opinion. This is another instance of the confusion, as Lord EUenborough, in Waring v. Cox ^ ex- presses it, which ' has arisen from similitudinous reasoning upon this subject.' Because in Lickbarrow v. Mason, a bill of lading was held to be negotiable, it has been contended that that instru- ment possesses all the properties of a bill of exchange ; but it would lead to absurdity to carry the doctrine to that length. The word ' negotiable ' was not used in the sense in which it is used as applicable to a bill of exchange, but as passing the prop- erty in the goods only." While generally an indorsee for value of a bill of lading may bring an action in his own name for the goods, he cannot gen- erally maintain an action in his own name on the instrument itself.* 243. The indorsement of a bill of lading by the shipper only assigns his rights and the title to the property called for by the bill. It involves no duty on his part to do anything to- ward forwarding the property, and therefore he is not liable in as- sumpsit for failure to ship and deliver the property. If the bill of 1 Stollenwerck v. Thacher, 115 Y.) 310, 316 ; Blanchard u. Page, 8 Mass. 224, per Gray, C. J. ; Forbes v. Gray (Mass.), 281, 298. Boston & Lowell R. R. Co. 133 Mass. This, of course, is a statement of 154; Western Union R. R. Co. v. the common law of the subject. Under Wagner, 65 111. 197; First Nat. Bank modern codes of procedure the real V. Northern R. R. 58 N. H. 203; Lin- party in interest is authorized to sue eker v. Ayeshford, 1 Cal. 75 ; Moore on any contract or chose in action V. Robinson, 62 Ala. 537. which has been transferred to him in 2 14 M. & W. 403. his own name. Merchants' Bank v. 8 1 Camp. 369. Union R. R. & Trans. Co. 69 N. Y. * Thompson v. Dominy, 14 M. & 373, 380, per Miller, J. W. 403 ; Dows v. Cobb, 12 Barb. (N. 183 §§ 244, 245.] PLEDGES OF BILLS OF LADING. ladino- be fictitious, or if there was any fraud practised in obtain- ing advances upon a transfer of it, any remedy that the pledgee may have is one for that special wrong. He cannot imply from the indorsement of the bill of lading a promise to perform what the carrier had agreed, or purported to have agreed, to do.^ 244. One making advances upon a bill of lading to one who is not the owner of the property therein described, ac- quires no right of property therein. Although possession is primd facie evidence of ownership, yet that alone does not deprive the true owner of his title. " Taking possession of the property, shipping it, obtaining bills of lading from the carriers, indorsing away the bills of lading, or even selling the property and obtaining a full price for it, can have no effect upon the right of the owner. Even a horid fide purchaser obtains no right by a purchase from one who is not the owner, or not authorized to sell." ^ Therefore, if an owner of cotton author- izes another person to ship it, but gives the agent no authority to ship in his own name, the latter, by shipping in his own name, and taking a bill of lading accordingly, cannot, by negotiating this, charge the cotton with the payment of advances made on the faith of such bill of lading.^ III. ffow far binding upon the Carrier. 245. A bill of lading represents the goods to be in the hands of the carrier. If, through inadvertence or otherwise, the bill of lading is signed before the goods have come to hand, but they are afterwards received and shipped, the bill of lading operates upon the goods by way of relation and estoppel ; and 1 Maybee v. Tregent, 47 Mich. 495 ; transfer a better title thau he has him- S. C. 11 N. W. Rep. 287, self, or than he has been authorized 2 The Idaho, 93 U. S. 575, 583, per by the owner to grant. Exceptions Strong, J. And so in Covill v. Hill, in favor of trade are allowed in the 4 Den. (N. Y.) 323, 327, it was said: case of money and negotiable instru- " It is a principle of the common law ments. But as to other personal chat- which has but few exceptions, that a tels, the mere possession, by whatever man cannot be divested of his prop- means it may have been acquired, if erty without his consent. And al- there be no other evidence of prop- though possession is one of the most erty, or authority to sell, from the usual evidences of title to personal true owner, will not enable the seller chattels, yet, as a general rule, mere to give a good title." possession will not enable a man to ^ Moore v. Robinson, 62 Ala. 537. 184 HOW FAR BINDING UPON THE CARRIER. [§ 246. one who accepts or discounts drafts on the security of such bill of lading, obtains a title to the goods as valid and effectual as he could obtain by an actual delivery to him of the goods them- selves.^ 246. A carrier is not bound by a bill of lading signed by an agent without an actual delivery of the. goods to the car- rier, although the bill of lading be assigned to a person who in good faith discounts a draft attached to it. It has long been the prevailing rule that the master of a ship cannot bind the owners by issuing bills of lading for goods not actually delivered on board the ship.^ The same rule applies with greater force in the case of an agent of a railroad company.^ In other words, a bill of lading, whether issued by the master of a vessel or by the agent of any carrier, is not a commercial or negotiable paper in the hands of an innocent party, which precludes or estops the owner from denying that the freight was received as therein admitted.* In a very recent case before the Supreme Court of the United States, involving the point under consideration, Mr. Justice Miller said : ^ " A bill of lading is an instrument well known in commercial transactions, and its character and effect have been 1 Rowley v. Bigelow, 12 Pick. (Mass.) 307, 312. 2 Brown v. Powell Diiffryn Steam Coal Co. L. R. 10 C. P. 562; Grant v. Norway, 10 C. B. 665; Coleman v. Riches, 16 lb. 104; Hubbersty v. Ward, 8 Exch. 330; McLean v. Flem- ing, L. R. 2 H. L. 128, by statute; Mackay v. Commercial Bank, L. R. 5 P. C. 394; Jessel v. Bath, L. R. 2 Ex. 267; Schooner Freeman v, Bucking- ham, 18 How. 182; The May Flower, 3 Ware, 300; The Loon, 7 Blatchf. 244; Pollard v. Vinton, 105 U. S. 7; S. C. 13 Rep. 545; Walter v. Brewer, 1 1 Mass. 99 ; Sears r. Wingate, 3 Allen (Mass.), 103; Dean v. King, 22 Ohio St. 118; Louisiana Nat. Bank v. La- veille, 52 Mo. 380; Robinson v. Mem- phis & Charleston R. R. Co. 9 Fed. Rep. 129, 138. For the rule in Canada, see Erb v. Great Western R'y Co. 42 U. C. Q. B. 90; ,S'. C. 3 Tnpper's App. 440 ; Oliver V. Great Western R'y Co. 28 U. C. C. P. 143; McLean y. Buffalo & Lake Huron R'y Co. 23 U. C. Q. B. 448 ; S. C. 24 lb. 271, but the latter case seems to be overruled by that first cited. There are a few cases which seem to be opposed to the general rule sup- ported by the weight of authority: Griswold v. Haven, 25 N. Y. 595; Armour v. Michigan Cent. R. R. 65 N. Y. Ill ; 5. C7. 22 Am. R. 603 ; Wichita Sav. Bank v. Atchison, Topeka & Santa Fe R. R. Co. 20 Kans. 519. 8 Baltimore & Ohio R. R. Co. v. Wilkins, 44 Md. 11; Robinson v. Memphis & Charleston R. R. Co. 9 Fed. Rep. 129. * Adoue V. Seeligson, 54 Tex. 593, 604, per Moore, C. J.; Stone v. Wa- bash, St. Louis & Pacific R'y Co. 9 Bradvv. (111.) 48. 6 Pollard V. Vinton, 105 U. S. 7; S. C. 13 Rep. 545. 185 § 247.] PLEDGES OF BILLS OF LADING. defined by judicial decisions. It is an instrument of a twofold character. It is at once a receipt and a contract. In tlie former character it is an acknowledgment of the receipt of property on board his vessel by the owner of the vessel. In the latter it is a contract to carry safely and deliver. The receipt of the goods lies at the foundation of the contract to carry and deliver. If no goods are actually received, there can be no valid contract to carry or to deliver." 247. This matter has become the subject of statutory enactmients. Thus in England ^ it is provided that every bill of lading in the hands of a consignee or indorsee for valuable con- sideration, representing goods to have been shipped on board a vessel, shall be conclusive evidence of such shipment, as against the master or other person signing the same, notwithstanding that such goods, or some part thereof, may not have been so shipped, unless such holder of the bill of lading shall have had actual notice at the time of receiving the same, that the goods had not been in fact laden on board ; provided that the master or other person so signing may exonerate himself in respect of such mis- representation, by showing that it was caused without any default on his part, and wholly by the fraud of the shipper, or of the holder, or some person under whom the holder claims. In Maryland ^ it is provided by statute that all bills of lading shall be conclusive evidence in the hands of any bond fide holder for value of such instrument, who shall have become such with- out actual notice to the contrary, that all of the goods, chattels, and commodities in said instrument mentioned or described, had been actually received by, and were actually in possession and custody of, such person or corporation at the time of issuing the said instrument according to the tenor thereof, and for the pur- poses and to the effects therein stipulated or provided, notwith- standing that the fact may be otherwise, and that such agent or officer may have had no authority to issue any such instrument on belialf of his said principal, excejjt for goods, chattels, or com- modities actually received, and in possession at the time of such issue.3 1 18 & 19 Vict. c. Ill, § 3. For a There is a similar statute in Ontario, case under this act, see Volieri v. R. S. c. 116, § 5, sub-section 3. Boyland, L. R. 1 C. P. 382. 2 r. Code, 1878, p. 298, §§ 13, 14. 186 ^ In Missouri (R. S. 1879, vol. i. HOW FAR BINDING UPON THE CARRIER, [§ 248. 248. Neither the master of a vessel nor its shipping agent can bind it or its owner by signing a bill of lading for goods not received. Such a bill of lading is not only void in the hands of the person to whom it is issued, but also in the hands of a pledgee in good faith and for value. ^ The question is one of agency. The Supreme Court of the United States upon this point say : ^ " Even if the master had been appointed by the owner, a wilful fraud committed by him on a third person by signing false bills of lading would not be within his agency. If the signer of a bill of lading was not the master of the vessel, no one would suppose the vessel bound ; and the reason is be- cause the bill is signed by one not in privity with the owners. But the same reason applies to a signature made by a master out of the course of his employment. The taker assumes the risk, not only of the genuineness of the signature, and of the fact that the signer was master of the vessel, but also of the apparent authority of the master to issue the bill of lading. We say the apparent authority because any secret instructions by the owner, inconsistent with the authority with which the master appears to be clothed, would not affect third persons. But the master of a vessel has no more apparent authority to sign bills of lading than he has to sign bills of sale of the ship. He has an apparent authority if the ship be a general one, to sign bills of lading for cargo actually shipped ; and he has also authority to sign a bill of sale of the ship when in case of disaster his power of sale arises. c. 11, § 557, 560) it is provided by veyed as expressed in such bill of statute that no master, owner, or lading, receipt, or other voucher or agent of any boat or vessel of any document. A violation of this pro- description, forwarder, or officer, or vision is punishable by a fine in any agent of any railroad, transfer, or sum not exceeding five thousand dol- transportation company, or other per- lars, or imprisonment in the peni- son, shall sign or give any bill of tentiary not exceeding five years, or lading, receipt, or other voucher or both. The person aggrieved by such document, for any merchandise or violation may also recover in an actioQ property, by which it shall appear that at law of the person guilty thereof all such merchandise or property has been damages he has sustainiMl. shipped on board of any boat, vessel, There are statutes similar to this in railroad car, or other vehicle, unless several states, this being given only the same shall have been actually as a sample. shipped and put on board, and shall i Pollai'd v. Vinton, 105 U. S. 7. be at the time actually on board or * Schooner Freeman v. 13ucking- delivered to such boat, vessel, car, or ham, 18 How. 182. other vehicle, to be carried and con- 187 §§ 249, 250.] PLEDGES OF BILLS OF LADING. But the authority in each case arises out of and depends upon a particular state of facts. It is not an unlimited authority in one case more than in the other ; and his act in either case does not bind the owner even in favor of an innocent purchaser, if the facts on which his power depended did not exist ; and it is incum- bent upon those who are about to change their condition upon the faith of his authority, to ascertain the existence of all the facts upon which his authority depends." 249. There is no distinction in this respect between a bill of lading given by a carrier on land and one given by a car- rier on water. The exemption of the owner of a ship from lia- bility for the fraud of the master in issuing a false bill of lading does not grow out of the peculiarities of the laws of the sea, and is not founded on the principle that the ship is bound to the freight and the freight to the ship.^ The exemption of the carrier from liability in such case is founded upon the common law principle, that one is not bound by the acts of an agent when acting outside the scope of his authority. So far as the agency of a master of a ship is implied, it is more comprehensive than that of a station or freight agent of a railroad company ; ^ and if any argument is to be drawn from the difference of the agency in the two cases, it is that inasmuch as the master has no authority, actual or appar- ent, to issue bills of lading until the goods are delivered to the ship, much less has the freight agent of a railroad company, whose agency is less comprehensive, any authority to bind the railroad company by issuing bills of lading for goods not actually delivered to the company. It is not essential, however, that the agent of the carrier, or the master of the vessel, should have actual possession of the goods, if he has potential possession of them, before executing a bill of lading. Thus he may issue a valid bill of lading upon receiving a warehouse receipt for the goods properly issued, as this places the goods within his control. 250. Neither a general nor a local custom to use bills of lading as collateral security can constitute them negotiable instruments as against the carrier, and make him liable to the 1 Robinson v. Memphis & Charles- ^ Robinson v. JNIemphis & Charles- ton R. R. Co. 9 Fed. Rep. 129, 140, ton R. R. Co. sw/)ra, per Hammond, J. per Hammond, J. 188 HOW FAR BINDING UPON THE CARRIER. [§ 250. indorsee in the same way that be would be if be bad drawn negotiable bills of excbange. A bill of lading is merely a receipt by tbe carrier for the mer- chandise received for transportation and evidence of a contract with the shipper to carry the merchandise to its destination. The carrier's liability would be the same if he received the goods and undertook to transport them without issuing a bill of lading. The carrier's contract is with the shipper and with no one else. If the shipper indorses his contract to any one else, the indorsee acquires only the rights of the shipper, and it is not for the in- terest of commerce that he should acquire any other rights. The common law makes it no part of the duty of a carrier to issue bills of lading which shall have the effect of negotiable securities as against him ; though it holds him rigidly to the performance of his contract as a carrier. While merchants have from time immemorial treated bills of lading as convenient symbols or in- struments of title, which they have transferred by indorsement, and have thus given them a quasi negotiability or capacity to pass from hand to hand, this custom of merchants is one wholly for their own benefit, and is one which does not benefit the carrier or in any way concern him, unless it be to make him liable to the indorsee, instead of the shipper, for the delivery of the goods. Upon this point Judge Hammond, delivering the judgment of the Circuit Court of the United States in the case of a fraudulent bill of lading which an indorsee had taken as security for the discount of a draft drawn against it, said : ^ "It seems to me with all deference, that it is a misapprehension of the true char- acter of this instrument, and of the true relation of the parties to it, to treat it as if the maker were engaged in the business of issuing negotiable securities, which he is bound to protect at all hazards in the hands of a bond fide purchaser for value ; or, as it is expressed in argument here, to protect those who innocently and in good faith deal with it. This entails a liability dehors the contract. It makes the carrier an insurer or guarantor of strangers to the contract against loss incurred by a use of the instrument in wliich the carrier has no interest, and binds him to a liability for which he is not paid ; for the comparatively small sum he receives as compensation for carriage will not, and is never intended to cover or insure him against loss incurred by ^ Robinson u. Memphis & Charleston R. R. Co. 9 Fed. Rep. 129, 133. 180 § 251] PLEDGES OF BILLS OF LADING. such a liability as that. The consideration he receives is not commensurate with the liability sought to be imposed, and if it is determined to exist, crrriers must necessarily add to the freight a sum sufficient to indemnify them, as insurance companies are ; and this for the protection of outside parties dealing in matters not pertaining to the carriage of the goods. Moreover it ob- structs the carrier in his proper business, and entails upon him the selection of agents possessing not only the ordinary mental and moral qualifications essential to the receiving, handling, and carriage of merchandise, but those having the relatively higher qualifications required of bank cashiers or other agents entrusted with the duty of issuing, signing, and handling bank notes, negotiable bonds, or like securities. It does not seem to me in the interest of commerce to compel carriers either to so increase the rates of compensation or to confine them to the selection of agents as banks and trust companies are confined." 251. The carrier is not estopped to deny that he has re- ceived the goods specified in the bill of lading, when this has been issued by a common agent, such as a station agent, freight receiver, or conductor of a railroad company, without actually receiving the goods, and has passed into the hands of an innocent indorsee for value. Such agent in issuing a fictitious bill of lad- ing is not acting within the scope of his authority, or even within the apparent scope of his authority. He is authorized to receive merchandise for transportation, and to give a receipt for it and a contract for its transportation. " It was not within the apparent scope of this authority to sign and issue documents for the mere purpose of having them attached to drafts or otherwise pledged as collateral security irrespective of the actual possession of goods to be carried. It may well be doubted whether the direc- tory itself, or the body of stockholders even, could authorize the company to issue bills of lading without the merchandise in hand to be used for any purpose. The charter does not authorize such a business, and the company is not engaged in it. Therefore it seems to me plain that the agent's authority, actual and apparent, was limited to issuing bills of lading on goods in hand, and all else was outside the agency, unless we are to treat these docu- ments as against the carrier just as if they were as negotiable in 190 HOW FAR BINDING UPON THE CARRIER. [§ 252. this respect as bills and notes, which we have seen we are not authorized to do." ^ 252. In New York, however, an exceptional doctrine pre- vails, that the carrier is estopped to claim that the bill of lading does not cover the goods described in it. A bond fide indorsee of a bill of lading, who has advanced his money upon it, is entitled to rely upon the quantity and kind of goods acknowl- edged therein, and he may compel the carrier to account for that quantity, whether it was actually shipped or not. The carrier is estopped by signing the bill from settling up his own want of care at the expense of the indorsee who has thus been induced to give credit to the shipment.^ '■' There is an established dis- tinction in favor of a bond fide indorsee, grounded upon the doc- trine of estoppel. By signing the bill of lading, acknowledging the receipt of a given quantity of merchandise, the master has enabled his shipper to go into the market and obtain money on the credit, of the shipment, and cannot be permitted, as against a person so advancing, to set up his own or the master's want of care at the expense of the indorsee. This results from the qualified negotiability of these instruments."^ A railroad com- pany which has issued a bill of lading for a certain number of barrels of eggs, when in fact the barrels contain nothing but sawdust, is liable to an indorsee of the bill of lading who has adv-anced money thereon, for the injury sustained through the falsity of the bill of lading. The carrier can always protect himself either by inspecting the packages received so as to know what they contain, or else by issuing bills of lading in such form that an indorsee would not be misled in regard to the quantity or kind of goods thereby covered. If he chooses to issue receipts for barrels or packages containing . specified articles, it is not enough to deliver to a bond fide indorsee who has advanced money on the faith of the bill of lading, packages containing articles altogether different and of no value.^ But the better doctrine is that the carrier is not estopped by ^ Robinson v. Memphis & Charles- » Meyer v. Peck, 28 N. Y. 590. ton R. R. Co. 9 Fed. Rep. 129, 137, < Meyer v. Peck, 28 N. Y. 590, 598, per Hammond, .J. per Denio, C. J. 2 Armour v. Michigan Cent. R. R. '' Miller v. Hannibal & St. Ju. R. R. 65N. Y. 111. 191 §§ 253, 254.] PLEDGES OF BILLS OF LADING. any error or misstatement in the bill of lading unless this was within his knowledge or should have been within his knowledge.^ 253. A bill of lading may be operative between the pledgor and pledgee, though not binding upon the carrier. Thus, if a bill of lading is not binding upon the carrier because the goods are not in fact delivered to the carrier, it does not follow that the bill of lading may not operate as a valid transfer as between the person to whom it is issued and his pledgor, if the goods are at the time in the hands of a third person. Moreover a bill of lading may be operative between the owner of the goods and his pledgee before the goods are actually received by the carrier. Thus, where a master of a vessel issued a bill of lading of cotton upon receiving an order therefor upon a cotton press which was duly accepted, and the shipper obtained advances upon a draft with the bill of lading annexed, it was held that the bill of lad- ing was effectual to pass the property to the pledgee, as against a creditor of the pledgor who levied an execution upon cotton after such pledge, but before the cotton was delivered from the press to the vessel.^ 254. Possession of goods obtained under a spurious bill of lading will not avail against a pledgee of the true bill of lading. The general owner of goods having obtained advances upon the security of bills of lading representing the goods, has no right to the possession, disposal, or control of the goods, and any possession obtained, or dominion exercised by him, without the pledgee's assent, is tortious and confers no title. Thus gen- uine bills of lading having been obtained at Chicago, of wheat shipped on board a propeller for Buffalo, and drafts having been discounted on the security of such bills of lading, the general Co. 24 HuQ (N. Y.), 607 ; 5. C. 12 N. shipped, added that " in saying this Y. Weekly Dig. 272. we do not mean that the goods must ^ See this subject in Chapter vii. have been actually placed on the deck 2 Adoue V. Seeligson, 54 Tex. 593. of the vessel. If they come within In Pollard v. Vinton (U. S. Supreme the control and custody of the olKcers Ct. 1882), 13 Rep. 545, Miller, J., after of the boat for the purpose of ship- stating the general rule that a bill of ment, the contract of carriage has lading is not a contract upon the car- commenced, and the evidence of it rier unless the goods are actually in the form of a bill of lading is bind- ing." 192 WHETHER SECURITY FOR ACCEPTANCE OR PAYMENT. [§ 255. owner afterwards obtained false bills of lading of the wheat as shipped upon certain canal boats at Buffalo, before the wheat had arrived there, although the wheat was afterwards shipped upon the canal boats named in the false bills of lading. Against the latter bills of lading the owner also drew drafts which were paid by the consignees, relying upon the security of these bills. They afterwards obtained possession of the wheat. In an action against them by the holder of the first bill of lading and a draft drawn against it, it was held that the plaintiff was entitled to recover ; that not having clothed the general owner with any authority to dispose of the wheat or to obtain new bills of lading, the latter represented no value, and the plaintiff was not estopped from reclaiming the proper ty.^ IV. Whether Security for Acceptance or Payment. 255. The assignment of a bill of lading drawn to tlie shipper's own order as security for the discount of a draft drawn against it may be regarded as conclusive of the shipper's inten- tion that the property shall not pass to the drawer except upon his payment or acceptance of the draft.^ A bill of lading so drawn shows an intent on the part of the shipper to reserve to himself the dominion over the goods shipped ; and when he as- signs such bill to another as security, his intention is conclusively shown that such assignee shall have a special property in the goods and the full control of them until the draft is accepted or paid ; and it is immaterial whether such assignee holds the bill of lading as security for the payment or acceptance of the draft.^ The in- tention that such assignment shall confer a special property in the goods arises even when the goods have been shipped in a vessel belonging to the person upon whom the draft is drawn.* It is likewise so even if the goods be delivered to the drawer as ^ Marine Bank of Buffalo v. Fiske, Peoi)le's Nat. Bank v. Stewart, 3 Pucs. 71 N. Y. 353. & Bur. (N. B.) 268. ^ Dows V. Nat. Exch. Bank, 91 U. ^ Hathaway v. Haynes, 124 Mass. S. 618; Jenkyns v. Brown, 14 Q. B. 311, 313 ; Security Bank v. Luttgen, 496 ; Mitchell i;. Ede, 11 Ad. & E. N. supra. S. 888 ; Alderman v. Eastern 11. R. * Turner v. Liverpool Docks, 6 Co. 115 Mass. 233; Security Bank v. Exch. 543; Schotsinans v. Ry. Co. L. Luttgen, 29 Minn. 363 ; S. C. 13 N. R. 2 Ch. App. 336; EUershaw v. Mag- W. Rep. 151 ; Mason v. Great West- niac, 6 Exch. 570. ern Ry. Co. 31 U. C. Q. B. 73 ; 13 193 § 256.] PLEDGES OF BILLS OF LADING. a mere warehouseman, and not as a purchaser ; and a subse- quent sale by him to another would confer no title against the holder of the draft or the shipper. 256. A bill of lading is regarded as security for the ac- ceptance of a time draft drawn against it rather than as security for the payment of such draft, in the absence of any express stipulation about it. It was urged in behalf of a bank which discounted certain drafts that the bills of lading were taken as security for the principal obligation, namely, the payment of the draft. But the court replied that this is an assumption of the very thing to be proved ; to wit, that the transfer of the bills of lad- ing was made to secure the payment of the drafts.^ " The opposite of this as we have seen is to be inferred from the bills of lading and the time drafts drawn against the consignments unexplained by express stipulations. The bank, when discounting the drafts, was bound to know that the drawees on their acceptance were entitled to the cotton, and of course to the evidences of title to it. If so they knew that the bills of lading could not be a security for the ultimate payment of the drafts. Payment of the drafts by the drawees was no part of the contract when the discounts were made. The bills of exchange were then incomplete. They needed acceptance. They were discounted in the expectation that they would be accepted and that thus the bank would obtain additional promisors. The whole purpose of the transfers of the bills of lading to the bank may therefore well have been satisfied when the additional names were secured by acceptance, and when the drafts thereby became completed bills of exchange. We have already seen that whether the drafts and accompanying bills of lading evidenced sales on credit on requests for advancements on the cotton consigned, or bailments to be sold on the consign- or's account, the drawees were entitled to the possession of the cotton before they could be required to accept ; and that if they had declined to accept because possession was denied to them concurrently with their acceptance, the effect would have been to discharge the drawers and indorsers of the drafts. The demand of acceptance, coupled with a claim to retain the bills of lading, would have been an insufficient demand. Surely the purpose of putting the bills of lading into the hands of the bank was to 1 Dows V. Nat. Exch. Bank, 91 U. S. 618. 19^ WHETHER SECURITY FOR ACCEPTANCE OR PAYMENT. [§ 257. secure tlie completion of the drafts by obtaining additional names upon them, and not to discharge the drawers and indorsers, leav- ing the bank only a resort to the cotton pledged." 257. A bank or other agent, towhoni a bill of lading with a time draft has been forwarded for collection may surrender it to the consignee upon his acceptance of the draft, if the drawer has not expressly directed that the bill of lading shall not be surrendered till the draft is paid.^ It is immaterial also whether the draft be indorsed " for collection " or not ; for these words simply rebut the inference that the indorsee is the owner of the draft. The agent receiving a time draft accompanied by a bill of lading, by the terms of which the property is deliverable to the consignee, is entitled to infer either that the merchandise specified has been sold on credit, in accordance with the terms of the draft, or that the draft is a request for an advance upon a consignment of goods to be sold on account of the shipper. If the transaction be the former, then the consignee being a pur- chaser, is entitled in the absence of any express arrangement to the contrary, to the possession of the goods on his accepting the bill.^ ^ National Bank of Commerce v. Merchants' Nat. Bank, 91 U. S. 92 ; Lanfear v. Blossman, 1 La. Ann. 148 ; S. C. 14 Hunt's Merchants' Mag. 264; Mears v. Waples, 4 Houst. (Del.) 62; affirming .S'. C. 3 lb. 581 ; Wisconsin M. & F. Ins. Co. V. Bank of British N. A. 21 U. C. Q. B. 284; affirmed 2 U. C, Error & Appeal, 282 ; Goodenough V. City Bank, 10 U. C. C. P. 51 ; Clark V. Bank of Montreal, 13 Grant's (Canada) Ch. 211 ; Wisconsin Marine & F. Ins. Co. V. Bank of British N. A. 21 U. C. Q. B. 284. 2 National Bank of Commerce v. Merchants' National Bank, 91 U. S. 92, per Strong, J. "This would not be doubted if, instead of an acceptance, he had given a promissory note for the goods, payable at the expiration of the stipulated credit. In such case it is clear that the vendor could not retain possession of the subject of the sale, after receiving the note for the price. The idea of a sale on credit is that the vendee is to have the thing sold on his assumption to pay and* be- fore actual payment. The considera- tion of the sale is the note. But an acceptor of a bill of exchange stands in the same position as the maker of a promissory note. If he has purchased on credit and is denied possession until he shall make payment, the transac- tion ceases to be what it was intended, and is converted into a cash sale. Everybody understands that a sale on credit entitles the purchaser to im- mediate possession of the property sold unless there be a special agreement that it may be retained by the vendor; and such is the well-recognized doc- trine of the law. The reason for this is that very often, and with merchants generally, the thing purchased is need- ed to provide means lor the deferred payment of the price. Hence it is justly inferred that the thing is in- 196 § 257.] PLEDGES OF BILLS OF LADING. If on the other hand the inference to be drawn is that advances are requested upon a consignment of the goods, the consequence is the same. In such case it is plain that the acceptance is asked for on the faith of the consignment, and not on the credit of the drawer. To refuse the consignee the bill of lading would be to withhold from him the very security upon which he is asked to accept the draft. An agent for collection cannot be permitted, by declining to surrender the bill of lading on the acceptance of the draft, to disappoint the obvious intentions of the parties, and deny to the acceptor a substantial right which is assured to him by his contract. This in brief is the reasoning of the Supreme Court of the United States in the leading case upon this subject. This reason- ing is supported by other rational considerations. " In the ab- sence of special agreement what is the consideration for accept- tended to pass at once within the con- trol of the purchaser. It is admitted that a difi'erent arrangement may be stipulated for. Even in a credit sale, it may be agreed by the parties that the vendor shall retain the subject un- til the expiration of the credit, as a se- curity for the payment of the sum stipulated, but if so, the agreement is special, something superadded to an or- dinai'y contract of sale on credit, the ex- istence of which is not to be presumed. Therefore in a case where the drawing of a time draft against a consignment raises the implication that the goods consigned have been sold on credit, the agent to whom the draft to be ac- cepted and the bill of lading to be delivered have been intrusted cannot reasonably be required to know, with- out instruction, that the transaction is not what it purports to be. He has no right to assume and act on the assumption that the vendee's term of credit must expire before he can have the goods, and that he is bound to accept the draft, thus making himself absolutely responsible for the sum named therein, and relying upon the ment 196 future time. This would be treating a sale on credit as a mere execu- tory contract to sell at a subsequent date." That the drawee in such a case is not bound to accept the draft except upon surrender to him of the bill of lading, see also dicta in Shep- herd V. Harrison, L. R. 4 Q. B. 493, per Lord Cockburn ; S. C. L. R. 5 H. L. 116, 133, per Lord Cairns; Coventry V. Gladstone, L. R. 4 Eq. 493; Gurney V. Behrend, 3 El. & Bl. 622 ; Schu- chardt v. Hall, 36 Md. 590; Marine Bank v. Wright, 48 N. Y. 1 ; Cayuga Bank v. Daniels, 47 N. Y. 631 ; Se- curity Bank v. Luttgen, 29 Minn. 363; S. C. 13 N. W. Rep. 151. In National Bank of Commerce v. Mer- chants' National Bank, supra, after a review of the authorities, Mr. Justice Strong said: " We feel justified in say- ing, that in our opinion, no respectable case can be found in which it lias been decided that Avhen a time draft has been drawn against a consignment to order, and has been forwarded to an agent for collection with the bill of lading attached, without any further instructions, the agent is not justified in delivering over the bill of lading on the acceptance of the draft." WHETHER SECURITY FOR ACCEPTANCE OR PAYMENT. [§ 258. ance of a time di-aft drawn against merchandise consigned? Is it the merchandise? or is it the promise of the consignor to deliver ? If the latter the consignor may be wholly irresponsible. If the bill of lading be to his order, he may, after acceptance of the draft, indorse it to a stranger, and thus wholly withdraw the goods from any possibility of their ever coming to the hands of the acceptor. Is then the acceptance a mere purchase of the promise of the drawer? If so, why are the goods forwarded before the time designated for payment ? They are as much, after shipment, under the control of the drawer as they were before. Why incur the expense of storage and of insurance? And if the draft with the goods or with the bill of lading be sent to a bank for collection, as in the case before us, can it be incum- bent upon the bank to take and maintain custody of the prop- erty sent during the interval between the acceptance and the time fixed for payment? Meanwhile, though it be a twelve- month, and no matter what the fluctuations in the market value of the goods may be, are the goods to be withheld from sale or use ? Is the drawee to run the risk of falling prices, with no ability to sell till the draft is due ? If the consignment be of perishable articles — such as peaches, fish, butter, eggs, &c., — are they to remain in a warehouse until the term of credit shall expire ? And who is to pay the warehouse charges ? Certainly not the drawees. If they are to be paid by the vendor, or one who has succeeded to the place of the vendor by the indorsement of the draft and bill of lading, he fails to obtain the price for which the goods were sold." ^ 258. But of course it may be expressly agreed that the bill of lading shall secure the payment of a time draft rather than the acceptance of it. If the holder of a bill of lading as security for a time draft drawn against it be expressly authorized to hold it until the draft be paid, he is, of course, under no legal obligation to surrender the security upon the acceptance of the draft, and to trust to the personal liability of the acceptors for payment ; and the drawer in such case is not entitled to require a formal presentment of the bill of exchange for acceptance, and notice of its non-acceptance.^ * National Bank of Commerce v. PeopUi's Nat. Bank v. Stewart, 3 Pugs- Mercliants' Nat. Bank, 91 U. S. '.)2, 9 7. ley & Bur. (N. J?.) 208. 2 ScLuchardt v. Hall, 30 jNM. .090 ; 197 § 259.] PLEDGES OF BILLS OF LADING. A custom of trade not to deliver the bill of lading till pay- ment of the acceptance, is exceptional.^ But an ap;ent receiving a time draft and a bill of lading attached with instructions to hold the goods until payment, has no power prior to such pay- ment, to make a delivery of the goods to the consignee which will divest the ownership of his principal.^ Thus if one who had discounted a draft drawn against a bill of lading of wheat, for- ward the draft with the bill of lading attached, to an agent, with instructions by special indorsement and by letter, to hold the wheat until payment of the draft, the agent has no power prior to such payment, to make a delivery which will divest the owner- ship of his principal.^ 259. Parol evidence is admissible of an agreement made between a shipper and a pledgee of a time draft with a bill of lading attached, that the bill of lading should not be delivered until the draft should be paid. The indorsement and delivery of the bill of lading do not constitute a written contract having a fixed definite meaning in the law presumably complete in itself, and of a nature to exclude from consideration all express parol agreements as to the conditions annexed to the transfer. The indorsement and delivery of a bill of lading have no such fixed legal effect as flows from the indorsement and delivery of nego- tiable paper, but operate only as a delivery of the merchandise re- presented in the bill of lading.* If, therefore, a merchant ships goods and takes a bill of lading to his own order, and drawing a bill of exchange payable thirty days after sight, attaches it to the bill of lading and obtains a discount of it at a bank, the transaction legally interpreted does not import a sale of the goods upon credit, or determine that the drawer is entitled to the bill of lading upon his acceptance of the draft without pay- ment ; and if the bank surrenders the bill of lading to the con- signee upon his acceptance of the draft, and the latter becomes insolvent without paying the draft, the bank must bear the loss^ and cannot recover of the drawer the amount of the draft.^ 1 Gurneyr. Bebrend,3El. &B1.622, & Bl. 622, 632; Pease v. Gloahec, L. 629; Coventry v. Gladstone, L. R. 4 R. 1 P. C. 219, 228. Eq. 493; ^. C. 6 lb. 44. » Dows v. Nat. Exch. Bank, supra. 2 Dows V. Nat. Exch. Bank, 91 U. * Security Bank v. Luttgen, 29 S. 618 ; StoUenwerck v. Tbacher, 115 Minn. 363; S. C. 13 N. W. Rep. 151. Mass. 224 ; Gurney v. Behrend, 3 El. ^ Security Bank v. Luttgen, supra. 198 HOW BILLS OF LADING MAY BE PLEDGED. [§§ 260, 261. 260. The title of one who holds a bill of lading for a draft upon the consignee is subject to the condition that it shall be divested upon the consignee's acceptance or payment of the draft, when the title to the property vests in the latter. Thus, if the draft be a time draft, so that the consignee is entitled to the goods upon acceptance of the draft, the title passes to him upon his acceptance, and the security of the holder of the draft is transferred to the personal liability of the consignee as acceptor ; but if he refuses to accept, the title continues unimpaired in the holder of the draft.^ On the other hand, if the holder of the draft is entitled to retain the bill of lading until the draft is paid, his right of property and of possession passes to the con- signee only upon the condition of his paying the bill of exchange.^ " It thus appears to be established as a correct rule that a person purchasing a draft drawn by the shipper of the goods with a bill of lading accompanying it, has a special property in the goods covered by the bill of lading. Usually in the case of a time draft this special property vests in the purchaser of the draft as secu- rity for its acceptance. It may be, if so agreed between the shipper and the purchaser of the draft, that the purchaser will have a right to retain the bill of lading, and thus retain his special property in the goods shipped, not only for the acceptance but for the payment of the draft.^ V. Hoio Bills of Lading may he Pledged. 261. A bill of lading drawn to the order of the con- signor is properly assigned by his indorsement. His pledge of it in this way passes to the assignee the title to the goods it represents.* But a mere indorsement of it, without a delivery, does not transfer the property in the goods.^ The consignor having indorsed and delivered the bill of lading, 1 Marine Bank v. Wright, 48 N. ^ Dodge v. Meyer, 10 Pac. Coast Y. 1; Cayuga Bank v. Daniels, 47 L. J. 169, per Thornton, J. N. Y. 631; First Nat. Bank v. * Tilden y. Minor, 45 Vt. 196 ; Hies- Crocker, 111 Mass. 163; Allen v. kell v. Farmers' & Mechanics' Nat. Williams, 12 Pick. (Mass.) 297; Petitt Bank, 89 Pa. St. 155; Robinson v. V. First Nat. Bank, 4 Bush (Ky.), Stuart, 68 Me. 61 ; Winslow v. Nor- 334. ton, 29 Me. 419. 2 Jenkyns v. Brown, 14 Q. B. 496; ^ Muffin gton v. Curtis, 15 Mass. Hieskell v. Farmers' & Mechanics' 528. Nat. Bank, 89 Pa. St. 155. 199 § 262.] PLEDGES OF BILLS OF LADING. the carrier is bound to deliver the goods to the person holding this evidence of title, and cannot deliver them to any other per- son without violating his contract and making himself respon- sible for the loss that the holder of the bill of lading may thereby suffer.^ A bill of lading with the name of a particular consignee, or bearer, may be transferred by delivery merely,^ unless there be a statute imperatively requiring indorsement. Such an indorsement and delivery transfers a special property in the goods to the holder of the draft drawn against them, both as against the consignor, and as against any creditor of his.'^ 262. A bill of lading drawn to the shipper's order may be transferred by delivery merely without any indorsement so as to transfer the property represented thereby.^ " It is well settled that property or goods shipped by a bill of lading drawn to oriler, may be transferred by delivery to a third person with- out any indorsement. Bills of lading are choses in action, and no rule is better established than that instruments of this char- acter may be transferred for a valuable consideration by delivery only. Although the plaintiff was not a party to the bill of lad- ing, it cannot affect his right to the contract contained in the same, if he acquired it lawfully. ^ Such a transfer does not, like the delivery of an unindorsed note, transfer a merely equitable title ; but it gives as valid and effectual a title to the goods rep- resented by the bill of lading, as could be obtained by an actual delivery of the goods themselves, if there was an intent to pass the title by such delivery .^ Such intent may be shown by the 1 Forbes v. Boston & Lowell R. R. ^ Merchants' Bank v. Union R. R. Co. 133 Mass. 154. & Trans. Co. 69 N.Y. 373, per Miller, 2 Allen r. Williams, 12 Pick. (Mass.) J.: and see Gibson v. Stevens, 8 How. 297. 384, 400. 8 Hathaway v. Haynes, 124 Mass. ^ Becker v. Hallgarten, 86 N. Y. 811; Forbes r. Boston & Lowell R. R. 167, 175; Glidden v. Lucas, 7 Cal. 26; Co. 133 Mass. 154. Allen v. Williams, 12 Pick. Mass. 297, * Bank of Rochester y. Jones, 4 N. 301, per Shaw, C, J.; Holmes v. Y. 497 ; Merchants' Bank v. Union R. Bailey, 92 Pa. St. 57; Holmes v. Ger- R. & Transportation Co. 69 N. Y. 373; man Security Bank, 87 Pa. St. 525 ; Marine Bank v. Wright, 46 Barb. City Bank v. Rome, W. & O. R. R. Co. (N. Y.) 45; Michigan Central R. R. 44N. Y. 136; St. Louis National Bank Co. V. Phillips, 60 111. 190; Dav- t;. Ross, 9 Mo. App. 399 ; Petitt i;. First enport Bank v. Homeyer, 45 Mo. Nat. Bank, 4 Bush (Ky.), 334; Dodge 145. V. Meyer (Cal. 1882), 10 Pac. Coast 200 HOW BILLS OF LADING MAY BE PLEDGED. [§ 263. circumstances attending the transaction.^ The fact that the bill of lading is delivered by the shipper as security to one who dis- counts a draft drawn against it, is well nigh conclusive of the shipper's intention to transfer the property in the goods.^ In a case where a bank discounted a draft on the security of a bill of lading, which was delivered to it without indorsement, and the consignee refused to pay the draft, but sold the property and ap- plied the proceeds to an old debt due him from the consignor, it was held that the bill of lading was evidence of an appropria- tion of the proceeds of sale of the property contained in the bill of lading, whether it was indorsed or not ; and that the consignee having notice of the draft and bill of lading before selling the goods, was informed of the appropriation of the proceeds of sale, and could not apply them to an old debt due to himself.^ In a recent case in Kentuckj^ a bank had discounted drafts drawn against bills of lading which were deposited with the bank without indorsement or other writing, and without actual delivery of the cotton represented by the bills of lading. The cotton was subsequently attached while in transitu by creditors of the ship- per. It was held that the bank had a lien upon the cotton para- mount to that created by the levy of the attachment.* 263. An informal bill of lading or one not drawn to order or bearer, may be effectually pledged by delivery without indorsement. A delivery of any documentary evidence of prop- erty with an intent that the transferee shall hold the property in pledge, is a good symbolical delivery of it, so as to vest a special property in the transferee.^ The policy of the law in this L. J. 169; Bank of Rochester r. Jones, ^ Holmes v. German Security Bank, 4 N. Y. 497 ; Michigan Cent, R. R. Co. 87 Pa. St. 525 ; approved and followed V. Phillips, 60 111. 190; Peters v. El- in Holmes v. Bailey, 92 Pa. St. 57. liott, 78 III. 321, 326; Davenport Bank * Petjtt ^^ Y\r&t Nat. Bank, 4 Bush V. Homeyer, 45 Mo. 145 ; Skilling v. (Ky.), 334 ; and see to like effect, Bollman, 6 Mo. App. 76. See, how- Skilling v. Bollman, 6 Mo. App. 76. ever, Bissell v. Steel, 67 Pa. St. 443. « Gibson v. Stevens, 8 How. 384 ; 1 Merchants' Bank v. Union R. R. First Nat. Bank v. Crocker, 1 1 1 Mass. & Transportation Co. 69 N. Y. 373. 163, 169. The court in the latter case ^ Dews V. Nat. Exch. Bank, 91 U. say: " We have then in this case an S. 618; Cayuga Bank v. Daniels, intent of the general owners of the flour 47 N. Y. 631 ; Merchants' Bank y. to make use of it as a security for an Union R. R. & Trans. Co. 69 N. Y. advance of money from the plaintifTs; 373. a delivery of the bill of lading in pur- 201 § 263.] PLEDGES OF BILLS OF LADING. matter was well expressed by Chief Justice Eyre in the last centur}^ ; and this policy certainly should not be less liberal now. He says : ^ " I see no reason why we should not expound the doe- trine of transfer very largely upon the agreement of the parties, and upon their intent, to carry the substance of that agreement into execution." In an Illinois case the railroad shipping receipt delivered in pledge, simply acknowledged the receipt of certain goods from the consignor, without naming any consignee, and stated that " this receipt is not transferable." It was contended that the de- livery of this receipt without indorsement did not pass any right to the goods in course of transportation, as against a creditor of the consignor who attached the goods in the hands of the railroad company. But the court held that such delivei-y of the receipt vested in the pledgee a special property in the goods sufficient to maintain replevin against the officer who made the attachment. As to the provision that the receipt was not transferable, the court say : ^ "It is enough to say, that, whatever the reason of this provision, it must have been, for some purpose, in the inter- est of the railroad company. As the company intended and undertook to carry and deliver the flour to the consignees, the delivery of the shipping receipt to them, or for their benefit, was only to the strengthening of their right to have the delivery of the flour made to them ; and it is not perceived how plaintiffs', the consignees', assertion of right to the property, through a de- livery of the receipt, should interfere with any interest of the railroad company, or any object of this provision in the shipping receipt. We do not conceive that it has any significance in its bearing upon the rights of the parties in this suit." In a Massachusetts case it was held that the delivery of a car- rier's receipt not negotiable in form, as security for advances, with the intention to transfer the property in the goods, is a suance of that intent ; and a valuable gage, there was a sufficient delivery to and executed consideration in the dis- give to the plaintiffs a special prop- counting of the draft. The fact that erty, which they could enforce by suit the goods were in the custody of the against any wrongdoer." consignees would not prevent this ar- ^ Haille v. Smith, 1 B. & P, 563, rangement from having the effect to 570. transfer the title of consignors to the ^ Peters v. Elliott, 78 111. 321, 324, plaintiffs. Whether it should be re- per Sheldon, J. garded as a sale, a pledge or a mort- 202 HOW BILLS OF LADING MAY BE PLEDGED. [§ 263. symbolical delivery of the goods themselves, and vests in the per- son making the advance a special property sufficient to enable him to maintain replevin against an officer who afterwards at- taches them as the property of tlie general owner.^ Mr. Justice Ames, delivering the opinion of the court, said : " It is true that a receipt of this kind does not purport on its face to have the quasi negotiable character which is sometimes said to belong to bills of lading in the ordinary form ; neither does it purport in terms to be good to the bearer. But independently of any in- 1 First Nat. Bank of Green Bay v. Dearborn, 115 Mass. 219, 222. This case is referred to in the subsequent case of Hallgarten v. Oldham, 134 Mass. (not printed), which arose upon a pledge of a warehouse receipt not drawn to order or bearer, which was transferred ia pledge by indorsement and delivery. Before any notice of the transfer had been given to the warehouseman, the goods were at- tached as the property of the general owner. It was held that enough had not been done to give the pledgee a good title as against the attaching creditor. Holmes, J., referring to National Bank of Green Bay v. Dear- born, said : " In that case the plain- tiff discounted Parks & Co.'s draff on Harvey, Scudder & Co. against a railroad receipt, of which the follow- ing were the material words: "Re- ceived from R. G. Parks & Co. one hundred barrels of flour consigned to Harvey, Scudder & Co., Boston," this was delivered to the plaintiff in Wis- consin on the understanding that the property was thereby transferred as security for the advances. Scudder & Co. declined to accept the drafts, and the goods were attached by the de- fendants. The plaintiff brought re- plevin, and was held entitled to re- cover. It will be observed that the document did not run to order, and was not indorsed, so that it could not be argued that the railroad had at- torned in advance, and there was no notice to the railroad company, so that it had not made itself the plaintiff's bailee subsequently if ordinary prin- ciples were to be applied. It was said, however, that the carrier became the plaintiff's bailee from the time its re- ceipt was delivered. A carrier does stand differently from other bailees in one respect. He has no delectus per- sonarum, but is bound to carry for any one who takes proper steps to make him do so. There is, too, the further circumstance that the usual mode of shipping grain is to draw against it and to get a bank to discount the draft. But it may be doubted whether the suggestion was warranted that a carrier would not ordinarily give up the goods except upon a production and surrender of the receipt. Forbes v. Boston & Lowell R. R. 133 Mass. 154, 158. And so far as the language might seem to imply that the mere passing of the property as between the parties made the carrier bailee for the plaintiff by the general law of bailment, is too broad. But whatever the scope of National Bank of Green Bay V. Dearborn, we cannot apply it as a precedent in the present case, so long as Lanfear v. Sumner, 17 Mass. 110 stands." For the case of Hallgarten v. Old- ham, see §§ 298-302. It seems hardly probable that the narrow doctrine of delivery laid down in Lanfear v. Sum- ner, and followed in IIall.;arten v. Old- ham, will be adopted elsewhere. 203 §§ 264, 265.] PLEDGES OF BILLS OF LADING. dorsement, or formal transfer in writing, the possession and pro- duction of it would be evidence indicating to the carrier that the bank was entitled to demand the propertj^ and that he would be justified in delivering it to them. There are cases in which the delivery of a receipt of this nature, though not indorsed or for- mally transferred, yet intended as a transfer, has been held to be a good symbolical delivery of the property described in it." 264. A third person by paying a draft drawn against a bill of lading, and receiving the latter as security, becomes vested with the title to the goods represented thereby,^ though the bill of lading be drawn to the consignee's own order, and it be de- livered without indorsement to the person paying tlie draft. And if the carrier delivers the goods without his order to the con- signee upon whom the draft was drawn, the delivery is wrongful, and the carrier becomes liable for the goods to the holder of the bill of lading.2 265. One who discounts a draft on the faith of a bill of lading delivered with the draft has such a property in the goods that he can maintain replevin against an officer who afterwards attaches them upon a suit against the general owner,^ or against any other person who holds the goods. It is not necessary for this purpose that the plaintiff should be the abso- lute owner of the property ; it is enough that he has a right of property and of possession to secure payment of the draft.* The right of the shipper is divested by his pledge of the prop- erty by delivery of the symbol of it, leaving him only a right in the surplus money which may remain after payment of the draft.6 1 Tiedeman v. Knox, 53 Md. 612. 4 Hieskell v. Farmers' & Mechanics' 2 Joslyn V. Grand Trunk Ry. Co. Nat. Bank, 89 Pa. St. 155. 51 Vt. 92; Newcomb v. Boston & 5 De Wolf v. Gardner, 12 Gush. Lowell R. R. Co. 115 Mass. 230. (Mass.) 19, 24; National Bank of 8 First National Bank of Green Bay Chicago v. Bayley, 115 Mass. 228; V.Dearborn, 115 Mass. 219; National Dovvs v. Nat. Exch. Bank, 91 U. S. Bank of Chicago v. Bayley, 115 Mass. 618; National Bank r. Merchants' 228; Gibson v. Stevens, 8 How. 384; Bank, 91 U. S. 92, 95; Lanfear v. Peters v. Elliott, 78 111. 321. See, Blossman, 1 La. Ann. 153. however, Bissell v. Steel, 67 Pa. St. 443. 204 pledgee's rights as against the consignor. [§ 266. VI. A Pledgee's Rights as against the Consignor. 266. A bon^ fide holder of a bill of lading put into circula- tion with the consent of the shipper has a title to the goods freed from the equitable rights of the unpaid shipper to stop the goods in transitu.^ The vendor's right of stoppage in transitu is defeated by his indorsement and delivery of a bill of lading of the goods to a bond fide indorsee for a valuable consideration, such as a loan of money, without notice of facts on which such right would otherwise exist ; for such indorsement and delivery of the bill of lading passes the property to the lender.^ Thus a purchaser of a shipment of nuts, to be paid for at three months, indorsed the bills of lading as security for a loan made in good faith upon the security. At the time of the application for the loan the bor- rower was already indebted to the lender, who said he would make the further advance desired, but the borrower must first cover his account. The borrower promised to do this, though he did not name any particular securities, and the lender at once made the further advance. On the subsequent arrival of the ship with the nuts the vendor sought to stop them in transitu, the purchaser having stopped payment ; but it was held that the pledgee had a good title as against the vendor.^ This is the general rule, even when the consideration for the indorsement of the bill of lading is an antecedent debt, and in no part arose at the time the bill of lading was handed to the transferee by the lawful holder.* 1 Lickbarrow v. Mason, 2 T. R. 63; judgment of the court, said on this S. C. 1 H. Bl. 357, 362; 6 East, 21 ; point: " Practically, such a past con- Barber V. Meyerstein, L. R. 4 H. L. sideration as is now under discussion 317; The Mary Ann Guest, Olcott, has always a present operation. It 498; Dows v. Greene, 24 N. Y. 638; stays the hand of the creditor. If Dows V. Rush, 28 Barb. (N. Y). 157 ; the plaintiff had agreed on the day Kawls V. Deshler, 1 Sheldon (N. Y.), the bill of lading was handed to him 48. to give a week's time, there would 2 Becker v. Ilallgarten, 86 N. Y. have been a present consideration. Is 167. it necessary there should be a formal 8 Leask v. Scott, 2 Q. B. D. 376. agreement in lieu of that which, * Leask v. Scott, supra, dissenting whether it would support legal pro- from Rodger v. Comptoir d'Escompte ceedings, as was contended by the de Paris, L. R. 2 P. C. 393. plaintiff, or not, was, no douljt, such Bramwell, L. J., in delivering the an understanding that, if the phiintifi' 206 §§ 267, 268.] PLEDGES OF BILLS OF LADING. 267. The vendor's right of stoppage in transitu is not discharged absolutely by his indorsement of the bill of lading by way of security or pledge, but that right must be exercised subject to the charge in favor of such indorsee, who mu&t be paid off before the vendor can assume full control of the goods. After the pledgee has been paid, the vendor stands in exactly the same position as to everybody else, as if there had been no indorsement of the bill of lading by way of security or pledge. The vendor's right of stoppage is not defeated by the pledging of the bill of lading, except as against the pledgee.^ VII. A Pledgee's Rights as against the Consignee. 268. A shipper of goods does not lose his title to them by inserting the name of the consignee in a bill of lading of them.- If a time draft be drawn against the bill of lading the consignee acquires title to the goods only in case he accepts the draft. In the mean time if the draft be discounted on security of the bill of lading the title to the goods vests in the holder of the draft. The assignee of the bill of lading obtains a title to the goods not only as against the consignor but as against the con- signee, although the former is indebted to the latter in a sum greater than the value of the goods.^ Thus the owner of a quantity of flour having consigned it to his factor in another city had taken proceedings against the that a bond fide assignee of a bill of borrower the day after he had received lading for a valuable consideration, the security, he would have committed and without notice that the goods a breach of faith? ... If the bor- are unpaid for, and the purchaser rower, in this particular case, had said insolvent, is protected in his title this bill of lading was coming forward, against the seller's right of stoppage and he would hand it to the plaintiff, in transitu. then value would have been obtained 2 Q.^^k of Rochester v. Jones. 4 N. by means of the bill of lading; so, if Y. 497; Michigan Cent. li. R. Co. v. he had said generally that he had Phillips, 60 111. 190; Taylor v. Tur- securities coming forward, and would ner, 87 111. 296; First Nat. Bank v. deposit them; and what is the differ- Crocker, 111 Mass. 163 ; Pratt v. Park- ence between a promise with such a man, 24 Pick. (Mass.) 42 ; Valle v. statement and a promise without it ? " Cerre, 36 Mo. 575 ; Jenkyns v. Brown, 1 Kemp V. Falk, L. R. 7 App. Cas. 14 Q. B. 496. 573; affirming /» re Westzinihus, 5 ^ Bank oi liochesterv. Jones, supra ; B. & Ad. 817; Spalding v. Ruding, 6 People's Nat. Bank v. Stewart, 3 Puag. ■Beav. 376. & Bur. (N. B.) 268. In Georgia it is provided by statute 206 pledgee's rights as against the consignee. [§§ 269, 270. drew upon the factor against the flour and obtained a discount of the draft upon a delivery of the bill of lading as security. The consignor being already indebted to the factor for previous con- signments, the latter refused to accept the draft ; but detached and retained the bill of lading, and thereby obtained possession of the flour. In a suit against him by the holder of the draft, he was held liable for a conversion of the flour. He could acquire title to the flour only upon the condition of accepting the draft, and he became a wrong doer by taking possession of the flour with- out such acceptance.^ Upon the delivery of the bill of lading to the consignee, the title passes to him from the consignor, so that he has no control of the property and his creditors cannot seize or attach it.^ 269. If a consignee obtains the goods from the carrier ■without accepting drafts secured by the bills of lading, and sells the goods, he is liable to the holder of the drafts for the pro- ceeds of the sale. He obtains no title or authority under a bill of lading if he refuses to comply with the terms upon which he is made consignee, namely, the acceptance of payment of the drafts drawn against it. The title to the property and the right of possession are both in the holder of the drafts.^ Even if a bill of lading be sent directly to the consignee with a draft upon him attached, or inclosed in the same letter,* the consignee cannot retain the bill of lading and under it take possession of the goods without accepting the draft.^ If the con- signee retains the bill of lading without accepting the draft he acquires no right of property.^ 270. A pledgee may even deliver possession of the goods to the consignee upon whom the draft secured is drawn with- out losing his security, if such delivery be made by a special indorsement to the effect that the goods are pledged for the pay- ment of the draft, and are placed in the consignee's custody " in ^ Bank of Rochester v. Jones, 4 N. * Shepherd v. Harrison, L. K. 5 II. Y. 497. L. UG, 123. 2 Flash V. Schwabacker, 32 La. 6 i^in-piiL-iJ t'. Harrison, .vi/y^ra; Han- Ann. 35G. CO cle Lima v. An^'lo-Peruvian I{;ink, » Allen f.Williams, 12 Pick. (Mass.) 8 Ch. D. 160, 171, per V. C. -Malins. 297. ® Shepherd v. Harrison, suj/ni. 207 § 271.] PLEDGES OF BILLS OF LADING. trust for this purpose, and is not to be diverted to any other use until the draft is paid." In such a case the property pledged and delivered was a boat-load of wheat, which on arrival the con- signee placed in a warehouse, and afterwards sold and delivered to the purchaser by an order on the warehouseman. The pur- chaser obtained advances upon the wheat from the warehouse- man, who had seen a copy of the bill of lading and of the indorsement thereon. In an action by the pledgee against the warehouseman for a conversion of the wheat it was held that such delivery of the bill of lading did not vest in the consignee a title to the wheat or confer upon him authority to sell it ; but simply vested him with the possession to hold in trust for the pledgee, whose title could not be divested by any act of the con- signee until he had paid his acceptance.^ 271. When a bill of lading has been taken by the con- signor, making the goods deliverable to his order, or to some person designated by him, the inference is that it was not intended that the property should pass to the consignee, except by sub- sequent order of the person holding the bill. Such intention is almost conclusive, although when there are circumstances indi- cating an intent to pass the ownership immediatel}'^, notwith- standing the bill of lading, or, in other words, where there is anything to rebut the effect of the bill, it is a question for the jury whether the property passed.^ If, however, there are no circumstances to rebut the intent to retain the ownership ex- hibited in the bills of lading, and confirmed by the indorsements on the bills, there is no occasion to submit the question to a jury whether there was a change of ownership. A bank discounted a draft drawn upon the consignee of a quantity of turpentine and rosin, bills of lading of which were delivered to the bank as security. The bank forwarded the draft to their agent, with instructions not to deliver the bill of lading until the draft was paid. The consignee accepted the draft, but did not pay it, and it was retained by the agents of the bank. The master of the vessel, however, delivered the goods to the consignee, without 1 Farmers' & Mechanics' Nat. Bank & Mechanics' Nat. Bank v. Atkinson, V. Hazeltine, 78 N. Y. 104; following 74 N. Y. 587. Farmers' & Mechanics' Nat. Bank v. ^ Dovvs v. Nat. Exchange Bank, 91 Logan, 74 N. Y. 568; and Farmers' U. S. 618, per Strong, J.; Ogg v. Shuter, L. R. 10 C. P. 159. 208 pledgee's rights as against the consignee. [§ 271. his producing the bill of lading. Subsequently the consignee delivered part of the goods to an auctioneer, who made advances upon them without notice that the consignee had not possession of the bill of lading. The auctioneer sold these goods at public auction, and, after deducting their advances and charges, paid the balance to the consignee. After this the bank demanded the goods of the auctioneer, and brought an action of trover for their conversion. It was held that the bank was entitled to recover.^ A ship which has issued a bill of lading to the consignor's order is bound to deliver the goods to such order, and may be libelled for a misdelivery. Thus, a member of a New York firm having purchased certain cotton, put it on board a steamer for New York, and received a bill of lading Avhich he indorsed to a bank as collateral security for drafts drawn upon the firm and discounted by the bank. Upon the arrival of the vessel in New York the firm demanded the cotton, and obtained it without pro- ducing the bill of lading, which was still held by the bank. The drafts not being paid at maturity, the bank, through its cashier, libelled the steamer in admiralty, and obtained a decree, which was affirmed by the Supreme Court.^ Mr. Justice Strong said : " By issuing bills of lading for the cotton,' stipulating for a delivery to order, the ship became bound to deliver it to no one who had not the order of the shipper, and this obligation was disregarded instantly on the arrival of the ship. And it is no excuse for a delivery to the wrong persons that the indorsee of the bills of lading was unknown, if, indeed, he was, and that notice of the arrival of the cotton could not be given. Diligent inquiry for the consignee, at least, was a duty, and' no inquiry was made. Want of notice is excused when a consignee is un- known, or is absent, or cannot be found, after diligent search. And if, after inquiry, the consignee or the indorsees of a bill of lading for delivery to order cannot be found, the duty of the carrier is to retain the goods until they are claimed, or to store them prudently for, and on account of, the owner. He may thus relieve himself of a carrier's responsibility. He has no right, under any circumstances, to deliver to a stranger." It was claimed that the pledgee delayed in presenting the bills of lading for some weeks until the drafts had fallen due, and had been dis- 1 People's Nat. Bank v. Stewart, 3 ' The Thames, 14 Wall, 98, 107. Pujrs. & Bur. (N. B.) 268. 14 209 §§ 272, 278.] PLEDGES OF BILLS OF LADING. honored. But the court said that this delay could not justify the ship's delivery of the cotton, on the day after its arrival, to persons who had no bill of lading, and no authority whatever to receive it. Had the delay been instrumental in causing the wrongful delivery, a different case might possibly have been pre- sented. But, at most, the laches of the pledgee was mere in- action, and the wrong delivery was in no degree due to it. 272. An agreement between a consignor and consignee that the proceeds of all shipments shall be applied to the payment of previous advances made by the latter, has no effect as against one who has in good faith taken a bill of lading from the consignor, as security for the purchase-money of the goods consigned, or for advances obtained by the consignor upon such goods. Thus, where a purchaser of grain agrees with the seller that the latter shall ship the grain in the purchaser's name to his commission merchant for sale, and the purchaser draws drafts upon the commission merchant for part of the price, and delivers the same with the bills of lading of the grain to the seller, the commission merchant acquires no greater interest in it than his consignor had, although the latter is indebted to him, and has agreed that the proceeds of all consignments should be applied to the consignor's credit on account.^ In such case, the neglect of the original seller of the grain and holder of the bills of lading to notify the consignee of his rights until the latter, having obtained possession of the grain without producing the bills of lading, has sold the grain and applied the proceeds to the consignor's credit on such indebtedness, does not interfere with the seller's right to recover of the consignee in an action for money had and received, the proceeds of the sale of the grain to the extent of the seller's interest in it.''^ VIII. A Pledgee's Rights as Against the Carrier. 273. If the carrier deliver the goods to any other per- son than the indorsee and holder of such bill of lading, he becomes liable to such indorsee and holder for a conversion of the goods, unless he can show some valid excuse. It does not matter that the carrier is ignorant of the fact that the bill of lading is 1 Taylor v. Turner, 87 111. 296. ^ Taylor v. Turner, supra. 210 pledgee's rights as against the carrier. [§ 274. not held by the consignee. One who has discounted a draft drawn against a bill of lading is entitled to rely upon the fact that he holds the bill of lading through the consignor's indorse- ment, and that, according to the ordinary course of business, the goods cannot be obtained from the carrier except upon the sur- render of the bill of lading. If the carrier delivers them to the consignee without requiring him to produce it, relying upon his representation that he is the holder of it, he takes upon himself the risk of the truthfulness of this representation, and if deceived is liable to the indorsee of the bill of lading for the value of the goods.^ 274. Where goods have been transferred from one carrier to another the last carrier is bound to deliver the goods to the holder of the bill of lading issued by the first carrier. This point is illustrated in a recent case in Massachusetts.^ The indorsee of a bill of lading who had taken it as security for advances upon a bill of exchange attached thereto, brought suit against a rail- road company for a conversion of a quantity of grain through a delivery of it to the consignee without requiring him to produce the bill of lading. " By the bill of lading in this case the grain was shipped by a vessel at Chicago, deliverable to the order of the consignor at Buffalo. The defendant contends that, upon the arrival of the vessel at Buffalo the bill of lading became functus officio. If this were so, it would not affect the result be- cause the bill of lading was transferred before the vessel arrived at Buffalo. But it is clear that upon the facts agreed the bill of lading remained as the representative of the property, at least until tlie transit was completed by the arrival at Boston. By the usual course of business in forwarding grain from Chicago to Boston, where the shipment is partly by water and partly by rail, a bill of lading is issued by the vessel at Chicago ; the grain is transferred from the vessel to the cars at some intermediate point, usually at Buffalo, and the railroad company issues a re- 1 Forbes v. Boston and Lowell R. R. 268; The Thames, 14 Wall. 98; Jef- Co., 133 Mass. 154; Newcomb v. Bos- fersonville, Madison & Ind. Ry. Co. v. ton & Lowell R. R. Co, 115 Mass. 230 ; Irvin, 46 Ind. 180 ; McEwen u. Rail- Alderman V. P:a8tern R. R. Co. lb. road Co., 33 Ind. 3G.S. 233; First Nat. Bank i;. Northern R. ^ Forbes v. Fitchburg R. II. Co., R., 58 N. H. 203; People's Nat. Bank 183 Mass. 154, 15D. V. Stewart, 3 Bugs. & Bur. (N. B.) 211 § 275.] PLEDGES OF BILLS OF LADING. ceipt similar in form to those issued in this case. This receipt contains a memorandum like the one in this case, ' Ex. Sch. Gallatin,' which indicates that the grain was received from a vessel arriving at Buffalo from Chicago, and that a bill of lading has been issued by that vessel, and is outstanding. The vessel's bill of lading is regarded as transferring the property, and that alone is used in procuring the goods from the carrier. It is clear that in such cases the parties contemplate a continuous transit from Chicago to Boston, and that the bill of lading is regarded as the representative of the grain during the whole of the transit. So far as any question in this case is concerned, the bill of lading has the same effect as if it had been a bill from Chicago to Bos- ton." The railroad was accordingly held liable for the value of the grain, less the freight, storage and other expenses. 275. But if the bill of lading makes the goods deliverable to the consignee and not to the consignor's order, the carrier may be justified in delivering the goods to the consignee without requiring him to produce the bill of lading.^ The Supreme Court of Massachusetts so decided in a recent case where it was found that it was the custom of the railroads terminating in Boston to deliver to the consignee goods " billed straight," as it is termed, that is, billed to a particular person, not to order, when they were satisfied of the identity of the consignee, without re- quiring the production of the bills of lading, and to rely upon the way bills to determine the consignee and the form of the con- signment. It was declared that the holder of the bill of lading who discounted a bill of exchange attached to it, either knew or ought to have known, of this custom. Although it does not affect the question of the pledgee's title as against the consignee, it qualifies the carrier's duties as to the delivery of the goods. It justified him in delivering the goods to the consignee, at least at any time before notice that the property had been transferred. Under it there was no laches in not calling for the bill of lading, and in thus delivering there was no violation of any of the terms of its contract express or implied. Such delivery, therefore, was ^ Lawrence v. Minturn, 17 How. O'Doughertyy. Railroad Co., 1 Thomp. 100; Sweet v. Barney 23 N. Y. 335; & C. (N. Y.) 477. 212 pledgee's eights as against the carrier. [§§ 276, 277. not a misdelivery whicli would amount to a conversion, and render the carrier liable to the pledgee for the value of the goods.^ A debtor shipped goods to his creditor on account of advances upon them, and sent an invoice of the shipment with a letter stating that the shipment was made on his indebtedness. He took a bill of lading in his own name which was not forwarded to the consignee. It was held under these circumstances that the delivery to the carrier was equivalent to a delivery to the consignee, and although the consignor retained the bill of lading he had no such interest in the goods as could be subjected to at- tachment at the suit of a creditor of his.^ 276. A complete and valid delivery of goods under a bill of lading is only made when they come into the hands of the person who has a right to the possession under it.^ In an English case involving this point Chief Justice Erie said : '^ "If it were established that a bill of lading — one of the most frequent secu- rities for advances amongst mercantile men, — becomes ex- hausted and extinguished and ceases to be a security when the ship has reached her destination, and the goods which it repre- sents have been landed and warehoused, what a wide door would be opened for fraud. It is scarcely possible to exaggerate the evil consequences which would be likely to result from such a doctrine. There is no authority for it." 277. The lien of a pledgee of a bill of lading covers freight paid by him on the goods pledged.^ But as against a carrier who has delivered the goods wrong- fully to the consignee upon his paying the freight, and falsely representing that he held the bill of lading, the pledgee is not entitled to recover the amount paid for freight in addition to the value of the goods. At the time of the conversion, the goods were subject to a lien for the freight. The only interest which the pledgee had in them was their market value less the freight. This interest was not increased by the fact that the pledgee and 1 Forbes v. Boston & Lowell R. R. 38; Hieskell v. Farmers' & Mechan- Cc, 133 Mass. 154, per Morton, C. J. ics' Nat. Bank, 89 Pa. St. 155. 2 Straus r. Wessel, 30 Ohio. St. 211. * Meyerstein v. Barber, su/n-n. 8 Meyerstein r. Barber, L. R. 2 C. P. ^ Clark v. Dearborn, 103 Mass. 335. 213 § 278.] PLEDGES OF BILLS OF LADING. the consignee bad agreed, as between tbemselves, tbat the latter should pay the freight. The payment by the consignee cannot be considered as a payment by the pledgee. It was a payment by the consignee as a part of his scheme of fraud. If the pledgee can recover the full value of the goods and the freight, he is a positive gainer by the fraud, and will receive more than the value of his interest at the time the fraud was committed. Under the circumstances of such a case it has been held that it is just and equitable that the reclamation by the carrier from the consignee, of a part of the proceeds of the fraud, should inure to the benefit of the carrier ; and that the plaintiff is entitled to recover a sum equal to the market value of the goods less the freight, with interest thereon from the time of the conversion. ^ But one who has made advances upon goods pledged to him by indorsement of the bill of lading, in demanding them of one who had contracted to purchase them and had obtained posses- sion of them upon paying the freight and storage, but not in good faith, need not tender the amount of such freight and storage as a condition precedent to receiving the goods. In a suit by such pledgee for a conversion of the goods, the amount so paid would be deducted from the value of the goods in the assessment of dam- ages, only because the payment inured to his benefit, by dis- charging the goods from a lien to which they were subject, and without the payment of which he could not have obtained pos- session of the property.2 IX. Rights of Pledgees of Different Parts of the same Bill of Lading. 278. If the several parts of a bill of lading be delivered to different persons, the property passes by the bill of lading first delivered for a valuable consideration, unless another has a superior equity.^ Thus if a bill of lading accompanied by drafts upon the consignee be delivered as security for prior advances, the title vests in him as against a subsequent innocent purchaser ^ Forbes v. Boston & Lowell R. R. ^ Kent's Comm. 308 ; Barber v. Co. 133 Mass. 154. The text follows Meyerstein, L. R. 4 H. L. 317; i\ C. in part the language of Morton, C. J., L. R. 2 C. P. 38, 661 ; Skilling v. BoU- who delivered the decision. man, 6 Mo. App. 76. 2 Adams v. O'Connor, 100 Mass. 515. 214 RIGHTS OF PLEDGEES OF DIFFERENT PARTS. [§ 278. for value to whom a duplicate of the bill of lading, or the goods themselves are delivered.^ And so if the goods before arrival at their destination be reshipped, and a new bill of lading be issued therefore while the original bill of lading is outstanding, and in the hands of one who has taken it as security for advances, the property remains in the latter although the goods be delivered to the consignee under the new bill of lading. The holder of the original bill of lading may in such case recover the property in an action of replevin, as against the consignee or as against one who has made advances to him upon the goods.^ Cotton was shipped in India for London, the master of the vessel signing a bill of lading in three parts. On the arrival of the cotton in London, the consignee having received from the consignor's bankers the three parts of the bill of lading, delivered two of them as security for advances upon the cotton, and after- wards fraudulently deposited the third with another person for an other advance. The latter obtained possession of the cotton, whei-e- upon the first pledgee brought an action of trover against him for converting the cotton, and it was held that he was entitled to re- cover against such second pledgee.^ Upon the argument the plain- tiff claimed that the indorsement to him was by way of pledge, and that it passed to him a sufficient right of property to enable him to maintain this action ; and the defendant contended that while his claim was also by way of pledge, he had the better title be- cause he had obtained actual possession of the property. In the Court of Common Pleas, and also in the Exchequer Chamber it was held that the mere indorsement of the bill of lading was such a delivery of the goods as amounted to a valid pledge, and gave the plaintiff a sufiicient property to enable him to maintain the action against the defendant ; and this judgment was affirmed by the House of Lords. To the objections urged against this conclusion the Lord Chancellor, giving his opinion in the House, said : ^ " It is said that a frightful amount of fraud may be per- petrated if persons are allowed to deal in this way with bills of lading drawn in sets, if you allow efficacy to be given to the first assignment of one of those bills, to the detriment of persons who may take, for value, subsequent assignments of the others. All ^ SkilHng V. Bollman, 6 Mo. App. « Meyerstein v. Barber, L. R. 2 C. 76. P. 38, 661, affirmed Barber v. Meyer- 2 Hieskell v. Farmers' & Mechanics' stein, L. R. 4 II. L. 317, 331. Nat. Bank, 89 Pa. St. 155. 215 § 279.] PLEDGES OF BILLS OF LADING. we can say is, that such has been the law hitherto, and that the consequences of the supposed evil, whatever they may be, have not been considered to be such as to counterbalance the great advantages and facilities afforded by the transfer of bills of lad- ing. There is no authority or reason for holding that the person who first obtains the assignment of a bill of lading, and has given value for it, shall not acquire the legal ownership of the goods it represents. It seems to be required by the exigencies of mankind. It may be a satisfaction to be told by Mr. Justice Willes (though it is a matter upon which I put no reliance), that other nations concur with us in holding that, whatever inconveniences there may be attending it, the person who gets the first assignment for value is the person to be preferred." In the same case Lord Westbury in regard to the obligation of the first pledgee, to give notice of his rights to the wharfinger in charge of the cargo, said : " It was contended at the bar that he had been guilty of laches, because he did not follow up the title he had acquired by giving notice of it to the wharfinger. But that is quite immaterial when a man has got both the right of property and the right of possession, passing by a symbol, the bill of lading, which is at once both the symbol of the property and the evidence of the right of possession. When his title is thus complete there is no obligation on him to give notice to any one. There was, therefore, no laches on his part, nor was there any ground of complaint that he failed in ordinary prudence, or that he did not in law and equity complete his security." 279. But the carrier is justified in delivering the goods to the consignee on his producing one of a set of bills though there has been a prior indorsement of another part as security for a loan, provided the cari'ier has no notice or knowl- edge of such prior indorsement. Thus goods having been shipped for London, the shipmaster signed a set of three bills of lading marked " First," " Second," and " Third," respectively, makiug the goods deliverable to the consignees, or their assigns, " the one of the bills being accomplished, the others to stand void." During the voyage the consignees indorsed the bill marked *' First " to a bank in consideration of a loan. Upon the arrival of the ship in London the goods were placed in the custody of a dock company, to whom the consignee produced the bill of 216 RIGHTS OF PLEDGEES OF DIFFERENT PARTS. [§ 279. lading marked " Second," and the dock company in good faith and without notice of the bank's claim delivered the goods. It was held by the House of Lords, affirming the decision of the Court of Appeal, that the dock company had not been guilty of a conversion, and that the bank could not maintain any action against them.i Lord Chancellor Selborne, in dehvering judg- ment, said : " Every one claiming as assignee under a bill of lading must be bound by its terms, and by the contract between the shipper of the goods and the shipowner therein expressed. The primary office and purpose of a bill of lading, although by mercantile law and usage it is a symbol of the right of property in the goods, is to express the terms of the contract between the shipper and the shipowner. It is for the benefit of the shipper that the right to take delivery of the goods is made assignable, and it is for the benefit and security of the shipowner that when several bills of lading, all of the same tenor and date, are given as to the same goods, it is provided that ' the one of these bills being accomplished, the others are to stand void.' It would be neither reasonable nor equitable, nor in accordance with the terms of such a contract, that an assignment, of which the ship- owner has no notice, should prevent a bond fide delivery under one of the bills of lading, produced to him by the person named on the face of it as entitled to delivery (in the absence of assign- ment), from being a discharge to the shipowner. Assignment, being a change of title since the contract, is not to be presumed by the shipowner in the absence of notice, any more than a change of title is to be presumed in any other case wlien the original party to a contract comes forward and claims its per- formance, the other party having no notice of anythino- to dis- place his right. He has notice indeed that an assignment is possible, but he has no notice that it has taken place. There is no proof of any mercantile usage putting the shipowner, in such a case, under an obligation to inquire whether there has in fact been an assignment or not ; and, in the absence of such usage, I am of opinion that it is for the assignee to give notice of his title to the shipowner, if he desires to make it secure, and not for the shipowner to make any such inquiry." ^ Glyn V. East & West India Dock London and County Banking Co. v. Co., L. R. 7 App. Cas. 591; and see Ratcliffe, 6 App. Cas. 722, T-ioTFuaron Shaw V. Foster, L. R. 5 H. L. 321 ; v. Bowers, 1 Sin. L. C. 8th cd. 782. 217 CHAPTER VII. PLEDGES OF WAREHOUSE RECEIPTS. I. How far warehouse receipts are nego- tiable, 280-297. II. How tliey may be transferred in pledge. 298-302. III. Rights of a bond fide pledgee, 303-313. IV. The warehouseman must have the in store before issuing a re- ceipt, 314-320. V. The owner of goods cannot give a valid receipt for them as warehouseman, 321-326. I. How far Warehouse Receipts are Negotiable. 280. Warehouse receipts by custom have long been con- sidered as representing the property mentioned in them ; and tlie assignment or indorsement of such histruments, has long been regarded as equivalent to the delivery of such property.^ The transfer of the certificate transfers to the vendee or pledgee the legal title and constructive possession of the property, and the warehouseman from the time of the transfer becomes his bailee. The delivery of the evidence of title is equivalent to a delivery of the property itself, and it sufficiently manifests the intention of the parties that the title and possession shall pass.^ Thus, receipts issued by storage and forwarding merchants for wool to be forwarded to consignees named, were sent by the owner to the consignees who, relying upon such receipts, ac- cepted drafts drawn against the wool. The wool was attached while in the hands of the storage merchant, as the property of the consignor. But it was held that the delivery of the receipts to the consignees vested the title and the possession of the wool in them, and that the wool was not liable for the consignor's 1 Young V. Lambert, L. R. 3 P. C. 142 ; M'Neil v. Hill, 1 Woolw. 96 ; Stewart v. Phoenix Ins. Co. 9 Lea (Tenn.), 104 ; Horr v. Barker, 8 Cal. 603, 614 ; Second National Bank v. Walbridge, 19 Ohio St. 419; Gibson V. Chillicothe Bank, 11 Ohio St. 311 ; Newcomb v. Cabell, 10 Bush (Ky.), 460; Western Union R. R. Co. v. 218 Wagner, 65 111. 197; Burton v. Cur- yea, 40 111. 320, 325 ; St. Louis Nat. Bank v. Ross, 9 Mo. App. 399; Fourth Nat. Bank v. St. Louis Cot- ton Compress Co. 11 lb. 333. 2 Gibson v. Stevens, 8 How. 384, 400 ; Yenni v. McNamee, 45 N. Y. 614, per Grover, J. HOW FAR WAREHOUSE RECEIPTS ARE NEGOTIABLE. [§ 281. debts, or if so liable, was first subject to the consignees' lien for advances.^ The delivery of the symbol of the property was as effectual as an actual delivery of the property itself. Of course the assignee of a warehouse receipt having both title and possession, has the right to maintain an action for the con- version of the property, or for the recovery of it.^ 281. A warehouse receipt, at common law, is not, in a technical sense, a negotiable instrument, although the prop- erty be made deliverable to " order " or " assigns." The re- ceipt merely stands in place of the property it represents, and the delivery of it has the same effect in transferring the title to the property as the delivery of the property itself. The delivery of the receipt does not transfer the contract so as to enable the assignee or indorsee to maintain an action upon it in his own name. There is no privity of contract between the warehouse- man and the assignee. The assignee occupies no better position, as regards the warehouseman, than his assignor had.^ There- fore where a warehouseman by mistake issued to the owner at different dates, two receipts for the same property, both of which he assigned as security for loans, and the assignee of the receipt first issued having recovered the property in replevin from the assignee of the other receipt to whom the warehouseman had delivered it, in a suit by the last named assignee against the warehouseman to recover the value of the property, it was held he could show the mistake as a defence to the action.* The owner acquired no rights against the warehouseman by virtue of the second receipt, and he could give no rights by an assignment of that receipt. In another case a warehouse receipt was delivered to a pur- chaser of the goods, who subsequently for the purpose of having the goods repacked by the seller indorsed the receipt in blank and delivered it back to him. The latter thereupon, in contra- vention of the purpose for which the receipt was delivered to him, 1 Davis V. Bradley, 28 Vt. 118 ; First Nat. Bank v. Bates, 1 Fed. Rep. S. C. 24 Vt. 55 ; Bryans v. Nix, 4 M. 702. & "W. 775, is a similar case. Also » Burton v. Ciiryea, 40 111. 320; Broadwell v. Howard, 77 111. 305. Western Union 11. it. Co. v. Wagner, 2 Harris v. Bradley, 2 Dill, 284; 65 111.197. M'Neil V. Hill, l Woolworth, 96 ; * Sccon/-a. 8 Stewart v. PhcEuix Ins. Co. 9 Lea ^ Insurance Co. v. Kiger, 103 U. S. (Tenn.), 104, 110. 352. 244 OWNER OF GOODS CANNOT GIVE A VALID RECEIPT. [§ 321. corn, which he did, taking a receipt from the carrier, and deliver- ing it to the person who took the former receipt, who thereupon obtained a bill of lading from the carrier, and attaching this to a draft, obtained a discount of it from the bank which received the first receipt in pledge. The bank had no notice that the receipt and bill of lading were for the same corn. It was held that the bank was entitled to recover of the warehouseman the value of the corn.^ V. TJie Owner of Croods cannot give a Valid Receipt for them as Warehouseman. 321. The owner of goods cannot give a warehouse receipt for them, which will be an effectual pledge of them, as against an attaching creditor, unless it be accompanied by an actual or symbolical delivery of the goods.^ A commission merchant on applying to a banker for a discount of his promissory note, at- tached thereto, as collateral, a receipt by him, as follows : " Re- ceived in store, for account of P. & S. (the bankers) or their order, the following named property as security to my note given this day." The goods remained in the owner's store, and he con- tinued to keep it open and transact business as he had done be- fore the pledge, and the bankers did not even look at the goods. In a suit by the bankers to recover the property from a sheriff, who had attached the property in favor of a creditor of the mer- chant, it was urged that the receipt showed upon its face that the merchant received the goods from the plaintiffs, and that he held them thereafter in a new capacity, as agent and factor for the pledgees. To this suggestion the Supreme Court of New York reply : ^ "So far as creditors are concerned, if this be a pledge, the writing is to them of no moment whatever; it is only at the furthest evidence of the pledge, which would have been just as valid if it had been left in parol. The true and only essential inquiry in this case is, has there been in fact a delivery ; none accompanied the transaction ; and this disposes of all the argu- ment made upon the suggestion that this paper on its face amounts to a warehouse receipt ; for the plaintiffs cannot by any 1 Union Savings As?o, i'. St. Louis Ohio St. 2.'34 ; Geddos v. Bennett, 6 Grain Elevator Co. 11 Mo. App. 59G. La. Ann. 51 G. 2 Thorne v. First Nat. Bank, 3 7 8 Par.shall v. Eggart, 52 Barb. (N. Y.) 3G7, 370. 245 § 322.] PLEDGES OF WAREHOUSE RECEIPTS. fiction avoid meeting the undisputed fact that the subject of the pledge was not delivered to them until the debt had matured, and after the claim of the attaching creditor had become prior and superior." ^ These views of the court upon the effect of the receipt are stated merely to. show the arguments that may be used upon the construction of such a paper ; for whatever weight these views might have in themselves, their authority is overcome by the declaration of the Commission of Appeal in deciding this case, that the receipt might be considered as showing conclu- sively against pledgor, that the property was delivered by him to the pledgee, and by the latter redelivered to him to be held as security for the pledgee, according to the terms of the receipt.^ The case was however decided upon another ground.^ And so a warehouse receipt issued by a warehouseman upon his own grain as collateral security, is invalid as against a prior purchaser who holds a valid receipt therefor.* Even a delivery of the keys of the warehouse to the holder of the invalid receipt does not amount to a valid delivery of the grain to him as against such prior purchaser. 322. In Nebraska,^ however, it is provided by statute that an}^ packer of pork or beef, or au}^ manufacturer of distilled spirits, having a warehouse for the storage of his own product ; and any keeper of an elevator where he stores his own grain, may issue receipts for his own meats, spirits, or grain, which he actually has so stored, in the usual form of warehouse receipts, which shall have the same force and effect as receipts issued by the keeper of a public warehouse, to parties having property so stored therein, which receipts shall be negotiable by indorsement, and entitle the bond fide holder thereof advancing money upon the credit of the same to a lien upon the property so stored and de- scribed therein, for the money so advanced, as to all subsequent purchasers and creditors of any person interested therein, from the issue of such receipts and the advances of such money, pro- 1 The decision upon this point of ^ See § 39. delivery was reversed upon appeal ; ^ Sexton v. Graham, 53 Iowa, 181. 64 N. Y. 18. 5 Laws 1879, p. 73, § 1; Compiled 2 Parshall v. Eggert, 54 N. Y. 18, Stats. 1881, c. 92 § 13. 23. 246 OWNER OF GOODS CANNOT GIVE A VALID RECEIPT. [§§ 323, 324. vided the said receipts, or a copy thereof verified by the oath of the holder of the same, be recorded in the office of the county clerk of the county in which such warehouse or elevator may be. 323. In Kentucky,! a warehouseman is impliedly author- ized by statute to give receipts or vouchers for his own goods, when stored and under his control and kept in his own ware- house or a warehouse kept by him. If the goods are at the time in his possession, his receipt vests in the holder a right to the propert}^, and no one without his written consent or transfer, and the production of the receipt can gain any title thereto. ^ This statute also requires that the receipt should show upon its face any lien or incumbrance that might exist upon the property in favor of the warehouseman. Therefore if a warehouseman himself sells goods upon credit and gives a receipt for the same, to be delivered on return of the receipt and payment of the stor- age and charges, and the purchaser indorses the receipt to an in- nocent holder as collateral to secure a loan obtained on the faith of the receipt, the latter has a right to have the property applied in the first place to the payment of the loan ; and it is imma- terial that the purchaser of the property acted fraudulently in the transaction.^ A provision of the statute forbidding the issu- ing of a second receipt without the written consent of the holder of the prior receipt, is intended to protect the holder of the second receipt, and does not allow the holder of the first receipt to re- pudiate his oral agreement that the holder of the property might sell it. He is as much estopped to deny the authority to sell, and the title of the innocent purchaser, as he would be if he had stood by in person, and acquiesced in the sale without asserting claim to the property.* 324, A receipt signed by the agpnt or servant of the owner has no more effect than the owner's own receipt. If such a receipt be transferred by the owner as collateral security for a loan, and the property remains upon the owner's premises, it affords no protection to the creditor, but the property ^ Act of IMarch 6, 1869. 8 Grecnbaiim v. Megibben, 10 Bush 2 Cochran v. Ripy, 13 Bush (Ky.), (Ky.), 419; and see Cochran i'. Ripy, 495; Ferguson v. Northern Bank of 13 lb. 495. Ky. 14 Bush (Ky.), 555. * Fanner v. Gregory, 78 Ky. 475. 247 § 325.] PLEDGES OF WAREHOUSE RECEIPTS. may be taken in execution by the creditors of such owner. As between the owner and his agent such a receipt is a nullity, and as between the owner and his pledgee it is wholly ineffectual as a pledge.^ 325. An instrument in the form of a warehouse receipt executed by a debtor to his creditor, on the debtor's own property, is not a warehouse receipt.^ A receipt issued by a private warehouseman for his own property, in his own ware- house, and delivered by him as collateral security for his own debt, vests no title to the property in the holder as against other creditors, and in bankruptcy proceedings against the debtor the holder of such a receipt has no preference. Such a receipt con- fers no possession, actual or constructive, which is essential to a pledge.^ Neither does it amount to a mortgage of the property, because no possession is conferred upon the mortgagee, nor does it, in fact, amount to a written mortgage. Even if it did amount to a mortgage, it would not be valid without record, according to the statute. The receipt might constitute a valid contract between the parties, but it amounts to nothing as against the creditoi's of the person who makes it.* A private wareliouseman having issued receipts for his own property, in his own warehouse, and delivered them as security for his indebtedness, it was held that the person taking such re- ceipts acquired no title to the property described as against other creditors, and in bankruptcy proceedings was not entitled to any preference. It did not appear that the bankrupt used his ware- house as a warehouse under the statute, in any other way than for the purpose specially intended by the bankrupt. It did not appear that the property of any other person than that of the bankrupt was stored in the warehouse'. The case was one, there- fore, where the bankrupt, having purchased and taken possession 1 Yenni v. McNamee, 45 IN". Y. 614. to transfer the title of the property de- 2 Thorne v. First Nat. Bank, 3 7 scribed, as between the borrower and Ohio St. 254. the bank, and such transfer, being col- 3 Farmers' & Mechanics' Nat. Bank lateral to the payment of a debt, could V. Lang, 87 N. Y. 209, 215. Finch, J., operate only as a mortgage." said : " There was, therefore, never * Adams v. Merchants' Nat. Bank any valid pledge by the borrower, nor (C. C. D. Ind. 1880), 2 Fed. Rep. 174; any actual -warehouse receipt. What S. C.9 Biss. 396; Yenni i'. McNamee, was so called operated in each instance 45 N. Y. 614. 248 OWNER OF GOODS CANNOT GIVE A VALID RECEIPT. [§ 326. of property, stored it in his warehouse, for which a permit under the statute had been obtained, and issued receipts for the same, and transferred them, through a third person to whom they were issued, to the bank as collateral security for the loan made. There was consequently no pledge, for there was no delivery of possession. Neither was there any valid mortgage of the prop- erty, because there was no possession in the mortgagee, nor was there, in fact, any written mortgage.^ It was claimed that the assignee took no greater rights than the bankrupt had, and that this contract, being valid between the parties, was valid against the assignee. But the court declared that the rule did not apply to cases of this kind ; but that the assignee had the right of a judgment creditor, where the mort- gage or pledge is invalid in consequence of wanting any element requisite under the law or under the statute.^ 326. There is a distinction between cases of sales and cases of pledges, as regards the effect of the delivery of receipts for the property. When a vendor delivers to the purchaser his own receipt for the property sold the vendor may be regarded as bailee of the property for the purchaser, so that the title majr be regarded as in the purchaser by virtue of the receipt. When the receipt is given by the owner of the goods merely as collateral security, and not for the purpose of carrying out an absolute sale, it comes within the principle of a mortgage of chattels, which must, to be valid as against third persons, be made and recorded in compliance with statutory law. Yet, as between the parties themselves, such a receipt is a lawful contract, and effects a valid transfer of the property according to its terms.^ Thus a 1 Adams v. Merchants' Nat. Bank St. 254; Iloyt v. Hartford F. Ins. Co. (C. CD. of Ind. 1880), 2 Fed. Rep. 26 Hun (N. Y.), 416 ; Farmers' & 174; (S. C 9 Biss. 396; Gibson v. Stev- Mechanics' Nat. Bank v. Lang, 87 ens, 8 How. 384; Gibson r. Chillicothe N. Y. 209; Yenni v. McNamee, 45 Bank, 11 Ohio St. 311; Yenni v. Mc- N. Y. 614; Adams v. Merchants' Nat. Namee, 45 N. Y. 614; Shepardson v. Bank, 2 Fed. Rep. 174, 178. In the Green, 21 Wis. 539. hitter case, the cases of Shepardson v. ^ Adams v. Merchants' Nat. Bank, Green, 21 Wis. 539, and Shepardson supra. V. Gary, 29 Wis. 34, are referred to, * Gibson v. Stevens, 8 How. 384; and the hmguage of the court in the Gibson V. Chillicothe Bank, 11 Ohio last named case criticised as not St. 311; the latter distinguished from consistently following the distinction Thorne v. First Nat. Bank, 37 Ohio above taken. 249 § 326.] PLEDGES OF WAREHOUSE RECEIPTS. pledgee holding such a receipt is entitled, as having the title to the property designated, to recover upon an insurance policy upon such property assigned to hira for further security .^ 2 Hoyt V. Hartford F. Ins. Co. 26 Hun (N. Y.), 416. 250 CHAPTER VIII. PLEDGES BY FACTORS. I. Pledges by factors at common law, 327- I II. Pledges by factors under the Factors' 332. " I Acts, 333-353. I. Pledges hy Factors at Common Law. 327. By the common law a factor or agent had no power to pledge goods which his principal had intrusted to his pos- session, although the factor or agent had made advances to his principal upon the goods, and had a lien thereon for the ad- vances.^ Although the principal had drawn upon his factor for the value of the property consigned, he was not authorized to pledge the goods even to raise funds to meet the bills.'-^ The rights of the principal and factor whenever this relation ex- isted, and whatever might be the circumstances, were regarded as depending on the law merchant, which was part of common law. By this law a factor was but the attorne}' of his principal, and he was bound to pursue the powers delegated, and could not go beyond them.^ An agent to sell goods, though being the ap- parent owner by reason of having possession by permission of the principal, could not pledge them for his own debt. No usage of 1 Patterson v. Tasb, 2 Str. 1178; Fed. Rep. 569; Holton v. Smith, 7 Daubicrny v. Duval, 5 T. R. 604 ; N, II. 446 ; Campbell v. Reeves, 3 Martini v. Coles, 1 M. & S. 140 ; Head. (Tenn.) 226 ; Merchants' Nat. Queiroz v. Trueman, 3 B. & C. 342, Bank v. Trenholm, 12 Heisk. (Tenn.) 348 ; De Boiichout ?;. Goldsniid, 5 Ves. 520; Van Amrin^jje v. Peabody, 1 210; Pickering v. Busk, 15 East. 38, Mason, 440 ; Hoffman v. Noble, 6 43; Peetr. Baxter, 1 Stark. 4 72; War- Met. (IMass.) 68, 74; Newbold v. ner v. Martin, 11 How. 209 ; First Wri:-V/ u 9 CuU^ . i "^ c . 464. Certificates of stock not being negotiable instru- ments, the title to them is not changed by an involuntary transfer by the owner, as in the case of loss or theft, or the put- ting of them into circulation through forgery o'r fraud.^ When a negotiable instrument is lost or stolen, or put into circulation without the knowledge or consent of the owner, a bond fide pur- chaser for value, without notice, acquires a valid title to it. But title to a certificate of stock can be acquired only through the voluntary/ act of the person entitled to dispose of the property. A certificate of stock indorsed in blank by the owner is in a condition to be passed from hand to hand, like any personal chattel. But if it was stolen from the owner, or lost by him, neither the thief nor finder, nor any subsequent holder, can convey any title by a transfer of it to an innocent purchaser for value. Thus, where the owner of shares in a railway company in- structed a broker to sell certain shares, and the broker obtained from him transfers in which blanks were left for the name of the purchaser, and for the number of the shares to be transferred, and the blanks were fraudulently filled up by the broker, with shares not intended to be transferred, the certificates having been 1 Prall V. Tilr, 28 N. J. Eq. 479, per Canal & Banking Co. v. Fisher, 9 lb. Grppti, J. ; S. r. 27 Tb. 893 ; and see 667. Mount Holly Turnpike Co. v. Ferree, ^ Davis u. Bank of Ennjlanrl, 2 Binsj. 17 lb. 117; Jiroadway Bank v. Mc- 393; Pratt u. Taunton Copper Manuf, Elratb, 13 Tb. 24; Leavitt v. Fisher, Co. 123 Mass. 110; Machinists' Nat. 4 Duer (N. Y.), 1. Bank v. Field, 126 Mass. 34.5 ; Bcrcich 2 Jones on Railroad Securities, §§ v. IMarye, 9 Nev. 312; Aull v. Colket, 197-210; Morris Canal & Bankinfr 2 Weekly Notes Cas. 322. Co. 17. Lewis, 12 N. J. Eq. 323; Morris 357 § 465.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. fraudulently obtained by the broker, and the shares sold to bond fide purchasers, it was held that the transfer of these shares was void, and that the original owner was entitled to have the shares delivered up, and their registration in the name of the purchaser rescinded.^ Again, an owner of shares in two companies, wishing to sell those in one company, was induced b}' his broker to execute a blank transfer, which the broker fraudulently filled with the numbers and descriptions of the shares in the other company, which the owner did not intend to transfer ; and the broker having forged the attestations of the transfers, and stolen the certificates of the latter shares from a box deposited in a bank for safe keeping, pledged them for his own benefit. It was held in the Exchequer Chamber that the transfer was void, and that there was no such negligence on the part of the owner as estop- ped him from insisting that the property in the shares did not pass under the transfer.^ 465. Whether it is negligence in the owner of shares to execute a transfer in blank as to the transferee, and the description of the shares, such that he is estopped from dis- puting the genuineness of the transfer, is a question that has been much discussed. The best and most authoritative state- ment of the law upon this subject is by Chief Justice Cockburn, in the Exchequer Chamber.^ " I am of opinion," he said, •' that negligence alone, although it may have afforded an opportunity for the perpetration of a forgery, by means of which another party has been damnified, is not of itself a ground of estoppel. The rule relating to negotiable instruments stands on peculiar grounds. The law relating to these instruments is part of the law merchant, which, in order that the negotiability of such in- struments, which is of the very essence of their commercial utility, shall not be impaired, establishes that if a man once 1 Tayler?;. Great Indian Peninsular Court of Common Pleas, 7 C. B. N. S. R'y Co. 4 De G. & J. 559 ; S. C. 28 400, where also that court was equally L. J. N. S. Ch. 285. divided. 2 Swan V. North British Australasian ^ Swan v. North British Australasian Co. 2 Hurl. & Colt. 1 75, on appeal from Co. 2 Hurl. & Colt. 1 75; and see Denny Court of Exchequer, 7 H. & N. 603, v. Lyon, 38 Pa. St. 98; Biddle v. Bay- where the court was equally divided ; ard, 13 Pa. St. 150 ; Pennsylvania R. the case first having been before the R. Co.'s Appeal, 86 Pa. St. 80. 358 HIS RIGHTS ACQUIRED IN GOOD FAITH. [§ 466. puts his name to such an instrument he shall be hable to a bond fide owner without notice, in respect of what may be added to give effect or negotiability to the instrument, notwithstanding this may be done in the absence of authority, or even for the purpose of fraud." But the doctrine of estoppel by which a genuine signature will make good a negotiable instrument fraudulently written above it, cannot be applied to make good other instruments executed in blank, and used for a purpose other than that intended by the maker. Moreover, negligence, to operate as an estoppel in any case, must be the proximate cause of the loss. 466. One taking, in good faith, a certificate of stock from the apparent owner may acquire title as against the true owner, although the certificate is not in any true sense a negotiable in- strument, and does not even partake of the character of such an instrument. The rights of a bond fide holder in such case rest upon another principle ; namely, that one who has conferred upon another by a written ti'ansfer all the indicia of ownership of property is estopped to assert title to it as against a third per- son who has in good faith purchased it for value from the ap- parent owner.i This forms an exception to the rule that a 1 Pickering v. Busk, 15 East, 38, 43; 390, Trunkey, J., delivering the opin- Rumball v. ISIetropolitan Bank, 2 Q. ion of the court, said : " The rights of B. D. 194 ; Moore v. Miller, 6 Lans. a bona fide holder, as against the true (N. Y.) 396; Moore v. Metropolitan owner of the stock to whom the appar- Nat. Bank. 55 N. Y. 41 ; McNeil v. ent owner of the stock has either sold Tenth Nat. Bank, 46 N. Y. 325 ; or pledged, do not depend on a ne- Wood's Appeal, 92 Pa. St. 379; Bur- gotiable character in the certificates, tons' Appeal, 93 Pa. St. 214; Moodie v. but rest on another principle; 'namely, Seventh Nat. Bank, 33 Leg. Int. 400 ; that one who has conferred upon an- State Bank v. Cox, 11 Rich. S. C. other by a written transfer all the m- Eq. 344; Eraser u. Charleston, 11 S. C. dlcia of ownership of property, is 486; Pennsylvania R. R. Co.'s Ap- estopped to assert title to it as against peal, 86 Pa. St. 80 ; Strange v. II. & a third person who has in good faith T. C. R. R. Co. 53 Tex. 162; Otis r. purchased it for value from the ap- Gardner (111. 1883), 15 Rep. 332 ; parent owner.' As a general rule, Dovey's Appeal, 97 Pa. St. 153; West the vendor or pledgor can convey no Branch & Susquehanna Canal Co.'s greater right or title than he has. Appeal, 81 a Pa. St. 19; Gass v. Simply intrusting the possession of a Hampton, 16 Nev. 185 ; Stone v. chattel to another as a depositary, Marye, 14 Nev. 362 ; Walker v. De- pledgee, or other bailee, is insufficient troit Transit Ry. Co. 4 7 Mich. 338. to prevent tlie real owner reclaiming In Wood's Appeal, 92 Pa. St. 379, his property in case of an unauthor- 359 § 466.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. purchaser of personal property other than negotiable commercial paper obtains no better title than his vendor had. This estoppel applies whenever the real owner of property has vested another with the apparent absolute title to it, by an instrument in writ- ing, upon the faith of which a third person has dealt, whether the property be a specific chattel or a chose in action. It is of frequent application to cases of pledges of stock. " The right- ful owner may be estopped by his own acts from asserting his title, as he may be in respect to other property of a like char- acter. If he has invested another with the usual evidence of title or an apparent authority to dispose of it, he will not be al- lowed to make claim against an innocent purchaser dealing upon the faith of such apparent ownership, and jus disponendi.'^ ^ Thus, if a shareholder in a corporation delivers as collateral security his certificate of shares, with a blank assignment and power executed by him, he passes to the pledgor all the external indicia of title to the stock, with a power of disposition over it apparently unlimited. One purchasing such shares in good faith from the pledgee may hold them against the pledgor ; and if the ized disposition of it by the person as intrusted. The mere possession of chattels without evidence of property or authority to sell from the owner, will not enable the possessor to give good title. But if the owner intrusts to another the possession of property, and also written evidence of title and power of disposition over it, as re- spects innocent third persons, he is deemed as intending it shall be dis- posed of at the pleasure of the depos- itary. If there be conditions on which this apparent right of control is to be exercised, not expressed on the face of the instrument, the case, in principle, is like that of an agent who receives secret instructions qualifying or re- stricting an apparent absolute power. If the owner of the stock voluntarily give certificates with blank assignment and power to make transfers to his brokers, who betray the confidence reposed in them, such owner must suffer the loss rather than innocent 360 strangers whose money the brokers were thereby enabled to obtain. The principle applies to pledges of stock and one who purchases from the pledgee may hold against the pledgor. And if the pledgee pledge it to secure payment of his own debt, the second pledgee may hold it as security till his debt be paid. ' A person loaning money on such certificate and power, has a right to believe that the bor- rower from whom he receives them has an absolute right to pledge the stock.' By commercial usage a cer- tificate of stock, accompanied by an irrevocable power of attorney, either filled up or in blank, is, in the hands of a third party, presumptive evidence of ownership in the holder. And where the party in whose hands the certificate is found is a holder for value, without notice of any interven- ing equity, his title cannot be im- peached." 1 Weaver v. Barden, 49 N. Y. 286, 288; per Allen, J. HIS RIGHTS ACQUIRED IN GOOD FAITH. [§ 466. pledgee himself pledges such shares as collateral security for a debt of his own, the second pledgee is entitled to hold them as security for the full amount of the debt for which they were pledged to him.^ If, for instance, an owner of stock allow certifi- cates to be taken in the name of his broker, who is carrying the stock upon a margin, without anything on the face of the cer- tificates to show his ownership, the holder of the certificate can sell or pledge the stock as his own, and give a title which the owner cannot interfere with.^ And so, if an owner of shares having transferred them in pledge by his indorsement, furnishes funds to another to pay the debt and take up the certificates, and after this has been done allows the certificates to remain thus in- dorsed in the hands of his agent, who afterwards pledges them for his own debt to a person who makes advances thereon in good faith, the latter can hold them against the true owner.^ A per- son loaning money upon such a certificate and power has the right to believe that the borrower from whom he receives them has an absolute right to pledge the stock.* In like manner if an owner of stock loans his certificate accompanied with a blank power of attorney to transfer the same with a broker or other bailee, and the latter pledges it for his own debt to one who has no knowl- edge of the fraud of the broker, the owner is estopped from set- 1 McNeil V. Tenth Nat. Bank, 46 15 lb. 389. Parker, C. J., in the earlier N. Y. 325; and see Bank v. Lanier, decision said : " If Russell (the agent) 11 AVall. 369; Lowry v. Bank of Bal- abused bis trust by pledging the certifi- timore, Taney, 310; Prall v. Tilt, 27 cates, instead of holding them in trust N. J. Eq. 393; S. C. 28 lb. 479; Hoi- for Jarvis (the owner) this is an affair brook V. N. J. Zinc Co. 57 N. Y. 616; to be settled between the representa- Willis V. Phila. & Darby R. R. Co. 6 tives of those parties. The certificates AVeekly Notes, Cas. 461; Mount Hoi- being lawfully in the hands of Rus- ly Turnpike Co. v. Ferree, 17 N. J. sell, with the name of Jarvis on the Eq. 117; Moodie v. Seventh Nat. back, without any restriction of the Bank, 33 Leg. Int. 400 ; Stone v. use of that name ; and there being Marye, 14 Nev. 362 ; S. C. 9 Rep. a vote of the company in which Jar- 448; Gass v. Hampton, 16 Nev. 185; vis concurred, that they should be Bridgeport Bank v. N. Y. & N. H. transferable in that manner, it is R. R. Co. 30 Conn. 231; Cushman v. enough for the defendant that he re- Thayer Manuf. Co. 76 N. Y. 365; Cher- ceived them as collateral security for ry V. Frost, 7 Lea (Tenn.), 1 ; Brews- a debt, and that the debt has not been ter r. Sime, 42 Cal. 139, and see Cow- discharged." drey v. Vandenburgh, 101 U. S. 572, And see Savage v. Stnythe, 48 Ga. 575. 562; Dovey's Appeal, 97 Pa. St. 153. 2 Thompson v. Toland, 48 Cal. 99. * Fatman r.Lobach, 1 Ducr (N. Y.), ' Jarvis v. Rogers, 13 Mass. 105; 354; Leavitt v. Fisher, 4 lb. 1. 861 § 467.] RIGHTS AND LIABILITIES OF A PLEDGEE OF «TOCK. ting up his own title as against the advances made by the pledgee.^ It has been insisted that to apply the foregoing rule to non- negotiable choses in action in effect makes them negotiable. " Not at all. No one pretends but that the purchaser will take the former, subject to all defences, valid as to the original parties, nor that the mere possession is any more evidence of title in the possessor than is that of a horse. In both respects, the difference between these and negotiable instruments is vital, and not at all affected by the application of the same rule as to chattels." ^ 467. This rule is undoubtedly a sound one, and forms the basis upon which the rights of pledgees of certificates of stock in cases such as have been given above must rest. It is true that in many of the cases the maxim applies, that a loss, as between two innocent parties, resulting from the fraud of a third person, should be cast upon the party who by employing and trusting such per- son enabled him to commit it.^ But this may generally be re- garded as a secondary and additional rule of law, by which, in such case, a bond fide pledgee of stock may sustain his title. There are many cases of betrayal of trusts by agents to which both of these rules are applicable. " The principle upon which ^ Burton's Appeal, 93 Pa. St. 214; sell and transfer the same, to an agent Moodie v. Seventh Nat. Bank, 3 for safe keeping, and the agent fraud- Weekly Notes Cas. 118 ; AuU v. Colk- ulently pledged them for a loan for his et, 2 lb. 322 ; Zulick v. Markham, 6 own use. Although the power of at- Daly (N. Y.), 129 ; Dickinson v. Dud- torney was dated thirteen years before, ey, 17 Hun (N. Y.), 569; Strange y. the transfer upon the books of the H. & T. C. R. R. Co. 53 Tex. 162; company was obtained by the pledgee Cherry v. Frost, 7 Lea (Tenn.), 1 ; Gass of the stock, it was held that the cor- V. Hampton, 16 Nev. 185; Walker v. poration was justified in making the Detroit Transit Ry. Co. 47 Mich, transfer, without inquiry as to the 338. validity of the power. Judge Shars- 2 Moore v. IVIetropolitan Nat. Bank, wood, delivering the opinion, said : 55 N. Y. 41, 48, per Grover, J. " AVhen one of the two parties who 3 Fatman v. Lobach, 1 Duer (N. are equally innocent of actual fraud Y.), 554, per Oakley, C. J.; White i'. must lose, it is the suggestion of cora- Springfield Bank, 3 Sandf. (N. Y.) mon sense as well as equity that the 222, 229; Pennsylvania Railroad Co.'s one whose misplaced confidence in an Appeal, 86 Pa. St. 80 ; 5. C 5 Weekly agent or attorney has been the cause Notes, Cas. 22. In this case, the owner of the loss, shall not throw it on the of stock had intrusted the certificates, other." accompanied by powers of attorney to 362 HIS RIGHTS ACQUIRED IN GOOD FAITH. [§ 467. these transactions have been, and ought to be established, is this : that when the owner of stock, in the ordinary course of business and in the method common to all mercantile communities, by his own act has armed another, his agent or attorney, with power to act for him, and when this agent or attorney deals with innocent third parties, who, without notice or other intervening equity advance money upon the faith of the evidences of title in the possession of the attorney or agent, the owner takes every risk, and is bound by the act of the person whom he sees fit to hold out to the world as his attorney or agent.^ It is to be observed that in the cases to which the principle of apparent ownership has been applied, the apparent owner was, in his dealings with persons relying in good faith upon the ap- pearances, the real owner, and sold or pledged the stock, or dealt with it as the real owner. Such cases are to be carefully distin- guished from a case in which a person deals with an agent of the owner of stock with limited authority, knowing him to be only an agent, and not the real owner, and knowing, or having reason to know, that his authority is limited. Thus, an owner of stock delivered it, without indorsement or power to transfer, as security for a loan of $3,000. Afterwards the lender applied to a bank for a loan of $8,000 upon the certificate, stating that he wanted it for a client , and the agent of the bank agreed to make the loan upon receiving a power of attorney attached to the certifi- cate. The lender thereupon, by representing to the owner that he ought to have a transfer, induced him to sign a printed blank transfer and irrevocable power of attorney, and obtained the money thei-eon from the bank ; and subsequently he obtained from the bank a further loan upon the stock for his client, as he represented. He had, in fact, no authority from the owner to pledge the stock. ■ It was held that, inasmuch as the holder of the certificate did not claim to be the owner of the stock, but only an agent of the owner, and there was nothing in the case to sliow that he was clothed with apparent authority to make the loan, beyond his own assertion, the owner was not estopped from asserting his title to the stock, subject, perhaps, to a lien for the ^ Burton v. Peterson, 35 Leg. Int. Weekly Notes, Cas. 118; .S'. C. 33 144, per Ludlow, J., and see also Leg, Int. 400; Jarvis v. Rogers, 13 Persch V. Quiggle, 57 Pa. St. 247 ; Mass. 105 ; S. C. 15 Mass. 389, 393. Moodie v. Seventli Nat. Bank, 3 363 §§ 468, 469.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. original loan of $3,000 ; that while the transfer or power might have given the holder an apparent ownership of the stock in case he had claimed to be the real owner, or it might have given him authority to go into the market as the agent of the owner, and as such to sell the stock and give good title, it did not hold him out as authorized to make a loan and pledge the stock ; or, at most, it only held him out as authorized to pledge the stock for an authorized loan.^ 468. The rule is the same whether the delivery of a cer- tificate with a power of transfer be regarded as passing the legal title or merely an equitable one. If it passes the legal title, then the owner having clothed his pledgee with the whole title, and consequently an unlimited power of disposition, can- not set up an unknown equity against a title acquired by a sub- sequent assignee in good faith for a valuable consideration, and in the due course of trade. If such a transfer passes only an equitable title, still the owner having intrvisted his pledgee not only with the possession of the certificate of stock, but also with written evidence over his own signature of title thereto, and of unconditional power of disposition over it, he is estopped to dis- pute the title which he has apparently conferred, and set up a prior equity in himself.^ 469. Precedent debt. — But to entitle a purchaser to protec- tion against the legal title or a prior equity, upon tlie ground that he has dealt with the person having the apparent ownership or right of disposition, he must appear to be a purchaser for value. What constitutes a valuable consideration is generally a question that is easily answered ; for it is everywhere agreed that a payment of purchase money or any part of it, or the part- ing with something of value upon the faith of tlie purchase, or a loan made at the time, or an agreement to extend the time of payment of an existing debt constitutes a valuable consideration.^ It is also the prevailing rule that a transfer of property in pay- ment or security of a preexisting debt is a sufficient considera- tion. But in New York and other states the rule is applied 1 Merchants' Bank of Canada v. ^ Cherry v. Froft, 7 Lea (Tenn.), Livingston, 74 N. Y. 223; S. C. 7 1, 10, per Cooper, J. N. Y. Weekly Dig. 249. » Cherry v. Frost, supra ; S. C. 21 364 Am. Law Reg. (N. S.) 57. HIS RIGHTS ACQUIRED IN GOOD FAITH. [§§ 470, 471. to negotiable paper, that a person taking it in payment or as security for an antecedent debt without giving further credit, surrendering any security or incurring any further obligation, is not a bond fide holder for value, as against third persons having prior equities ; and the same rule is also, for stronger pei'sons, applied to transfers of stock ; and it is accordingly held that the mere existence of a precedent debt will not support a transfer of stock as against the rightful -owner, or as against the equities of others, altiiough the assignor be clothed with the apparent owner- ship or right of disposition.^ If the stock be transferred partly in consideration of a precedent debt and partly for a new consid- eration paid at the time, the taker will be regarded as a holder for value so far as the assignment was made for a consideration paid at the time, but not a holder for value for the amount of the precedent debt.^ 470. Collaterals taken in exchange for other collaterals are taken for value to the extent of the consideration given in exchange. This is the rule where collaterals for a preexisting debt are not regarded as taken for value. When old collaterals are surrendered and others taken in their place, the creditor in fact pays a consideration for the new securities, and the extent of that consideration is the value of the securities surrendered.^ 471. Under the old usury laws, which happily have now mostly disappeared, a person who took a pledge upon a usurious contract was not considered as a bond fide holder, in the usual course of business.^ "A note or stock taken to secure a loan of money which is illegal and forbidden at law, is not taken in the ordinary course of business, and such a transaction does not give the holder a superior right to that of a real owner who has been defrauded of his property by the person who passed it away on the usurious contract.^ Therefore if a re-hypothecation of stock 1 Weaver v. Banlen, 49 N. Y. 286; » Cherry j;. Frost, 7 Lea (Tenn.), 1; Ashtoii's Appeal, 73 Pa. St. 153, 162; S. C. 21 Am. L. Reg. (N. S.) 57. Moodie D. Seventh Nat. Bank, 33 Leg. * llamsdell v. Morgan, 16 Wend. Int. 400; Dovey's App. 97 Pa. St. (N. Y.), 574; Dean v. Howell, Hill & 153. Den. (N. Y.) 39; Sands v. Church, 6 * Weaver v. Barden, supra; Gould N. Y. 347. V. Farmers' Loan & Trust Co. 23 Hun « Felt t;. Heye, 23 How. (N. Y.) (N. Y.), 322. Pr. 359, per Ingraham, C. J. 3G5 § 472.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. be made under a contract void for usury, the pledgee will not be considered a bond fide purchaser without notice, and he will not therefore be protected in the possession of the stock as against the owner, who is entitled to recover it without even paying the original debt secured.^ 472. Actual notice. — When, however, one dealing with the apparent owner of stock has notice, actual or constructive, of the rights of the true owner, he can acquire no better title than the apparent owner can lawfully transfer.^ A judgment cred- itor buying at an execution sale stock already transferred by the debtor by indorsement and delivery of the certificate, with notice of such transfer, obtains no better title than his debtor had.^ It would seem to be upon this ground that where the owner of stock executed and delivered to an agent a power of attorney in blank, with the understanding that it should be used to secure a particular creditor, whose name the agent inserted in the power, but erased after that creditor had been satisfied, and inserted another name, it was held that the agent's authority was ex- hausted by the first transaction, and the principal was entitled to a return of the stock.^ It was contended on the one hand that the issuing of the power in blank implied the intention of the owner to pledge the stock to any creditor who should loan money to the attorney authorized to make the transfer ; on the other that the filling up of the blank in the first instance argued, that any subsequent transferee knew that the owner had issued the power only for the benefit of the person whose name was first inserted in the power. Then the creditor replied that erasing the first name and inserting his own, made the transfer under the power legal and valid; and the owner rejoined that the attor- ney's power was exhausted when he first filled the blank. " And out of this forensic game of shuttlecock and battledore," say the court, " we are expected to educe the equities that shall deter- mine the title to the stock ; " and they accordingly hold that the owner having proved his allegation that he transferred the stock only to secure the creditor whose name was first inserted, and 1 Felt V. Reye, 23 How. (N. Y.) Pr. ^ Newberry it Detroit & Lake Su- 359. perior Iron Co. 17 Mich. 141. 2 Porter v. Parks, 49 N. Y. 564. ■* Denny v. Lyon, 38 Pa. St. 98 ; and see Sitgreaves v. Farmers' & Me- 366 cbanics' Bank, 49 Pa. St. 359, 365. RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§§ 473, 474. that this creditor had been fully paid, he was entitled to a re- turn of the stock. 473. The mere fact that a certificate of stock re-hypoth- ecated by the pledgee, was in the name of the first pledgor, accompanied with his power of attorney to transfer it, is not of itself sufficient to charge the second pledgee with notice of the first pledgor's rights, or even to charge him with sufficient knowl- edge of those rights to put him upon inquiry.^ To pass the title to stock, in equity at least, it is not necessary that it should be transferred upon the books of the corporation.^ The pledgee may hold the certificate with the power of attorney, and have all the rights he could have from a transfer of the stock upon the books. So if a certificate of stock be assigned to one by a transfer not filled in, that is by a transfer signed in blank, the holder of the certificate may effectually pledge it in that condition, though in doing so he makes an improper use of the stock. Equity will not give the assignor relief against a bond fide pledgee of the certificate, though the assignee pledges it in that condition, with- out having the stock first transferred to himself on the books of the corporation.^ III. His Rights when Dealing ivith One holding a Fiduciary Relation. 474. One holding stock as •' trustee " has prima facie no right to pledge it, to secure his own debt growing out of an in- dependent transaction ; and whoever takes it as security for such debt, without inquiry, does so at his peril.'* If a certificate of stock issued in the name of " A. B. trustee," be pledged by him 1 Felt V. Heye, 23 How. (N. Y.) Budd u.Munroe, 18 Hun (N. Y.), 316; Tr. 359. Simons r. S. W. Railway Bank, 2 Am. 2 See §§ 169-171. L. Reg. 54G ; Ham v. Ham, 58 N. II. 3 Otis u. Gardner (111. 1883), 15 70. See Ashton v. Atlantic Bank, 3 Rep. 332. Allen (Mass.), 217, for a case decided * Siiaw V. Spencer, 100 Mass. 382; on its own peculiar facts, but still go- Jaudon v. Nat. City Bank, 8 Blatchf. ing too far, perliaps, iu protecting the 430; Duncan y. Jaudon, 15 Wall. 1G5; lender from liability ari.^iug from a and see Sj)rague v. Coclieco Manufac- presumption of bis knowledge that turing Co. 10 Blatchf. 173; Swan v. the pledge was made in violation of Produce Bank, 21 Hun (N. Y.), 277; the trustee's duty. 367 § 474.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. to secure his own debt, the pledgee is, by the terms of the cer- tificate, put upon inquiry as to the character and limitations of the trust. The effect of the word " trustee " is the same as if it had been A. B., trustee for C. D.^ " Where one known to be a trustee is found pledging that which is known to be trust prop- erty, to secure a debt due from a firm of which he is a member, the act is one primd facie unauthorized and unlawful, and it is the duty of him who takes such security to ascertain whether the trustee has a right to give it. The appropriation of corporate stock held in trust, as collateral security for the trustee's own debt, or a debt which he owes jointly with others, is a transac- tion so far beyond the ordinary scope of a trustee's authority, and out of the common course of business, as to be in itself a suspicious circumstance, imposing upon the creditor the duty of inquiry. This would hardly be controverted in a case where the stock was held by ' A. B., trustee for C. D.' But the effect of the woi'd ' trustee ' alone is the same. It means trustee for some one whose name is not disclosed ; and there is no greater reason for as- suming that a trustee is authorized to pledge for his own debt the property of an unnamed cestui que trust, than the property of one whose name is known. In either case, it is highly improbable that the right to do so exists. The apparent difference between the two springs from the erroneous assumption that the word ' trustee ' alone has no meaning or legal effect." ^ This case, and the prin- ciples therein announced, are approved by the Chancellor of New Jersey in a recent case. There it was held that the fact that a certificate of stock is indorsed to a person as " trustee " is suf- ficient notice of the existence of the trust, whatever that may be ; and that one who loans money to such person, on a pledge of such stock, has notice that the trustee is abusing his trust, and applying the monej'^ to his own purposes, when the loan is appar- ently for the private purposes of the borrower, and that fact would be revealed by inquiry .3 " In this case," said the Chan- cellor, " one of two innocent parties must suffer, — the bank (which made the loan) or the cestuis que trust; and it is but just that the loss should fall on the former, which might, by the ex- 1 Shaw V. Spencer, 100 Mass. 382; ^ Per Foster, J., in Shaw v. Spencer, Sturtevant v. J;i([ues, 14 Allen, (Mass.) supra. 623 ; and see Fisher v. Brown, 104 « Gaston v. Am. Exch. Nat. Bank, Mass. 259. 29 N. J. Eq. 98. 368 RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§ 474. ercise of reasonable care, have protected itself. In such cases reasonable care is a duty. The trustee proposed to borrow money on his individual account for his own use, and to secure the repayment of it by the pledge of stock which on its face bore evidence that it was not his own, but the property of some one else, for whom he held it in a fiduciary capacity, and that he had no right to pledge it for his own debt. The bank, without a question, even to him, so far as appears, as to his right to pledge the stock, and without any inquiry whatever on the subject, lent him the money and accepted the security. One hundred shares of the stock still stood on the books of the company in the name of the trustee's immediate predecessor in the trust. As to all of the stock, the fact that it was held in trust was known to the bank. It was not misled by any statement or representation. It chose to assume that inquiry was unnecessary, and to rely on the character of the trustee as a guaranty for the lawfulness of the transaction, and the propriety of his conduct in dealing with the trust property. The loss should, as before remarked, in equity fall on it rather than on the cestuis que trust.^' There was a similar case in Pennsylvania of a lender advanc- ing his money on certificates of stock, expressed on their face as held by the borrower in trust for some other party, and making no effort either to ascertain who that party was, or whether the funds proposed to be raised on the securities were bond fide in- tended to be applied for the purposes of the trust. " A loan made under such circumstances," say the court,^ " is at the peril of the lender. In Maples v. Medlin,^ on the soundest principles it was ruled, that to make a purchaser of the legal estate a trustee ^ Walsh V. Stille, 2 Pars. (Pa.) pressed, would have demanded by Eq. 17, 23. Per King, Prest., J.: " In what authority he proposed making the first place it was manifest, from use of them, and for what purpose, the face of the certificates, that Stille consistent with his duty as trustee, did not hold tiie stocks in his own he intended to use tlie money raised right, but in a fiduciary character for from them. Nor would a cautious some other person. In the answer, lender have been satisfied with the Bridges (tlie lender) does not say that mere say-so of the trustee, lie would he ever made any inquiry of Stille on and ought to have applied to the cor- the subject, a circumstance in itself porations, in order, if practicable, to suspicious. One would suppose that ascertain from that source who was any prudent man, when such secu- the true party interested beneficially rities were oilered to him by a party in them." whose character was so distinctly ex- ^ 1 Murphy (N. C), 219. 21 309 §§ 475-477.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. for the cestui que trust it is not necessary that he shouM have notice of the particular cestui que trust. It is sufficient if he has notice that the person from whom he purchased is a trustee." 475. A certificate of stock issued to " the estate of " a de- ceased person is notice to a pledgee that the stock is affected by a trust. If therefore in order to carry out the provision of a will giving the income of certain real estate to the testator's wife for life, by agreement of all the parties interested they sell the real estate, and the executors invest the proceeds in certain stock, taking the certificate in the manner indicated, inasmuch as the executors really hold the shares in trust, and not in their capacity of executors, one of them cannot make an effectual pledge of the shares to secure a debt of his own, by indorsing the certificate in his own name as executor.^ 476. One of two trustees cannot, without the consent of his co-trustee, pledge the trust property ; and a person taking such a pledge with notice of the trust acquires no title to the property.^ The fact that a certificate of stock is issued to " the estate of " a person deceased is notice of the trust to one who takes it in pledge from one of two executors.^ 477. A corporation whose stock is transferred upon its books by a trustee or executor to secure a loan to himself may be liable for permitting the transfer, when its officers have good reason to know that the trustee or executor is violating his trust.* In a case in the Circuit Court of the United States for Maryland holding a bank liable for permitting such a transfer, Chief Justice Taney said : ^ " Undoubtedly, the mere act of per- mitting this stock to be transferred by one of the executors, fur- 1 Ham V. Ham, 58 N. H. 70; and mers' Bank of Baltimore, Taney, 310, see Pannell v. Hurley, 2 Coll. 241. 330. ^ Ham V. Ham, supra ; Cottam v. In this case the transfer was not Eastern Counties Ry. Co. 1 Johns, made until after the lajise of eight & H. 243. years after the testator's death, at ^ Ham V. Ham, supra. which time the bank was bound to * Magwood V. Railroad Bank, 5 S. presume that the testator's debts had C. 379; Loring v. Salisbury Mills, 125 been paid, and was bound to know Mass. 138. that the executor had no implied ' Lowry v. Commercial and Far- authority to sell the testator's stock. 370 RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§§ 478, 479. nishes no ground for complaint against the bank, although it turns out that the executor was, by the act of transfer, converting the property to his own use ; for an executor may sell or raise money on the property of the deceased, in the regular execution of his duty ; and the party dealing with him is not bound to in- quire into his object, nor liable for his misapplication of the money. . . . But if these officers, at the time of the transfer, had reason to believe that the executor, by the act of transfer, was converting this stock to his own use, in violation of his duty, then the bank, by permitting the transfer knowingly, enabled the ex- ecutor to commit a breach of his trust, and upon principles of justice and equity is as fully liable as if it had shared in the profits of the transaction. The object of the executor could not have been accomplished without the cooperation of the bank, in per- mitting the transfer to be made on its books." 478. One who takes in pledge shares of stock knowing that the pledgor holds them in trust and that he is using them to secure his own debt, cannot hold them as against the beneficial owner, though there is nothing upon the face of the certificate to indicate such trust.^ 479. A person in good faith loaning money upon cer- tificates of stock which do not indicate any trust, is not bound to examine the books of the corporation, or to look be- yond the certificate assigned to him to ascertain the validity of former assignments ; and his title is not affected by the fact that the stock was originally held by the borrower as " trustee " for a third person, and that the borrower had by mesne conveyances fraudulently obtained a transfer to himself, making the pledge in question to secure his own debt.^ The corporation itself is liable in damages to the cestui que trust for negligently recording a transfer by the trustee, when it has knowledge that the present holder is a trustee, and also has knowledge of the name of the cestui que trust.^ ^ Crocker u. Crocker, 31 N. Y. 507; supra; Bayard v. Farmers' & Me- Lorinjr v. Brodie, 134 IMass. , chanics' Bank, 52 Pa. St. 232; Lowry 2 Salisbury Mills v. Townsend, 109 v. Commercial & Farmers' Bank, Mass. 115; Atkinson v. Atkinson, 8 Taney, 310. Allen (Mass.), 15 ; Crockery. Crocker, 3 j^oring v. Salisbury Mills, 125 371 §§ 480, 481.] EIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. 480. But contrary to the better and prevailing rule, it has been held in Maryland and California, that tiie addition of the word " trustee " in a certificate of stock does not show that the person to whom it is issued has not the full right to pledge it as his own, nor give the person dealing with him notice that any other person has any interest in the same.^ " All that is in- tended to be decided is, that the mere addition of the word ' trus- tee ' after the name in the certificate is not, in this state, of itself, nothing more appearing, to be deemed constructive notice of the equities of a secret owner of the stock. If it is intended that the so-called trustee shall not have power to sell or hypothecate the stock, without the expi'ess consent of the equitable owner, it is an easy matter to limit his authority by apt words in the certifi- cate." 2 Moreover, it is declared that if the word raises a pre- sumption that some one else is the owner, it may be inferred that the latter, in clothing the trustee with the legal title, invested him with authority to sell in the usual course of business. " Con- siderations of public policy and common justice demand that when stock is placed in the name of a trustee under these cir- cumstances, the secret owner shall be bound by the act of his trustee dealing with persons who have no actual notice of the relations between the parties." ^ 481. There is a material distinction between pledges by executors or administrators and pledges by trustees ; for a sale and transfer of stock is ordinarily in the line of duty for the former; but trustees presumptively hold trust property as an investment for their cestuis que trusts Therefore, while mere Mass. 138; and see Salisbury Mills v. ^ Brewster t?. Sime, 42 Cal. 139, Townsend, supra, per Chapman, C. J.; 144. Pratt V. Taunton Copper Co. 123 3 Brewster v. Sime, supra, per Mass. 110; Pollock v. National Bank, Crockett, J. 7 N. Y. 274, 278; Telegraph Co. v. •* Prall v. Tilt, 28 N. J. Eq. 479, Davenport, 97 U. S. 369; and see 484, per Green, J.; Gaston v. Am. Willis V. Phila. & Darby R. K. Co. 6 Exch. Nat. Bank, 29 lb. 98, 102, per Weekly Notes Cas. 461. Runyon, Chancellor; Bayard v. Far- 1 Albert v. Savings Bank of Balti- mers' & Mechanics' Bank, 52 Pa. St. more, 1 Md. Ch. 407; S. C. affirmed 232, per Strong, J.; Leitch v. Wells, 2 Md. 159; Thompson v. Toland, 48 48 N. Y. 585; Jaudon v. National Cal. 99 ; Winter v. Belmont Mining City Bank, 8 Blatchf. 430 ; and see Co. 53 Cal. 428; see, however, Brew- Nutting u. Thomason,46 Ga. 34 ; Stin- ster V. Hartley, 37 lb. 15. son v. Thornton, 56 lb. 377 ; Carter v. 372 RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§482. knowledge that an executor or administrator is dealing in a fidu- ciary capacity with assets of the estate, is not enough to raise a suspicion or to put one dealing with him upon inquiry, such knowledge affects one dealing with a trustee with notice of the terms of the trust. One taking stock in pledge from a trustee deals with it at his peril, for there is no presumption that the trustee has a right to dispose of it, as there is in the case of an executor.! It is negligence in one taking stock in pledge for loans to a trustee to act without inquiry ; and certainly if the pledgee has reasonable ground for believing that the trustee intends to apply the money obtained upon such loans to his private uses, he will be regarded as cooperating in a breach of trust.2 482. For the purposes of administration, the title of an executor is absolute, and a purchaser or pledgee from him of personalty of the estate is neither required to notice the provis- ions of the testator's will, nor made liable for the executor's mis- application of the purchase money .^ To require evidence of au- National Bank of Lewiston, 71 Me. 448, 453. In this case the court say: " The law recognizes a distinction be- tween an ordinary trustee and an ex- ecutor. The former has possession for custody and the latter for adminis- tration. The latter has a necessary incidental power of disposal which the former does not. And as a conse- quence when one purchases of the latter stocks or other securities bearing on their face the revelation of a trust, he may do so safely in the absence of notice or knowledge of any intended breach of trust on the part of the ex- ecutor; but if he purchase like trust property of an ordinary trustee the law imposes upon him the duty of in- quiring into the right of the trustee to change the securities." 1 Woods' Appeal, 92 Pa. St. 379. 2 Jaudon v. Nat. City Bank, 8 Blatchf. 430; Duncan v. Jaudon, 15 Wall. 1G5; Lowry v. Commercial & Farmers* Bank, Taney, 310. 8 Russell V. Plaice, 18 Beav. 21; Cruikshank v. Duffin, L. R. 13 Eq. 555 ; Tyrrell v. Morris, 1 Dev. & B. (N. C.) Eq. 559; Vane v. Rigden, L. R. 5 Ch. App. 663. In the latter case Lord Hatherly said: " Lord Thurlow expressed his opinion clearly to be that the executor is at lib- erty either to sell or pledge the as- sets of the testator. Scott i'. Tyler, 2 Dick. 712, 725. In fact he has complete and absolute control over the property, and it is for the safety of manhood that it should be so; and nothing which he does can be disputed, except on the ground of fraud or col- lusion between him and the creditor." And Sir W. M. James in the same case said: "It seems to me to be set- tled on principle, as well as by author- ity, that an executor has full right to mortgage as well as to sell; and it would be very inconvenient and very disastrous if the executor wore obliged immediately to convert into money by 373 § 482.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. thority beyond the letters testamentary, might greatly delay and embarrass the executor in the discharge of his duties. ^ The executor has an inherent right to sell the personal assets of the estate, and the same right to pledge them ; and the purchaser in the one case, or the creditor in the other, has no concern with the purpose for which the executor makes the sale or pledge. The executor is liable to those interested in the estate for any misapplication of the assets ; but the purchaser or pledgee is not bound to know whether the money obtained is required for the payment of debts of the estate, or in fact to know anything about the estate beyond the executor's appointment.^ The same rule applies to administrators. " The law casts the legal owner- ship of personal property of a deceased intestate upon his admin- istrators. They are sometimes said to be trustees, but they are such for administration. Their primary duty always is to dis- pose of the personal property, and therewith pay the debts of the intestate and make distribution among his next of kin. A sale and transfer of stocks by them is therefore in the line of their duty. There is no cestui que trust having a right to interfere sale every part of the assets of the tes- tator. It is a very common practice for an executor to obtain an advance from a banker for the immediate wants of the estate by depositing securities. It would be a strange thing if that could not be done." The American cases are to the same effect. Smith v. Ayer, 101 U. S. 320. ^ Bayard v. Farmers' & Mechanics' Bank, 52 Pa. St. 232; Woods' Appeal, 92 Pa. St. 379; Goodwin v. Am. Nat. Bank, 13 Rep. 268; Carter v. Nat. Bank of Lewiston, 71 Me. 448. Mr. Justice Virgin in that case said: " As a necessary incident to the execution of the will and the administration of the estate, the power to dispose of the personal estate is given to the execu- tor. And no general proposition of law is better established than that an executor has an absolute control over all the personal effects of his testator. While it is the duty of an executor to use reasonable diligence in convert- 374 ing assets into money for the general purposes of the will, the law permits him to exercise a sound discretion as to the time, within a limited period, when he will sell. And high authority has declared that circumstances may exist in which it is certainly not wrong in him, although it may not be a posi- tive duty, to make advances for the benefit of the estate and reimburse himself therefrom. Munroe v. Holmes, 13 Allen, 109, 110. If he may advance his own money for the general purposes of the will and may sell the personal efEects for the like object, it is difficult to see why, in the absence of any pro- hibitory provision in the will, he may not mortgage or pledge the assets for the same purpose ; and the great weight of authority so holds." 2 Leitch V. Wells, 48 N. Y. 585; Hutchins v. State Bank, 12 Met. (Mass.) 421 ; and see Petrie v. Clark, 11 S. &R. (Pa.) 377. RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§ 483. and prevent such a transfer. Hence letters of administration are always sufficient evidence of authority." ^ A foreign executor or administrator can generally make a valid transfer of shares of stock. For this purpose there is not the occasion that there is when an executor or administrator assigns a mortgage that his authority to act should appear by letters granted in the state where the land is situated.^ By statute in Pennsylvania foreign executors and administra- tors are invested with authority over shares of stock of incorpor- ated companies within that state standing in the names of dece- dents ; and therefore in the absence of any provision in the bj^-laws or articles of association of a national bank to the con- trary, such a bank is bound to recognize a transfer of its stock by a foreign executor only appointed in another state.^ 483. One of several executors has the same power to dis- pose of his testator's personalty that all the executors have jointly. One executor may pledge a note belonging to the estate of his testator, or may pledge stock belonging to it as collateral security for a debt of the estate ; * and the pledgee is not bound to inquire or to know in any particular case whether the executor is obtaining the money for that purpose or for his own benefit. " Co-executors are regarded in law as an individual person ; and the acts of any one of them, in respect to the ad- ministration of the effects, are deemed to be the acts of all ; as where one releases a debt or settles an account of a person with the deceased, or surrenders a term, or sells the goods and chat- tels of the estate, his acts bind the others." ^ One of four execu- tors placed in the hands of his brokers certain certificates of stock which belonged to the estate of his testator. These certificates were pledged as collateral security for the personal indebtedness of this individual executor, and were accompanied by a blank bill of sale and a power of attorney signed by him as acting exec- utor. The brokers in turn pledged the stock to one who ad- 1 Bayard v. Farmers' & Mechanics' (C. C. E. D. Pa.) 8 Weekly Notes, Bank, 52 Pa. St. 232, 235. Per Cas. 131. Strong, J. * Wheeler v. Wheeler, 9 Cow. (N. The above case led to the passage Y.) 34. of Stat. 23, May, 1874, Purdon 1942. ^ Wood's Appeal, 92 Pa. St. 379. '■' Jones on Mortgages, § 797. Per Trunkey, J. 2 Ilobbs V. Western Nat. Bank, 375 §§ 484, 485.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. vanced money to tliem in the belief that the brokers were the real owners of the stock. Upon a bill in equity filed by the remaining executors to recover the stock, it was held that the same principle which prevails in the case of an absolute owner applies in the case of an executor who invests the holder of cer- tificates of stocks with apparent ownership, and that there could be no recovery of the stock until the advances made thereon were paid.^ 484. A trustee of an insolvent debtor, whose duty is like that of an executor or administrator, to dispose of the property and distribute it, would probably stand upon the same footing.^ He does not hold the property for custody but for administration. 485. Knowledge that an executor or administrator is mis- appropriating securities. — An exception, however, has been made in respect to cases in which an executor or administrator personally borrows money upon the security of a certificate of stock belonging to the estate in his charge, in such a way that the person dealing with him knew, or might have known, that such representative was using tlie securities of the estate for his own debts; and in such cases it has been held that a person hav- ing knowledge of the representative's fraudulent conversion of stock belonging to the trust fund, can acquire from him no title to it.3 The distinction between a case where one dealing with an executor has knowledge that he is abusing his trust in using for himself or for another stock belonging to the estate, and a case 1 Wood's Appeal, 92 Pa. St. 379. Eq. 182; Abbott v. Reeves, 49 Pa. St. 2 Bajard v. Farmers' & Mechanics' 494; Pendleton v. Fay, 2 Paige (N. Bank, 52 Pa. St. 232, 235. Per Y.), 202. Strong, J. And see Hill v. Simpson, 7 Ves. 152, « Smith V. Ayer, 101 U. S. 320, 326; 168 ; Collinson v. Lister, 7 DeG. M. Wood V. Ellis, Court of Com. Pleas & G. 633; Dodson r. Simpson, 2 Rand. Pa. 31 Leg. Int. 140; affirmed in the (Va.) 294; Christmas v. Mitchell, 3 Supreme Court in Ellis's Appeal, 8 Ired. (N. C.) Eq. 535; Williamson v. Weekly Notes Cas. 538; Williamson Branch Bank of Mobile, 7 Ala. 906; V. Morton, 2 Md. Ch. 94 ; Albert v. Haynes r. Forshaw, 11 Hare, 93; Wil- Savings Bank of Baltimore, 2 Md. son v. Moore, 1 Mylne & K. 337; Colt 159; Ashton v. Atlantic Bank, 3 Allen v. Lasnier, 9 Cow. N. Y. 320; Miller (Mass.), 217; Nicholls v. Peak, 12 v. Williamson, 5 Md. 219; Carter v. N. J. Eq. 69; Dey v. Dey, 26 N. J. Nat. Bank of Lewiston, 71 Me. 448. 376 RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§ 485. where one dealing with an executor or administrator in relation to such stock is led to believe that he is using it legitimately, is well illustrated by two recent cases in New Jersey arising out of the administration of the same estate. In the one case ^ the ex- ecutrix, who was the widow of the testator, assigned certain stock belonging to the estate as collateral security for the debt of two of her sons, who with other children of hers were interested in the estate. The will gave a life estate in the property to the widow, with power of sale and re-investment ; and after her death the property was to go to all the children ; although in a certain con- tingency the executrix was authorized to advance a certain sum to each of the sons whose debts she secured. The certificates of stock so assigned stood in the name of the testator, and the sons' cred- itor knew at the time of the transfer that the stock belonged to the estate. The sons were in business, and the stock was assisned to give them credit for goods to be purchased. The creditor may very likely have thought that the executrix had a legal right to pledge the stock as security for the credit to be given the sons. But that was held not to be enough to protect him in the possession of the stock ; for he knew that the executrix was not disposing of it in the course of administration, but was pledging it as executrix, to secure credit for her sons in their private business ; a purpose obviously and confessedly not connected with her trust as executrix, and it was his duty to inquire as to her authority so to deal with the stock. Having disregarded this duty he could not successfully claim protection on the ground of bond fides and ignorance. In the other case^ the same sons obtained ci'edit with another person by pledging stock as collateral security. The creditor undoubtedly knew that the stock had belonged to the testator, and that at the time of the negotiation it still stood in his name on the books of the company, as appeared by the certificates, for these were delivered to him by the sons with a power of attorney in blank for the transfers, duly executed by the executrix. The circumstances distinguishing this case from the other are tliat the application for credit was made by one of the sons, who represented that the stock in question belonged to himself and his brother, and had been acquired by them on account of their 1 Prall V. Ilainil, 28 N. J. Ivj. GO. » Prall v. Tilt, 28 N. J. Eq. 479, afTirming 27 N. J. Eq. 303. 877 §§ 486, 487.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. interest in the estate. This statement was corroborated by the executrix in delivering to her sons the certificates and her blank power of attorney to transfer the stock. The creditor in this case dealt with the soils, who held the certificates and dealt with them as their own property, by virtue of a title valid upon its face, although derived from the executrix ; while the creditor in the other case received and dealt with the stock as the property of the estate. 486. Knowledge that an executor is perverting the per- sonal assets of the estate in his hands to his own use is im- puted to a pledgee, from knowledge that he is using a promissory note belonging to such estate as collateral security for money bor- rowed for the use of a commercial firm of which the executor was a member.^ The pledgee dealing with the executor is bound to look into his authority, and is held to a knowledge of all the limita- tions thereon imposed by law or by the will under which he acts. Such knowledge of the trust as should put the pledgee upon in- quir}^ will charge him with actual knowledge of the trust.^ Stocks, promissory notes, or other personal assets taken by a pledgee with knowledge that the executor or administrator is acting in violation of his trust, and in disregard of its obligations, may be followed and recovered of such pledgee.^ 487. The fact that an executor pledges a certificate of stock issued to him as executor, to secure his own note, is not conclusive notice to the pledgee that the executor is pro- curing the money for his own private use. On the contrary, if the pledgee makes a loan upon such note and security in good faith, and relying upon the executor's affirmation that the money is wanted for the settlement of the estate, the pledge is valid.* 1 Smith V. Ayer, 101 U. S. 320; 71 Me. 448. Virgin, J., said : "The Thomasson v. Brown, 43 Ind. 203 ; note could not be collected against the Prosseri;. Leathernian, 4 How. (Miss.) estate, for it was the personal note of 237; Loring r. Brodie, 134 Mass. . the executor. He could not create a 2 Ellis's Appeal, 8 Weekly Notes debt in that manner against the estate. Cas. 538 ; Webb v. Graniteville And if the money was thereby pro- Manuf. Co. 11 S. C. 396. cured for his own private use, and the 8 Smith V. Ayer, supra; Thomasson bank knew it at the time, the transfer V. Brown, supra. of the stock would be a devastavit, and * Carter v. Nat. Bank of Lewiston, could not be upheld. If the note had 378 RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§§ 488, 489. 488. The same facts that are notice to an individual are notice to a corporation that an executor or administrator bor- rowing money of him is committing a breach of trust. " If a banking company has what is called a branch bank, managed or superintended by a local agent, who, in that character, advances money of the banking company, by way of loan, knowing at the time facts which render the loan an improper transaction, and would prevent the agent from sustaining it were the transaction his own, — as in the instance of a trustee borrowing money in that character, who, by the very act of so borrowing, commits a breach of trust, having sought and obtained the money for the sole purpose of misapplying it, and the circumstances being all known at the time to the agent lending, — I apprehend it to be clear that the banking company acquire no better title than the- agent would have done had the case been his own, or than the trustee." ^ 489. A pledgee is not bound to see to the proper appli- cation of the proceeds of a loan obtained by an executor. Thus, an executor having power either to pay certain legacies or to hold a portion of the estate in trust, and to pay the income thereof to the legatees during their lives, represented to a bank that he desired to pay the legacies, and that it would be to the advantage of the estate to obtain a loan upon a pledge of certain stock, so as not to be obliged to sell this until there should be a more favorable condition of the market. The loan was made upon his note as executor, secured by the stock, and the proceeds been given to the bank for a private plaint. The case finds ' that the debt due to the bank from the execu- money was loaned in good faith by tor, created before or during his ex- the bank, and, upon the statement ecutorship, but independent thereof, made by Cook, that the same was it would come within the principle of wanted in the settlement of the the numerous cases before cited, where estate.' The presumption is, that the transaction itself would speak and he was acting faithfully. There is conclude the bank. But if given as no evidence tot he contrary, and the a voucla-r for money obtained for a presumption must stand." The doc- legitimate purpose connected with a trine of this case is recognized in hond fide administration of the will, Pettingill v. Pettingill, 60 Me. 412, then, though the executor alone was 425. made liable for its payment, the trans- ^ Collinson v. Lister, 7 De G. M. & action would be legitimate, and the G. 633, per Knight Bruce, L. J. estate would have no reason for com- 379 § 490.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. were placed to his private account in the bank. Shortly after- wards he transferred a part of the proceeds to another account kept by hira in the bank as town treasurer. The note was renewed from time to time for four years, when the executor left the state a defaulter. It was held that no knowledge of actual fraud, either accomplished or intended, was to be imputed to the bank from these circumstances, and that there was no duty laid upon the bank to see to the application of the money. The declared purpose of the loan was one for which the bank could safely make the loan.^ The money obtained upon the loan became so far his own that he was entitled to take possession of it, or place it to his own private account, to transfer it from one account to another, or to draw it out, without imposing upon the bank any obligation to know or suspect that he was commit- ting a fraud in his trust. Neither was any knowledge of fraud, accomplished or intended, imputed to the bank from the fact that the executor transferred money from his own account to his account as treasurer, and drew checks upon the latter account, payable to himself or bearer. The bank was " not required to assume the hazard of correctly reading in each check the pur- pose of the drawer." Nor was the continuance and renewal of the loan a circumstance from which the bank should be charged with knowledge of the executor's fraudulent purpose. The reason for borrowing was also a reason for continuing the loan. 490. The same rule is applied to dealings with persons occupying other fiduciary relations, which primd facie give them no power of disposal of the trust property, such as guardian, receiver, master in chancery, or officer of a corporation. One dealing with persons occupying such positions of trust, with notice that they are using trust property for their private use, is not entitled to protection as a bond fide purchaser.^ " It is an undoubted principle of equity," say the Supreme Court of Penn- 1 Goodwin I'. Am. Nat. Bank (Conn, felin, 7 Johns. (N. Y.) Ch. 150 ; Mul- Dec. 1881), 13 Rep. 268. ligan j;. Wallace, 3 Rich. (S. C.) Eq. 2 Atkinson v. Atkinson, 8 Allen 111; "Webb v. Grauiteville ]\Ianuf. (Mass.), 15; Jaudon r. National City Co. 11 S. C. 396. Bank, 8 Blatchf. 430 ; Field v. Schief- 380 RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§ 491. sylvania,^ " that the owner of property may follow and reclaim it wherever he can find and identify it, until arrested in the pursuit by the countervailing equity of a bond fide purchaser, for a valuable consideration paid. A purchaser with notice that the sale is a breach of trust, or a fraud upon the rights of the real owner, is particeps criminis with the fraudulent vendor, and his purchase cannot protect him against the owner, because such a purchase is not bond fide. Notice is either actual or constructive. Constructive notice is in its nature no more than evidence of notice, the presumption of which is so violent that the court will not even allow of its being controverted. Whatever is sufl&cient to put a party upon inquiry, is in equity held to be good notice to bind him. Where a purchaser cannot make out a title but by a deed which leads him to another fact, he shall be presumed to have knowledge of that fact ; so he is supposed to have knowl- edge of the instrument under which the party with whom he contracts as executor, or trustee, or appointee, derives his power." 491. These principles have been applied to the case of a pledge of municipal bonds by the president of a railroad company, to which the bonds were issued and to which they be- longed, as collateral security for the president's own debt ; and it appearing upon the face of the bonds that they were issued to the railroad company, and that they were indorsed in blank by the president in behalf of the company, it was held that one taking the bonds as security for an existing individual debt of the presi- dent himself, was bound to inquire into his authority to make the transfer ; and the inquirer would have found that the president had authority merely to negotiate the bonds for the benefit of the company. The court say that one purchasing the bonds from the president for a money consideration, would have purchased in pursuance of the power, and would not have been atfected by any subsequent misapplication of the funds by the president. But when a creditor of the president's took the bonds as collateral security for his individual debt, the creditor became a party to the misapplication and the breach of trust. Even if the blank left for the name of the assignee had been filled up with that of the president himself, at the time his creditor took it, there would still have been sufficient to put him upon inquiry, because 1 Garrard v. Pittsburgh & Connelsville R. R. Co. 29 Pa. St. 154. 381 § 492.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. the president had no right to sell to himself as an individual. But the blank in the assignment was sufficient to show any man of ordinary prudence that it was an unfinished paper, placed in his hands as a convenient mode of executing the power to sell for the benefit of the company. When the chief officer of a corporation is found in possession of its securities, his possession is, as a general rule, presumed to be the possession of the corporation. The pledgee in this case was accordingly held to be afiected with con- structive notice of the rights of the corporation in the bonds so pledged.! 492. In Georgia it is provided by the Code that all sales by an administrator shall be public. In violation of this, an administrator sold at private sale certain stock belonging to the estate of the intestate, and the purchasers resold the same to the defendants, who were bond fide purchasers. Whether the inter- mediate transfer of the stock was or was not registered upon the books of the company does not clearly appear. " The question is," said the court, " if the administrator of the estate does col- lude with the purchaser of the stock, and sells it to him at pri- vate sale, and such purchaser of the stock at private sale after- wards sells it to a bond fide purchaser for value, without notice that it was purchased of the administrator at private sale, in fraud of the riglits of the parties interested therein, will such bond fide purchaser of the stock be protected in a court of equity ? This is an important question to the purchasers of stock in rail- road companies. It was said, on the argument of this case, that the bond fide purchaser of this stock stood in no better condition than the bond fide purchaser of stolen property ; that inasmuch as the thief had no title to the property stolen, those who pur- chased it from him, or derived title under or through him, ac- quired no better title than he had, and he having none, the bond fide purchaser would acquire none." But the court admit- ting that, as between the original parties, the transaction was undoubtedly invalid to divest the title of the legatees, held that the analogy had no application whatever as to subsequent pur- chasers, and that the latter were entitled to the protection of the 1 Garrard v. Pittsburgh & Connelsville R. R. Co. 29 Pa. St. 154. 382 RIGHTS WITH ONE HOLDING A FIDUCIARY RELATION. [§ 493. court, when they have purchased in good faith for vahie, without notice of the fraud in the sale by the administrator.^ 493. One taking a pledge of stock from another who is professedly acting as an agent cannot infer the agent's au- thority to pledge the stock as coUateral from the fact that he holds a certificate with an irrevocable power of attorney to trans- fer it, signed by the owner. Such a certificate and power of transfer confer upon the holder the apparent legal and equitable title " only when he appears to be the real owner of the stock. One dealing with a person whom he knows to be only an agent, or with a person who professes to be only an agent, is bound to inquire and to know what his authority is. Thus, a person hold- ing a certificate of stock as collateral for a loan of $3,000, applied to a bank for a loan of $8,000 upon this certificate, stating that he wanted it for a client. The bank agreed to make the loan if the applicant would procure a proper power of attorney to be attached to the certificate. The holder of the certificate by rep- resenting to the owner that he ought to have the instrument to secure his loan, procured from the owner a transfer and irrevo- cable power of attorney to make a transfer executed in blank. The pledgee filled up the blanks, save the name of the transferee and attorney, and delivered it with the certificate to the bank, which thereupon made the loan. The pledgee had no authority from the owner to repledge the stock, and the latter never re- ceived any part of the money procured from the bank upon the stock. In an action by the bank to foreclose the pledge it was held that the owner was not estopped from asserting his title to the stock, and that the bank could assert a lien only for the amount for which the owner had pledged the stock ; that while the transfer and power of attorney would have given to the first pledgee an apparent ownership in case he had claimed title, or an apparent authority to sell as agent, it did not hold him out as au- thorized to make a loan or to pledge the stock, or at most it only indicated that he could pledge the stock for an authorized loan. All the evidence the bank had of his authority to obtain a loan upon the stock was his naked assertion ; and upon this assertion it relied at its own risk. The owner did not hold him out as ^ Nutting V. Thoinason, 46 Ga. 34. 377; Ross v. Southwestern K. R. Co. See, also, Stinson v. Thornton, 56 Ga. 53 Ga. 514. 383 §§ 494, 495.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. authorized to borrow money for himself ; and hence the owner is not estopped from denying such authority.^ 494. A broker who buys stock on an order from another broker, knowing or having reason to know that the latter is acting only as an agent for an undisclosed principal, has no right in consequence of the omission to name the principal, to pre- sume that he has authorized his broker to pledge the stock for his own debt. It is wholly immaterial that the name of the real owner was not disclosed. The stock is held in trust for him as much as it would be had his name been given.^ Of course, when there is nothing upon a certificate of stock, or upon the com- pany's record of it, to indicate a trust on the part of the holder, one dealing with him in relation to the stock, without reason to know that it is held in trust, is not affected by a secret, undisclosed trust.^ A memorandum of " Framingham and Lowell Railroad bonds as collateral," on a joint and several note, signed by one as prin- cipal and by others as sureties, is not notice to the payee that the bonds mentioned should accompany the note for the protection of the sureties. The payee is under no obligation in consequence of the memorandum to take care of the interests of the sureties by refusing to lend money on the note, and a different security from that named ; and does not lose any rights against them by taking notes of the railroad company, instead of its bonds, as collateral.* IV. His Rights as Broker Carrying Stocks upon Margin. 495. The carrying of stock by a broker for a customer upon a margin creates the relation of pledgor and pledgee be- tween the parties, unless there be some express agreement be- tween the parties which would constitute the transaction a mort- ^ Merchants' Bank v. Livingston, amount for which the stock was sold. 74 N. Y. 223. Merchants' Bank v. Livingston, 17 Pending the appeal in this case i^he Hun, 321. stock was sold by consent of parties; ^ Fisher v. Brown, 104 Mass. 259. but at the time of the second trial it ^ Martin v. Sedgwick, 9 Beav. 333; •was shown to be worth twelve per Dodds v. Hills, 2 Hem. & Mil. 424. cent, more; but it was held that as the * Fitchburg Sav. Bank v. Rice, 124 owner had consented to the sale the Mass. 72. bank was only chargeable with the 384 broker's rights carrying stocks upon margin. [§ 495. gage.i The stock piircliased is the property of the customer, and is in effect pledged to the broker as security for the payment of the advances made by hira in the purchase of the stock. There- fore a sale of the stock by the broker at the broker's board, with- out notice, upon the faikire of the customer to keep the margin good, is a conversion of the stock ; and evidence of a usage that stocks so held might be sold in this manner is inadmissible.^ Thus, if a stock-broker undertakes to buy certain stock for a customer, the latter advancing ten per cent, of the market value, and agreeing to keep good such proportionate advance according to the fluctuations of the market, the result of the agreement, as stated by Chief Justice Hunt,^ is as follows : " The broker under- takes and agrees : 1. At once to buy for the customer the stocks indicated ; 2. To advance all the money required for the pur- chase, beyond the ten per cent, furnished by the customer ; 3. To carry or hold such stocks for the benefit of the customer so long as the margin of ten per cent, is kept good, or until notice is given by either party that the transaction must be closed, — an appreciation in tlie value of the stocks is the gain of the customer, and not of the broker ; 4. At all times to have in his name, or under his control, ready for delivery, the shares purchased, or an equal amount of other shares of the same stock ; 5. To deliver such shares to the customer when required by him, upon the re- ceipt of the advances and commissions accruing to the broker; or, 6. To sell such shares upon the order of the customer, upon payment of the like sums to him, and account to the customer for the proceeds of such sale. Under this contract the customer undertakes : 1. To pay a margin of ten per cent, on the current market value of the shares ; 2. To keep good such mai'gin ac- cording to the fluctuiitions of the market ; 3. To take the shares 80 purchased on his order whenever required by the broker, and 1 Baker v. Drake, 66 N. Y. 518; N. S. 428 ; Colt v. Owens, 90 N. Y. Stenton v. Jerome, 54 lb. 480; Vau- 368; Thompson v. Toland, 48 Cal. 99; pell V. Woodward, 2 Sandf. (N. Y.) AVorthington v. Tormey, 34 Md. 182; Ch. 143; iMcNeil r. Tenth Nat. Bank, Hatch v. Douglas, 48 Conn. 116; 55 Barb. (N. Y.) 59, overruled on i\ C. 12 Rep. 744. other points in 46 N. Y. 32o; Brass 2 Markham r. Jaudon, 41 N. Y. 235, V. Worth, 40 Barb. (N. Y.) 648; overruling Sterling j;.Jaudon, 48 Barb. Clarke v. Meigs, 22 How. (N. Y.) Pr. (N. Y.) 459; Hanks v. Drake, 49 lb. 340; Morgan v. Jaudon, 40 lb. 306; l«i). Read t;. Lambert, 10 Abb. (N. Y.) Vv. » In Markham v. Jaudon, supra. 25 385 § 496.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. to pay the difference between the percentage advanced by him and the amount paid therefor by the broker." 496. The broker acts in a threefold relation : first, in pur- chasing the stock he is an agent ; then, in advancing money for the purchase, he becomes a creditor ; and, finally, in holding the stock to secure the advances made, he becomes a pledgee of it. It does not matter that the actual possession of the stock was never in the customer. The form of a delivery of the stock to the customer, and a redelivery by him to the broker, would have constituted a strict, formal pledge. But this delivery and redelivery would leave the parties in precisely the same situation they are in when, waiving this formality, the broker retains the certificates as security for the advance. The contract is in spirit and effect, if not technically and in form, a contract of pledge, and is governed by the law of pledges.^ In Stenton v. Jerome,^ the effect of a contract for the purchase of stock upon a mai'gin was carefully considered by the New York Court of Appeals. The agreement between a firm of stock- brokers and their customer provided that the latter should fur- nish a specified margin as security, and keep the same good whenever called upon to do so ; and in the event of non-com- pliance with such demand, the brokers were authorized to close the account without notice, by purchase or sale, at public or private sale, or at the brokers' board, or otherwise. In an action against the brokers by the customer for a sale of stock without making demand for more margin, or for payment, the court ^ say : " Under the agreement the defendants were not obliged to carry the stocks indefinitely. Whenever they desired to close the transaction in reference to any stocks, it was their duty to tender the certificates thereof to the plaintiff, and demand payment for them ; then, if within a reasonable time he did not take and pay for the stocks, they had a i-ight to sell them to satisfy their lien, 1 Per Hunt, C. J., in Markham v. Hanks v. Drake, 49 Barb.' (N. Y.) Jaudon, 41 N. Y. 235. See, however, 186, Sterling v. Jaudon, 48 lb. 459, dissenting opinions of Grover and and Schepeler v. Eisner, 3 Daly (N. Woodruff, JJ. ; Morgan r. Jaudon, Y.), 11, cannot be considered law; 40 How. (N. Y.) Pr. 366. and, in fact, are overruled in Mark- ^ 54 N. Y. 480, approved in Baker ham v. Jaudon, supra. V. Drake, 66 N. Y. 518. Expressions ^ pg^ Earle, C. not in accord with these cases, in 386 broker's rights carrying stocks upon margin. [§§ 497, 498. after first giving her notice of the time and place of sale. There was only one contingency in which they could, under the agree- ment, sell the stock without notice, and that was, if the plaintiff's margin fell below twenty per cent, and she failed, upon demand, to make the margin good ; then, by the express stipulation in the agreement, they could sell without notice. Here no demand was made for more margin, and hence there was no right to sell on account of the insufficiency of the margin ; and there was no tender of the stock, and no demand that the plaintiff" should pay for the same ; and hence the defendants had no right to sell for the purpose of closing their accounts with her. The sale of the stocks was, therefore, wrongful and unauthorized, and rendered the defendants liable to the plaintiff for such damage as the rules of law entitled her to." 497. There is a distinction between the carrying of stocks upon a margin and a like carrying of executory contracts for the future delivery of grain or other like prop- erty ; and the ground of the distinction is, that while a broker may well be considered a pledgee of the stocks which he has purchased for his customer, because he has actual possession of them, the holder of an executory contract for the delivery of grain cannot be so considered, because he has neither the actual possession of the grain nor the constructive possession of it, by means of a warehouse-receipt or bill of lading. Therefore, it is held that if a commission merchant or broker contracts in his own name for the purchase of grain for a customer, to be de- livered at a future time, the latter making an advance on the purchase, and agreeing to keep the margin good up to the time of delivery, the relation of pledgor and pledgee is not created, so as to require a notice of the time and place of sale of the grain, on the customer's failure to keep up the margins.^ 498. A different view of the contract of a stock-broker and his customer in such case is taken by the Supreme Court of Massachusetts in a recent decision.^ The contract is not regarded as creating the relation of pledgor and pledgee be- tween the parties, but as being merely an executory agreement, 1 Corbett v. Underwood, 83 111. 324. ^ Covell v. J^oud, 134 Mass. — ; S.C. IG Cent. L.J. 4 71. 387 § 498.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. under which the broker may, upon the default of the customer, sell the stock without notice. In the case before the court a stock-broker had purchased certain shares of stock for a customer, under an agreement to carry the stock for him upon the payment of a certain " margin," which the customer was to keep good. The stock having declined, the broker requested the customer to make his margin good ; and the latter failing to do so, the broker, after a few days, sold the stock at the brokers' board in New York, at the market price, without notice. The sale left the customer indebted to the broker, but the latter made no demand for the payment of the balance due him till some four months afterwards, when, the stock having risen in price above that originally paid for it, the customer demanded the stock, and offered to pay the balance of the purchase money and interest. In a suit by the customer against the broker for tlie value of the stock the trial court held that he was entitled to recover, upon the ground that the relation of the parties was that of pledgor and pledgee, and that the usage of brokers, which was proved, to sell stock so held at the brokers' board, as soon as the margin is ex- hausted, without notice, was illegal. Exceptions to these rulings were sustained by the Supreme Court. Mr. Justice Devens, delivering the opinion, said : " The relation of the parties ex- isted by force .of a mutual and dependent contract, by which the defendants agreed to purchase, and hold or convey for the plain- tiff, a certain number of shares of stock, the plaintiff paying a certain sum of money at the time, and agreeing to pay interest on the sums advanced by the defendants, and, in case the stock depreciated, to make Avhat is termed ' a margin ' of ten dollars per share in the cost of the market price of the stock, as that might change from time to time. When the plaintiff failed to perform his part of the contract, by making the necessary ad- vances upon demand, the stock having rapidly depreciated, in value, he has no ground of complaint that the defendants ceased to hold and carry it for him, and thereafter disposed of it. " We are aware that transactions of this nature have been held sometimes to make the broker an agent who pui'chases the stock as such agent for the customer, and who holds it thereafter as a pledgee for the money advanced for its purchase. But in Wood V. Hayes, ^ it was held that a broker who advanced money to buy ^ 15 Gray (Mas?.), 375. There seems to be nothing in this case to show 388 broker's eights carrying stocks upon margin. [§ 499. stock for another, and held it in his own name, might, so long as he had not been paid or tendered the amount of his advances, pledge it as security for his own debt to a third person, without making himself liable to an action by his employer ; and this upon the ofronnd that the contract was conditional to deliver the shares upon the payment of the money. It cannot make any difference that, in this case, a small portion of the money necessary for the original purchase was advanced by the customer." 499. This decision introduces a new doctrine as regards the relation of a stock-broker and customer, which has heretofore always been regarded as that of pledgor and pledgee. And such, in fact, is the relation, in all ordinary cases where the broker has purchased stocks for a customer, and carries them for him upon the payment of a portion of the purchase-money. The broker holds the stock as collateral security for the remainder of the purchase-money, and should be subject to the established rules of law governing the contract of pledge. The case is wholly different from that where a broker simply makes a contract with another for the future delivery of grain, which is not delivered into the broker's actual possession. In the latter case there is no pledge, for no property of the customer is delivered to the broker. This distinction was pointed out in the Illinois case, in which it was decided that a broker holding for a customer an executory that the contract between the broker of payment, of the debt secured, and the customer was not regarded by The return of the pledge cannot be the court as a pledge. The statement asked for, except upon the condition of facts clearly made it such; for it of payment of the debt secured. A appeared that the broker bought the sale or pledge of the property by the stocks, and that afterwards the parties pledgee does not amount to a conver- settled an account, and found a certain sion by him, unless the pledgor tenders balance due from the customer to the payment of the debt and demands the broker, for which the customer gare his return of the property. In this case promissory note, and, as security for before the court the debt was neither its payment, the broker acknowledged paid nor tendered. The customer, that he held certain shares of stock, therefore, had no right of action The statement by the court that the against the broker. Besides, on gen- contract was strictly conditional, to eral principles governing the contract deliver so many shares on payment of of pledge, the broker had the right 80 much money, is not inconsistent to pledge the stock for a debt of his with this view. The pledgee's con- own, to the extent of his advances tract is always conditional, to deliver upon it. See §§ 331, 418-423. the pleilge on the payment, or tender 389 § 500.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. contract foi" the future delivery of corn which never came into his possession did not stand in the relation of a pledgee of his customer. The court in that case say that if the corn purchased had been delivered to the broker, and he had paid for the same, and held the possession of it as security for the money advanced, then it might, with propriety, be claimed that the relation of pledgor and pledgee existed, and that notice of the time and place of sale should be given.^ 500. But a broker cannot recover for a purchase which is fictitious, or which he has charged to his customer at an en- hanced price. In such case he fails to perform the contract of purchase.^ A usage of brokers that one, on receipt of an order to buy stocks on a margin, may assume the contract himself, in- stead of making it with a third person, is illegal. The broker has no right to put himself in a position antagonistic to the in- terests of his employer. He cannot make himself both buyer and seller. A broker purchased for a customer certain United States Bonds, under an agreement that the broker should ad- vance the purchase-price and should carry the original bonds purchased at a specified rate of interest. In the purchase the broker overcharged for a part of the bonds, and for another part charged a commission for buying and received a commission for selling. Before the maturity of the loan, the broker sold the bonds without the knowledge of the customer. The latter made a payment on account of the supposed loan. At the maturity of the loan the broker demanded payment of the customer, and notified him that in case of default, he would be sold out. Pay- ment was not made and the broker thereupon sold other bonds of a like amount. In an action by the customer to recover the money he had paid on this transaction, the broker set up a coun- ter-claim for a deficiency arising on such sale. It was held that the counter-claim was properly rejected ; that substantial per- formance of his contract was a condition precedent to the bro- ker's right of recovery, while in essential elements he had not performed it.^ 1 § 497; Corbett r. Underwood, 83 Mass. 285; Farnswortb v. Hemmer, 1 111. 324, 327. Allen (Mass.), 494. 2 Commonwealth v. Cooper, 130 s Levy v. Loeb, 85 N. Y. 365. Mr. Justice Finch, delivering the opinion 390 RIGHT TO USE AND HYPOTHECATE PLEDGED STOCK. [§ 501. In a subsequent suit by the customer against the broker to recover the moneys he had paid in this transaction, it was held that upon obtaining knowledge of the facts he was entitled to repudiate the purchase and to recover back the moneys paid.^ V. His Right to Use and Hypothecate Pledged Stock. 501. Authority to use collateral stock. — In the absence of an agreement on the part of the pledgor, either express or im- of the court, said: " The contract was not merely for the loan of so much money- That was but a single ele- ment in an entire and much broader agreement. The defendants were to buy the bonds as agents of the plain- tiffs. They were to make the pur- chase in that capacity, with the skill and ability which their business and experience indicated, and in entire good faith to their clients, without any adverse or hostile interest; and the identical bonds thus bought they agreed to carry, advancing the money for that purpose, and holding the bonds as collateral. That contract was not performed by the defendants in any of its essential elements. They did not buy for their clients in good faith as agents, but on the contrary, buying, without disclosing their agency, sought to transfer the bonds to the plaintiffs at a larger price, con- cealing the profit intended to be real- ized. They broke their contract by taking commissions from both sides. They broke it again by not carrying the original bonds as agreed, and the deficiency upon which they rely sprang from a sale of their own bonds and not plaintiffs'. Not only was there thus a total failure to per- form on the part of defendants, but it is entirely possible that the sale which they did make of the original bonds, brought their full cost and left no deficiency. The defendants choose not to disclose either the date or terms of that sale. Doing so they cannot sell their own bonds at a sacrifice and claim that deficiency of the plaintiffs. The rule might be otherwise if the defendants had not specially agreed to carry the original bonds. It is that fact as found by the trial judge, which is fatal to the counter-claim alleged. The agreements were mutual and the acts to be done concurrent. Since no directions to sell the bonds were given l)y plaintiffs upon the expiration of the contract by the lapse of the stipu- lated time, it was the duty of the de- fendants to deliver the original bonds which had been carried at the price actually and in truth paid for them, and the duty concurrently of plaintiffs to pay that price with the interest. The defendants, therefore, could not put the plaintiffs in default without a tender of performance or at least proof of a readiness and willingness to per- form. No such proof was given. No bonds were tendered. The original bonds could not be, since the brokers had sold them by their own unauthor- ized act and rendered their delivery impossible. They did not even offer similar bonds at the price actually paid, but demanded a greater one. There was no element of performance or readiness to perform in the case. Not a single stipulation of the contract was fairly and in good faith fulfilled, and no valid counter-claim was estab- lished." 1 Levy V. Loci), 89 N. Y. 386; S. C. 15 N. Y. Weekly Dig. 17G, reversing S. C. 15 J. & S. CI. 391 § 502.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. plied, the pledgee has no right to use a thing held in pledge.^ A general authority to a creditor holding corporate stock as col- lateral security " to use, transfer, or hypothecate the same," at his option, he being required, on payment or tender of the amount of the loan, to return an equal quantity of the stock, but not the specific stock deposited, authorizes the pletlgee to sell it for his own benefit before maturity ; and such a sale is not a conversion of the stock for which an action will lie.^ The object of such a clause is to enable the creditor, if he finds it inconvenient to carry the loan, to obtain the money upon the stock, by sale or other- wise. It was doubtless an inducement to him to make the loan. In selling the stock, by virtue of the contract, he simply took upon himself the burden of returning to the debtor, upon de- mand, when the loan should be made, the same quantity of stock. 602. Authority in the pledgee of stock to hypothecate it for his own debts may be inferred from the circumstances of the transaction, and the course of dealing between the par- ties. Thus, a broker having bought gold for a customer, upon his agreement to furnish a margin of ten per cent, for the accom- modation of the latter, accepted certain stock instead of money ; and an intent that the broker should use the stock as he might have used the money was inferred.^ In a conflict of testimony as to the broker's authority to use the stock, it is within the prov- ince of the jury to decide what the contract between the parties was ; and evidence may be given to show that, in previous trans- actions between the parties, the broker had, with the knowledge of the customer and without objection on his part, hypothecated stock deposited for a margin.^ Parol evidence of an agreement, made at the time of a pledge of stock of a corporation, that the pledgee might use the stock, is inadmissible when the pledgee has given a receipt for the stock, stating that he holds it as collateral security, and providing that he may sell " on one day's notice." The tendency of such evi- 1 Lawrence f. Maxwell, 53 N.Y. 19. ^ Lawrence v. Maxwell, 58 Barb. 2 Ogden V. Lathrop, 65 N. Y. 158, (N. Y.) 511; 6 Lans. 4G9; 53 N.Y. reversing 1 Sweeny, 643; 3 J. & S. 19; S. C. 64 Barb. 102; Hope ;;. Law- 73, where it was thought that the rence, 1 Hun (N. Y.), 317; Chamber- power "to use," &c., did not authorize lain v. Greenleaf, 4 Abb. (N. C). 178. a sale. * Lawrence v. Maxwell, supra. 892 RIGHT TO USE AND HYPOTIIKCATE PLEDGED STOCK. [§§ 503, 504. dence would be to show that the contract made wiien the stock was pledged was different from that set forth in writing at the time.^ 503. A general custom that a broker may pledge his cus- tomer's stock for the purpose of raising money to carry it, is valid. ^ It is not unreasonable that a broker who is carrying stock for a customer upon a margin, or small payment by him, should have the right to use the stock by way of pledging it for the purpose of enabling him to carry the stock for the customer. Probably this is the general custom in such transactions, and a knowledge of such custom would be imputed to one who pur- chases stock of a broker to be carried in this manner. Authority in the pledgee to sell stock held in pledge is incon- sistent with the contract of pledge, and a custom or usage for a broker holding stock in pledge to sell it will not avail to vary the terms of the implied agreement.^ The contract of pledge recog- nizes the general property of the bailor and his right to redeem and have the thing pledged. A custom or usage for a pledgee to sell the thing pledged is not consistent with the contract because such sale would put it out of his power to return it to the pledgor upon payment of the debt secured. 504. But if a broker pledges his principal's stock to a bank for a specific loan, and the bank is informed of the ownership of the stock, and of the purpose for which it is ob- tained, the stock is not subject to a general banker's lien for moneys subsequently borrowed by the brokers from the bank. A tender by the owner of the stock made with a view to set- tling the matter without suit, the bank claiming a lien upon ^ Fay V. Gray, 124 Mass. 500. in this respect by payini^ for his stock in ^ Vanliorn v. Gilboutrh (Sup. Ct. full; but where, as here, he only pays Pa.), 21 Am. Law Reg. N. S. 171. The a small percentage of its value, while referee whose conclusions were adopted his agent, the broker, musit provide by the Supreme Court, said: " I can for the balance, it would not seem un- perceive no real objection to the valiil- reasonable, that the broker should for ity of a general usage that a broker that purpose pledge it as collateral." may use his customer's stock as col- As to the effect of stock exchange lateral to carry it for the customer, usages in general, see note to above Such usage contravenes no statute or case by Francis A. Lewis, Jr., Esq., princi()le of public policy. The cus- pp. 176-181. tomcr can, of course, avoid all trouble ^ Lawrence v. I\L'ixwell, 53 N. Y. 19 393 § 505.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. the stock for subsequent loans, is not conclusive upon him or his assignee as an admission that the bank had a lien on the stock for the amount so tendered.^ 505. The use which the "pledgee may make of the property pledged must be consistent with the general ownership of the pledgor, and consistent with his ultimate right to redeem. The right to use the pledge ceases the instant the debt is paid or tendered, and the creditor must at his peril be in condition to restore the property to the debtor.^ " Conceding the right to use the stock pledged, by way of hypothecation or otherwise, as claimed, and that it was at the time of the tender and demand lawfully out of the actual possession of the defendant, it was his duty at once to regain the possession and restore the same to the plaintiff. A neglect or refusal to do so gave to the plaintiff an ac- tion as for a conversion of the property. It is immaterial whether the stock was hypothecated by the defendant upon a loan of money for the benefit of plaintiff's transactions or for his own purposes. In either case the duty and the obligation were the same. The defendant conceded his inability to redeem the stock from his pledge or hypothecation, so that it was lost to the plain- tiff by the act of the defendant, which was not a use consistent with a pledge, or the legal rights of the pledgor. It was not a mere temporary use of the pledge. No use of a pledge which could be authorized consistent with such a bailment could justify such a dealing with it as to destroy the property or deprive the general owner of his property in it. If the pledgee may use the thing pledged he must do so at his peril, and so use it, as not to affect the ultimate right and ability of the pledgor to have it again, when the lien shall be discharged. It follows that upon the undisputed facts in this case the evidence offered and rejected was wholly immaterial, for at the time of the demand and the refusal to deliver the stock pledged, the lien of the defendant was discharged, the relation of pledgor and pledgee had ceased to exist, and the right of the defendant further or longer to use or detain the stock was gone." ^ 1 Talmadge v. Third Nat. Bank ^ Lawrence v. Maxwell, 53 N. Y. (Court of Appeals, March 6, 1883), 19. 16 N. Y. Weekly Dig. 487. s Lawrence v. Maxwell, supra, per Allen, J, 394 RIGHT TO USE AND HYPOTHECATE PLEDGED STOCK. [§§ 506-508. 506. If however there is an agreement or understanding that a broker may hypothecate stocks which he is carrying for a customer upon a margin, according to the usual course of business, such use of them does not of itself amount to a conver- sion of them.^ 507. The pledgor may treat as a conversion a transfer of a certificate of stock as collateral security by the pledgee to a creditor of his own in the absence of specific authority ; and the fact that the pledgee had a greater number of shares standing to his credit on the books of the company at all times during the transaction, is immaterial. The pledgor may recover the market value of the stock at the time of the conversion. ^ If, however, a pledgee transfer the collateral stock in such a way that he retains control of it and is able to deliver it at once when- ever the pledgor should call for it, there is no conversion of it. Such was the case where the pledgee assigned the collateral stock to third persons, in order not to injure his credit by appear- ing to own too much of it, taking back from the transferees as- signments in blank, so that the stock remained actually in his control and I'eady for delivery to the owner. The pledgor's rights were not violated or injuriously affected.^ And such also was the case where a pledgee of corporate shares transferred them to another person to hold for him in order to protect himself against personal liability. There was no real conversion of the stock by the pledgee because by such transfer he did not apply it to his own use. He did not exercise any dominion over it in defiance of the rights of the owner. He put it into the hands of a third person to hold for him, in order that what was intended for a security might not be a burden. The stock remained under his control.* 508. Return of identical stock. — A broker carrying stock upon a margin, according to the usual custom, is not bound to keep the stock separate from other stock of the same kind owned by himself, but only to keep in possession and read}'- for delivery 1 Chamberlain v. Greenleaf , 4 Abb. « Day v. Holmes, 103 Mass. 306. (N. Y.) N. C. 178. See § 503. * Heath v. Griswold, (C C. Vt., 2 Fay V. Gray, 124 Mass. 500. 1881) 5 Fed. Rep. 573. 395 § 508.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. on demand an amount of stock equal to that purchased.^ Ordi- narily, a pledgor of personal property is entitled to have the specific property pledged returned to him upon payment of the debt, and cannot be compelled to accept other property of the same kind and equal value in place of it ; but shares in a cor- poration stand upon a different footing, because one share rep- resents the same interest in the business of the corporation that another does, and, all the shares being of equal value, there can be no reason for preferring one from another, or for distinguish- ing one from another.^ The reasons for this distinction are obvious. Two visible, tangible chattels, though apparently pre- cisely similar, may yet, in fact, be of different values. Moreover, the owner of a specific article of personal property may attach a peculiar vakie to it beyond the value of other articles of a pre- cisely similar kind ; and, having pledged it, he cannot be com- pelled to take back any other article of the same kind and equal value, in lieu of that which was converted.^ For the same reason it would seem that a pledgee of negotiable bonds of a private or municipal corporation, or of government 1 Horton v. Morgan, 19 N. Y. 170; Gruman v. Smith, 81 N. Y. 25; S. C. 9 Rep. 748; Levy v. Loeb, 15 J. & S. 61 -,8.0.6 Duer, 56; Thomjjson v. To- land, 48 Cal. 99; Allen v. Dykers, 3 Hill, 593 ; Hardy v. Jaudon, 1 Robt. (N. Y.) 261 ; Gilpin v. Howell, 5 Pa. St. 41; Stewart (;. Drake, 46 jST. Y. 449, per Allen, J. ; Worthington v. Torniey, 34 Md. 182; Chamberlain v. Green- leaf, 4 Abb. (N. Y.) N. C. 178; Genin V. Isaacson, 6 N. Y. Leg. Obs. 213; Salters v. Genin, 7 Abb. (N. Y.) Pr. 193; S. C. 3 Bosw. 250; Taussig v. Hart, 58 JST. Y. 425; i\ C. 49 lb. 301. 2 Atkins V. Gamble, 42 Cal. 86; Hawley i: Brumagim, 33 Cal. 394. 3 Per Crockett, J., in Atkins v. Gamble, 42 Cal. 86, 101, said: " It is impossible that any sane person should have centered his affections upon a particular stock certificate, or that any violence could be done to his feelino-s by requiring him to accept another cei:tificate of preciselv similar charac- 396 ter in lieu of it. His own certificate was only the evidence that he owned an undivided interest in the capital and business of the corporation. An- other certificate of the same kind, for the same amount of stock, would en- title him to precisely the same rights as the former certificate. Each would be a precise equivalent of the other, and it is certain he could sutler no pecuniary loss by the transaction; whilst the nature of the pi'operty, or rather of his interest in it, forbids the idea that it could be the object of per- sonal attachment or have a peculiar value in his estimation, as contradis- tinguished from any other equal num- ber of shares in the same company." There may V)e a stipulation in a pledge of stock expressly excusing the pledgee from returning the identical certificate. Hardy r. J.iudon, 1 Robt. (N. Y.) 261. But such a stipulation is only useful by way of abundant caution. RIGHT TO USE AND HYPOTHECATE PLEDGED STOCK. [§ 509. bonds, would not be required to retain the identical bonds depos- ited with him, if he has always had other bonds of precisely the same kind which he could return to the pledgor on demand.^ 609. "When shares of stock are pledged without any agreement that they shall be kept separate from other shares of the same stock, and no certificate is delivered to the pledgee expressing the trust upon its face, the pledgee may properly have the stock placed to his credit upon the transfer books of the company ; and it does not matter that he has other shares of the same stock, or that he buys and sells such stock, and is afterwards unable to identify the shai'es received in pledge, provided that at all times he has shares of the stock standing in his name or under his rightful and absolute control to an amount equal to the number held in pledge, and is ready and able at any time to redeliver the shares on payment of the debt for which they were pledged .^ If he sells all the stock standing in his own 1 Stuart V. Bialer, 98 Pa. St. 80. 2 Nourse r. Prime, 7 Johns. (N. Y.) Ch. 69; S. C. 4 lb. 490; Allen v. Dvkers. 3 Hill, (N. Y.) 593, affirmed 7 lb. 497 ; Gilpin v. Howell, 5 Pa. St. 41; Neiler v. Kelly, 69 Pa. St. 409; Bojlan V. Hu^uct, 8 Nev. 345 ; Fay r. Gray, 124 Mass. 500; Wovthington V. Tormey, 34 Md. 182; Hubbell v. Drexel, (C. C. E. I). Pa.) 21 Am. Law Pteg. 45 2 ^^ S. ; S. C. 1 1 Fed. Rep. 1 1 5. In the latter case Butler, J., said : " A share of stock is without ' ear-marks,' and cannot therefore be distinguished, as has been said, from others of the same corporation and issue. The certi- ficates, bearing dates and numbers, are but evidence of title. On payment of debt the pldgor is entitled to a return of the number of shares which the pledgee had received — nothing more." In Gilpin v. Howell, supra, Bell, J., said : " It is in general true, that where the pledge is distinctive in its character, and therefore capable of being recognized among other things of a like nature, or where a mark is set upon it with a view to its discrim- ination, the pledgee is bound to re- deliver the identical article pledged, and cannot substitute something of a like kind unless so authorized by the contract. But I think there is a mani- fest difference ex necessitate where the thing pledired, from its very nature, is incapable, in itself, of identification, if once mingled with other things of the same kind. In such case, it is the duty of the pledgor to put a mark ujjon it by which it may be distin- guished ; for, as is said in Nourse v. Prime, supra, if a person will suffer his property to go into a common mass without making some provision for its identification, he has no right to ask more than that the quantity he put in should always be there and ready for him. By a just fiction of law, that residuum shall be presumed to be the portion he put in." The case of Ex parte Dennison, 3 Ves. 552 is not in conflict with the rule above stated, for this case was de- cided with reference to a rule of the Stock PLxchange on this subject; and nioruuver, it is evident that the [)ledgee 397 I § 510.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. name, but Las stock sufficient to meet the demand of the pledgor standing in the name of another person, but absolutely within the pledgee's control, he is not liable for a conversion of the stock. ^ If a pledgee of corporate shares be himself the owner of other shares in the same corporation, it does not matter that, in selling the shares under a power to satisfy the debt, he is unable to tell whether the stock sold be the identical shares delivered to him as collateral security ; such shares not being distinguishable from each other, a sale of one parcel answers the purpose of crediting the debtor with the proceeds of the stock, as well as the sale of the specific shares.^ But, of course, if there be different kinds of stock of the same corporation, the pledgee is bound to keep within his control, and to restore upon payment, the same kind of stock as that received in pledge. If, for instance, he has received in pledge •' consoli- dated" Erie, he cannot fulfil his obligation by keeping on hand and returning " converted " Erie, a stock of a different kind and value.^ 510. But it is essential that the pledgee of stock should always have enough of the stock on hand ready for delivery.* In a suit for the conversion of stock pledged by a collateral note, which authorized the creditor to sell the stock on the non-pay- ment of the note, the defendant, being a stock-broker and dealer in stock, offered to prove that it was a usage with stock-brokers having such collateral not to hold it specificalU', but to transfer it by hypothecation or otherwise, at pleasure, and on payment of the debt to return an equal quantity of the same kind of stock; and that this usage was general and known to the pledgor. Without determining what effect would be due to such proof in the case of a simple pledge as collateral security without any further agreement, it was held that the evidence was inadmis- sible, as tending to contradict the legal imj)ort of the note ; that in that case did not keep on hand a ^ Berlin v. Eddy, 33 Mo. 426. sufficient number of shares to enable ^ Wilson i\ Liitle, 2 N. Y. 443. him to return the security at any time * Chamberlain v. Greenleaf, 4 Abb. on demand. (N. Y.) N. C. 178; Horton v. Morgan, 1 Le Croy v. Eastman, 10 Mod. 19 N. Y. 170; Taussig v. Hart, 58 499. lb. 425; Hardy t-. Jaudon, 1 Rjbt. (N. 398 Y.) 261, affirmed, 41 N. Y. 619. RIGHT TO USE AND HYPOTHECATE PLEDGED STOCK. [§§ 511, 512. the parties having prescribed m the note the terms of the loan and the conditions under which the collateral might be disposed of, no usage could be incorporated with the agreement of the parties, so as to make the latter import a consent by the debtor tiiat the creditor might use the stock during the running of the loan the same as if he were the absolute owner of it.^ 511. Moreover it is incumbent upon the pledgee to show that he has always had sufficient stock of the kind deposited to enable him to return it at any time, for otherwise it might happen that he has made a profit in selling the stock when the price was high, and buying it again when the price had declined. The pledgor in that case would be entitled to take advantage of the pledgee's sale of the stock, although it was wrongful. There- fore if the pledgee has not the identical certificate of stock which was pledged to him, or the stock issued to himself by the corpo- ration on surrender of that certificate, he should be prepared to show that he has had all the while other shares of the same stock on hand sufficient to meet this and every other obligation resting upon him to deliver that stock. In a suit brought by him upon the debt secured by such stock, it would seem tliat his inability to return the certificate pledged, or the stock issued to him by the corporation upon a surrender of that certificate, would be evidence tending to show a conversion of the stock by him ; and that the burden would be upon him to show that he had always had during the continuance of the pledge other shares of the same stock not required to meet other obligations which he could have returned to the pledgor at any time upon payment.^ 512. When securities belonging to several persons have been rehypothecated together as security for a single loan, the pledgee taking them should proceed pari passu in applying the securities to the satisfaction of the loan, so that each of the sev- eral owners of the securities shall bear his just proportion of the common burden. If such pledgee, without notice of the claims of the true owners, sells the securities belonging to one, and therefrom satisfies the claim for which he holds all tlie securities, leaving the others undisposed of, a court of equity will order the remaining securities to be disposed of, and the proceeds applied 1 Allen V. Dykers, 3 Hill (N. Y.), 593. « See §§ 421, 422. 39U § 512.] RIGHTS AND LIABILITIES OF A PLEDGEE OF STOCK. in such a manner that the burden of the loan will be borne in equitable proportions by all.^ 1 Gould V. Central Trust Co. 6 r. Boyce, 39 Md. 314; Gould r. Tar- (N. Y.) Abb. N. C. 381 ; and see Cham- mers' Loan & Trust Co. 23 Hun (N. berlain v. Greenleaf, 4 lb. 178; Rich Y.), 322. 400 CHAPTER XIII. THE EIGHTS OF A SURETY. I. His right of subrogation to the creditor's securities, 51i-522. n. The creditor's equitable right to the surety's securities, 523-533. HI. The mutual equitj' of co-sureties to claim the benefit of each other's securities, 634-539. I. His Right of Subrogation to the Creditor's Securities. 513. A surety upon paying the debt of his principal is sub- rogated to the benefit of any collateral security wbich the cred- itor liolds for the payment of the debt ; and to the benefit of all rights and remedies which the creditor had against the principal debtor.^ Tliis right is strictly one of subrogation. It arises, how- ever, from a natural equity and not out of any express or implied contract.^ It does not become fixed and positive until the surety has paid the debt. Before payment he has no control over the creditor's securities ; and afterpayment his right is strictly one of subrogation. His claim arises only when he has extinguished the creditor's claim by paying it. He is then by substitijtion entitled to stand in the creditor's place, in respect to the secu- rities held by him for the payment of the debt. The surety is entitled to the benefit of the creditor's securities, though in be- coming a surety he did not rely upon them, or know of their existence.^ It is immaterial, also, whether the debtor placed the securities in his creditor's hands at the time when the obligation was contracted or subsequently. Neither does it matter that the surety became such without any contract with the principal debtor, and without his knowledge.* ^ Richardson v. Wasliington Bank, 3 Mete. (Mass.) 53C; Guild v. Butler, 127 Mass. 386; Johnson v. Bartlett, 17 Pick. (Mass.) 99; Murrell v. Scott, 51 Tex. 520; Sublett v. McKinney, 19 Tex. 438 ; Jordan v. Hudson, 11 Tex. 83; Greiner v. Greiner, 58 Cal. 115; Glazier v. Douglass, 32 Coiui. 393, 26 398; Miller r. Ord, 2 Binn. (Pa.) 382; Sheldon on Subrogation, § 86. 2 Hodgson V. Shaw, 3 M. & K. 183, per Lord Brougham. 8 Lake v. Brutton, 8 De G., M. & G. 440. * Mathews v. Aikin, 1 N. Y. 595; Hughes V. Littlefield, 18 Me. 400. 401 § 514.] THE EIGHTS OF A SURETY. A surety is subrogated to a lien which" the' creditor has upon his debtor's propert}'. Thus where a corporation lias a lien upon the stock of any stockholder for the payment of any debt due from him to the corporation, a surety for such debt upon paying it is subrogated to this lien.^ If the lien does not exist by stat- ute in all cases, but depends upon the voluntary act of the cor- poration, unless the corporation has claimed the lieu, none exists, and there is nothing to which tlie surety can be subrogated.^ In this country, moreover, the surety is generally entitled to be substituted to the creditor as to the very debt itself, and to have that assigned to him ;^ though in England the judicial rule was finally settled otherwise, on the ground that wjjen the debt has been paid by the surety, it is technically discharged, and therefore cannot be regarded as surviving for the benefit of the surety.^ This rule was applied to all obligations which are ex- tinguished by the act of payment, such as a bond or other spe- cialty, or a judgment. A similar rule has been adopted by a few courts in this country.^ A recent statute in England, however, enacts the rule of equitable subrogation to the debi.*^ One who has become a surety on the promise of the principal debtor to transfer to the creditor stock as collateral for the debt, may afterwards compel the debtor to make such transfer.^ 514. The foundation of this equity is that any fund placed by the principal debtor in the hands of the creditor or of any surety is a trust to be administered for the benefit of all the par- ties to the compact. In a recent case before the Supreme Court Mr. Jnstice Matthews admirably stated the principle and its ap- plication.^ " Many sufficient maxims of the law conspire to justify the rule. To avoid circuity and multiplicity of actions ; to prevent the exercise of one's right from interfering with the rights of others ; to treat that as done which ought to be done ; ^ Klopp V. Lebanon Bank, 46 Pa. 224; Hodgson v. Shaw, 3 M. & K. St. 88 ; Young v. Vough, 23 N. J. Eq. 183, 190. 325. 6 As in Massachusetts, Vermont, ^ Perrine v. Mobile Ins. Co. 22 Ala. Alabama, and Nevada ; bheldon on 675. Subrogation, § 138. » Sheldon on Subrogation, Sublett ^ 19 & 20 Vic. c. 97, § 5. V. McKinney, 19 Tex. 438; Lumpkin 7 McCoy v. Wilson, 58 Ind. 447. V. Mills, 4 Ga. 343. 8 Hampton v. Phipps, 2 Supreme * Copis V. Middleton, Turn & R. Ct. Rep. 622, 624. 402 SUBROGATION TO HIS CREDITOR'S SECURITIES. [§ 615. to require that the burden shall be borne by him for whose ad- vantiige it has been assumed ; and to secure equality among those equally obliged and benefited, are perhaps not all the familiar adages which may legitimately be assigned in support of it. It is, in fact, a natural and necessary equity which flows from the relation of the parties, and though not the result of contract, is nevertheless the execution of their intentions. For, when a debtor, who has given personal guaranties for the performance of his obligation, has further secured it by a pledge in the hands of his creditor, or an indemnity in those of his surety, it is con- formable to the presumed intent of all the parties to the arrange- ment, that the fund so appropriated shall be administered as a trust for all the purposes, which a payment of the debt will ac- complish ; and a court of equity accordingly will give to it this effect. All this, it is to be observed, as the rule verbally requires, presupposes that the fund specially pledged and sought to be primarily applied is the property of the debtor, primarily liable for the payment of the debt ; and it is because it is so that equity impresses upon it the trust, which requires that it shall be ap- propriated to the satisfaction of the creditor, the exoneration of the surety, and the discharge of the debtor. The implication is that a pledge made expressly to one is in trust for another, be- cause the relation between the parties is such that that construc- tion of the transaction best effectuates the express purpose for which it was made." 615. It follows that if a creditor holding collateral secu- rity surrenders it to the principal debtor without the knowl- edge or consent of a surety of the debt, he thereby discharges him to the extent of the value of the property surrendered.^ A bank upon discounting a note received as collateral security from a surety an assignment of certain shares of stock of a rail- road company, the principal debtor having previously caused a 1 Richardson v. Washinorton Bank, 15 N. H. 119 ; Sanders v. Reed, 12 N. 3 Met. (Mas.s.) 536, 540; Guild v. H. 558, 560; New London Bank v. Butler, 127 Mass. 386; Baker v. Lee, 11 Conn. 112 ; Stearns ?;. Bates, Briggs, 8 Pick. (Mass.) 122; Ameri- 46 Conn. 306; Stewart v. Davis, 18 can Bank v. Baker, 4 Met. (Mass.) Ind. 74; Pliilbrooks v. McEwen, 29 164; Chester v. Kingston Bank, 17 Ind. 347; Springer v. Toolhaker, 43 Barb. (N. Y.) 271 ; S. C. 16 N. Y. 336 ; Me. 381 ; Cumniings v. Litlle, 45 Me. New Hampshire Sav. Bank. v. Colcord, 183 ; Kirkpatrick v. Ilowk, 80 III. 122. 403 §§ 516, 517.] THE RIGHTS OF A SURETY. certificate of the shares to be issued to the surety. Subsequently the raih'oad company was consoKdated with another company, and the former company issued to its stockholders coupon bonds to the full amount of its capital stock, and the consolidated com- pany also issued one share of new stock for each share of the old stock. At this time the collateral stock stood upon the books of the company in the name of the surety. The transfer to the bank was executed by an indorsement of the certificate in blank, and no new certificate was taken out by the bank. The bank, however, allowed the principal debtor to receive the bonds issued upon the collateral stock without obtaining the consent of the surety. In an action by the bank against the surety upon the note, it was held that the bank having authorized the railroad company to deliver the bonds to the debtor, or having consented to such delivery, the surety was relieved from his liability upon the note to the extent of his loss by reason of the delivery of the bonds to the debtor.^ 516. If the creditor loses collateral security given him by the principal debtor, the surety is discharged to the extent of the value of the security lost.^ If, however, such collateral security is placed, not in the hands of the creditor, but in the hands of a trustee, who is the common agent of both the debtor and the creditor, the latter is not responsible for a loss or mis- management of the security, unless he connives at it. A trustee, such as a trustee in a mortgage of a stock of horses or other per- sonal property made for the security of the creditor, is not an agent of the creditor, to such an extent as to render the latter responsible for his want of diligence in executing the trust, nor will his subsequent assent to what the trustee has wrongfully done, or neglected to do, relate back and make the creditor re- sponsible for a loss that has already occurred.^ 517. A surety may even recover from the creditor the amount of the released security, in case the surety, in igno- rance of the creditor's surrender or discharge of the collateral 1 Fitchburg Savings Bank v. Tor- Phares v. Barbour, 49 III. 370; Sher- rey, 134 Mass. ; S. C. Mass. Law raden v. Parker, 24 Iowa, 28. Rep. May 3, 1883. « Murrell v. Scott, su^jra. ■' Murrell v. Scott, 51 Tex. 520 ; 404 SUBROGATION TO HIS CREDITOR'S SECURITIES. [§§ 518-520. securit}^ has paid the debt or suffered judgment for it to be en- tered against him.^ 518. When the fact that one debtor is a surety for an- other does not appear upon a written instrument, tliis collat- eral fact of the relation between debtors and notice of it to the creditor may be proved by extrinsic evidence. The right of the surety does not depend upon the form of the contract but upon equities arising, out of his relation to the other parties to it ; and the creditor is affected with knowledge of this relation, acquired at an}'^ time before he does any act which alters the position of the suret}'.^ 519. A creditor taking collateral security from a debtor, without giving time, does not discharge a surety of the debt.^ Mere delay by the creditor to sue the principal debtor does not discharge the surety, for the obvious reason that the surety may at any time discharge his obligation to the creditor, and thus make the principal his debtor. For the same reason the law implies no contract on the part of a creditor holding collateral security to proceed to enforce such security before he can sue a surety of the debt after its maturity. Neither is it any defence for the surety that the collateral has depreciated between the time of the maturity of the debt and the commencement of suit against the surety. * 520. A surety is released by any false statement made by the creditor as to the existing condition of the collateral security, which puts the surety off his guard, and causes him to lose the opportunity to protect himself, although the statement be innocently made.'^ Thus, if a creditor informs a surety that the principal debtor has paid the debt, and the surety thereupon relinquishes security which he has received from the principal, ^ Chester v. Bank of Kingston, 16 ^ Sigourney v. Wetlierell, 6 Met. N. Y. 336. (Mass.) 553; Norton v. Eastman, 4 2 Guild V. Butler, 127 Mass. 386 ; Me, 521; Prather v. Young, 67 Ind. Harris v. Brooks, 21 Pick. (Mass.) 480. 195; Carpenter v. King, 9 Met. * Brick v. Freehold Nat. Banking (Mass.) 511 ; Wilson v. Foot, 11 lb. Co. 37 N. J. L. 307. 285 ; llorne v. Bod well, 5 Gray ^ Baker v. Briggs, 8 Pick. (Mass.) (Mass.), 45 7. 122. 405 §§ 521, 522.] THE RIGHTS OF A SURETY. this is a good defence to an action by the creditor against the surety, though the creditor did not intend to mislead him.^ But where a loan was made upon a note having a memorandum that railroad bo7ids to a certain amount were collateral to it, but, in fact, 7iotes of railroad company to the same amount were de- posited as collateral, sureties upon the note were not discharged in consequence of a statement to one of them by the payee, that the bonds were deposited with the note, when the inquiry made of him did not direct his attention to the question whether the securities deposited were of the kind named in the memorandum or not; but the inquiry was such that the creditor would natu- rally suppose it was directed to the point of ascertaining whether he held the securities which he had taken when the loan was made, or had surrendered them.^ 621. As between a surety and a creditor to whom the principal debtor has given collateral security covering also other obligations, the surety is not preckided from showing that he was induced to become a surety for the debtor upon the faith of a parol agreement between him and the creditor to the effect that the collateral security should be applied primarily to the payment of the obligation signed by the surety, even though such parol agreement might be inconsistent with the agreement in regard to the collateral made between the principal debtor and the creditor. Such parol agreement being established, the creditor is bound to apply the proceeds of a sale of the collateral in ac- cordance therewith. Such evidence Is not liable to objection on the ground that it contradicts such written agreement, because this objection could only apply to the parties to the agreement.^ 522. A surety's right of subrogation to the creditor's securities does not arise until the surety has paid the debt.* But immediately upon such payment this equity arises in favor of the surety, and he is entitled to have the securities 1 Carpenter v. King, 9 Met. (Mass.) might not object to such application 511. of it, was a question which was not 2 Fitchbnrg Savings Bank v. Rice, considered in tliis case, because they 124 Mass. 72. were not parties to the controversy. 8 Fant V. Sprigg, 50 Md. 551. * Hampton v. Pbipps, 2 Supreme Whether sureties upon other obliga- Ct. Rep. 622, G 2 G, jier Matthews, J. tioas secured by the same collateral 406 creditor's right to surety's securities. [§ 523. held by the creditor turned over to him.^ Payment itself oper- ates as an equitable assignment of such securities to the surety. The wliole debt must, however, be paid before the right of sub- rogation will arise ; a partial satisfaction of the debt gives the surety no right to claim the benefit of any part of the securities. A surety may apply securities which the debtor has placed in his hands fur his indemnity as soon as the pledgor's debt falls due,2 II. The Creditor s Equitable Right to the Surety^s Securities. 523. On the other hand, any security for the payment of the debt placed in the hands of a surety is a trust in favor of the creditor, which he may avail himself of at any time after the debt matures ; and it is immaterial whether the creditor was apprised of the giving of such security at the time or not,^ The earliest case in which this equitable right is de- clared and enforced is that of Maure v. Harrison, decided in 1692.* The whole report is as follows : " A bond creditor shall, 1 Klopp V. Leiianon Bink, 46 Pa. New York : Moses v. IMiirga- St. 88; LoiiLMiridirc v. Bowland, 52 troyd, 1 Johns. Ch. 119; Heath v. Miss. 54G ; jMcConiiick v. Irwin, 35 Hand, 1 Paige, 329; Vail u. Foster, 4 Pa. St. Ill; Magee i-. Leggett, 48 N. Y. 312. Miss. 139; Jones «;. Tincher, 15 Ind. Pennsylvania : Cornwell's Appeal, 308. 7 AV. & S. 30.); Kramer's Appeal, 37 2 Vest V. Green, 3 :\ro. 219. Pa. St. 71; Martin, in re, 1 Pearson, 8 Alabama : MeMidlen f. Xeal, 60 37; Jack v. Morrison, 48 Pa. St. 113, Ala. 552; Toulmin i'. Hamilton, 7 Rice's Appeal, 79 Pa. St. 168. Ala. 362; Ohio Life Ins. Co. v. Led- Tennessee : Kinsey v. McDear- yard, 8 Ala. 866; CuUum v. Branch mon, 5 Coldw. 392 ; Saviors v. Saviors, Bank, 23 Ala. 797. 3 Ileisk. 525; Breedlove v. Stump, 3 Kansas : Seibert v. True, 8 Kans. Yerg. 257. 52; Seibtrtr. Thompson, lb. 65. 4 i Eq. Cas. Abr. 93; case 5. Kentucky: Bronston r. Robinson, Mr. Joseph AVillard, in a learned 4 B. Mon. 142; Moore r. Moberly, 7 article (14 Am. Law Rev. 839,842), lb. 299; Helm r. Young, 9 lb. 394 ; to which I am much indebted, corn- Havens V. Foudry, 4 Mete. 247. ments upon this case as follows : Maryland : Baltimore & Ohio R. " This, it will be observed, states the R. Co. V. Trimble, 51 ]\ld. 99 ; Kunkel right as an absolute one, and suggests V. Fitzhuuh, 22 Md. 577; Owens u. no condition of insolvency on the part Miller, 29 .Md. 144, 161. of either debtor or surety as a pre- Massachusetts: Eastman v. Fos- requisite to the exercise of the equity; ter, 8 Met. 19; Rice v. Dewey, 13 nor any necessity of judgment to be Gray, 47. flpst obtained by the creditor, or that Missouri : Thornton v. E.\change the liability of the surety should be Bank, 71 Mo. 221. otherwise fi.xed; nor any limit as to 407 § 524.] THE RIGHTS OF A SURETY. in this coui't, have the benefit of all counter bonds or collateral security given by the principal to the surety ; as if A. owes B. money, and he and C. are bound for it, A. gives C. a mortgage or bond to indemnify him, B. shall have the benefit of it to recover his debt." These authorities generally make the creditor's right to the security an absolute one, without reference to the insolvency of either the debtor or the surety, though the later cases in Eng- land have disi'egarded or repudiated the authority of Maure v. Harrison, and have made the creditor's right to relief depend upon the bankruptcy of both the debtor and the surety.^ 624. That a creditor did not rely upon securities given by the debtor to a surety, and did not know of their existence until long after they were given, does not prevent his claiming the benefit of them whenever he may learn of their existence. This point was established in an early and leading case in this country, Avhere a bill was brought by the holder of indorsed paper to have securities given by the debtor to the indorser ap- plied for the creditor's benefit. The indorser set up in defence that he had assigned the securities, and also that he was a gen- eral creditor of the debtor, who had become insolvent. Chan- cellor Kent held that the creditor was entitled to the benefit of the indorser's securities, saying : '^ " These collateral securities ai'e, in fact, trusts created for the better protection of the debt, and it is the duty of this court to see that they fulfil the design. And whether the plaintiffs were apprised at the time of the creation of this security is not material. The trust was created for their benefit, or for the better security of their debt, and when it came to their knowledge they were entitled to affirm the trust and enforce its performance." It is not necessary that the creditor should know that the debtor has secured the surety in order to enable him to claim the benefit of the security as a trust in his behalf, because the trust being for his benefit it is presumed that it has his assent.^ the time when the creditor could en- v. Brush, 2 lb. 311; Haggerty v. Pitt- force his right." man, 1 lb. 298; Moses i'. Murgatroyd, 1 Ex parte Waring, 19 Ves. 345. 1 Johns. (N. Y.) CIi. 119. 2 Curtis V. Tyler, 9 Paige (N. Y.), » McMuUen v. Neal, 60 Ala. 552 ; 432 ; Pratt v. Adams, 7 lb. 615 ; Keyes Kramer's Appeal, 37 Pa. St. 71. 408 creditor's rights to surety's securities. [§ 525. " The autliorities place tlie principle upon the ground that as the security is a trust created for the better securing of the debt, it attaches to it, and hence it is that it may be made available by the creditor, although unknown to him at the time of the purchase of the security, for which it may have been given as an indemnit3\ The effect of such a transaction is the placing of means in the hands of the surety by the principal debtor to meet liability on account of his contract of suretj^ship. It is, consequently, a trust for that specific purpose, and equity will control the legal title to it in hands of the surety, so that it may be applied to the object intended, viz., the payment of the debt to the holder." i 525. In several states, however, the creditor's equity is merely a right to be subrogated to the securities held by the surety, or a right to be substituted in the surety's place for the enforcement of any securities he may have taken from the prin- cipal debtor. The creditor's right in respect to securities in the hands of the surety is regarded as resting upon the same ground as the surety's right in respect to securities held by the creditor.^ " This arises not from aiiy notion of mutual contract between the parties, that in providing for the surety, the creditor shall be equally provided for, but from a principle of natural equity inde- pendent of contract ; namel}^, that to prevent the surety from being first harassed for the debt or liability, and then turning him round to seek redress from the collateral security given by the principal, a court of equity will authorize, and even encourage, the creditor to claim through the medium of the surety, all the rights he has thus acquired to be exercised for his benefit, and in discharge of his obligations. The claim of the creditor, there- fore, is as much founded on the well-known doctrine of substitu- tion, as the claim of the surety to stand in the place of the creditor who has received collateral security from the debtor ; and, in my opinion, it has no other foundation. For when the princi- pal debtor conveys property to his surety, not specifically bound to 1 Kramer's Appeal, 37 Pa. St. 71, Kramer v. Farmers' Bank, lb. 253; per Thompson, J. Ohio Loan & Trust Co. v. Retder, 18 ^ Virginia : Hopewell v. Cumber- lb. 35. Mississippi : O.-born v. land Bank, 10 Leij^h, 20G; Bank v. Noble, 46 Miss. 449; Carpenter v. Boisscau, 12 Leigh, ^87. Ohio: Bowen, 42 Miss. 28 ; Bibb y. Martin, McConnell v. Scott, 15 Ohio, 401; 14 Sm, & M. 87. 409 § 52G.] THE RIGHTS OF A SURETY. the creditor, be has no intention of giving any lien to the creditor, or to pledge the property to him for the debt ; and as he has a right to dispose of his property as be pleases, provided he com mits no fraud, the court will not construe the instrument giving the lien beyond the intent; although it will, to effect the exon- eration of innocent sureties, permit their substitution to the creditor's rights, or his substitution to theirs." ^ 526. A distinction is to be observed between cases where the security has been given to the surety for the payment of the debt and cases where it has been given solely for his in- *demnit3^2 In the first class of cases the primary purpose of the debtor may fairly be taken to be to secure the payment of the debt ; while in the latter class of cases his purpose seems to be primarily to secure the surety. In the former class of cases the creditor may fairly be regarded as a direct beneficiary in the property placed in the control of the surety ; but in the latter class of cnses the creditor is secured only indirectly through the surety. There is, however, much difficulty in determining whether a case falls within one class or the other, from the fact that di- rectly opposite views are taken in different jurisdictions of instru- ments of the same tenor. " Thus,^ where a mortgage is given in terms conditioned to save the surety harmless, and to pay the notes, the former clause has been held b}' some courts to give the controlling character to the instrument as an indemnity;* while with others the latter clause has been viewed as decisive that it created a direct trust to pay the debt." ^ ^ Hopewell v. Bank of Cumberland, Qninnipiack Bank, 29 lb. 25. Illinois: 10 L.i^h. (Va.) 206, 221. Per Constant v. Matteson, 22 Til. 546. Pinker, J. Kentucky: Havens i'. Foudry, 4 2 In New Bedford Inst. Sav. v. Mete. (Ky.) 247. Missouri: Haven Fairliaven Bank, 9 Allen (Mass.), v. Foley, 18 Mo. 136. 175, the security was merely for the ^ As in Massachusetts: Eastman indemnity of the surety; and the dis- r. Foster, 8 Mete. 19. Mississippi: tinction between an indemnity and a Ross v. AVilson, 7 S. & I\I. 753. Ten- direct (rust for the payment of the nessee: Saviors v. Saylors, 3 Heisk. debt WHS jiressed upon the court, but 525. Vermont: Paris v. Hulett, 26 was rejected as immaterial. Vt. 308. Maryland: Kunkel r. Fitz- 8 U Am. Law Rev. 855. hugh, 22 Md. 5G7; Boyd v. Parker, * As in Connecticut: Thrall v. 43 lb. 182. Spencer, 16 Conn. 139; Jones v. 410 creditor's rights to surety's securities. [§§ 527, 528. 527. As between the doctrine of the creditor's equitable lien and the doctrine of his right of subrogation, the weight of authority seems to be clearly in favor of the former. The former properly applies to cases where the securities have been placed in the surety's hands for the payment of the debt; and the latter to cases where the securities have been placed in his hands purely for his indemnity. In fact, however, there is no such sharp distinction in the application of these doctrines to these different classes of cases; for, as already noticed, similar instruments have been regarded by dilferent courts as falling under each of these classes. We have noticed, too, the tendency of the courts to regard the security in the surety's hands as a trust for the payment of the debt rather than as a mere indemnity to the surety. To regard it as a trust seems better to satisfy the natural equities of the transaction. " We think," says Mr. Willard, " that subrogation fails to exhaust and satisfy the equi- ties of the various modes in which securities are delivered for the surety's indemnity, in that, first, it overlooks the real sense of the transfer, which is to reimburse the surety only if he has paid, and if he has not paid, then, to enable him to do so ; in a word, to pay the debt, but through the surety.^ Secondly, by adhering so literally to the words of the transfer, it confers upon the surety an absolute control over the securit}^ which may, and often does utterly defeat the payment of the debt.^ Thirdly, it is, in practice, a I'ule of very difficult application, because of the widely differing forms in which this indemnity is given, in some cases directly to the surety, in others in trust for him, where he can assert a control only by himself becoming a suitor in law or equity ; in other cases, again, no instrument defining the terms of the transfer, but only a simple delivery of the security, being made to the surety." ^ 528. The creditor is entitled at any time after the delivery of the security to control or enjoin any misappropriation of the security, where the creditor's right is regarded as a trust, though until the maturity of the debt, his trust lien does not fully attach to the security. Thus if the surety has been indem- nified by receiving collateral notes from the debtor, he will be 1 Lewis V. DcForest, 20 Conn. 427, ^ Rnnkin v. Wilscy, 17 Iowa, 4G3. 442, 443. 8 14 Am. L. Rev. 8'A. 411 § 529.] THE RIGHTS OF A SURETY. regarded as holding such notes as trustee for the benefit of the creditor who may obtain an injunction restraining him from nego- tiating the notes. 1 Inasmuch as the creditor's right rests upon the trust in his favor he has an interest in tlie securities from the time they are given which he may interfere to protect, and he need not wait till the surety's liability has become fixed. A surety who has received in pledge a negotiable note can, of course, before its maturity and while it is not subject to equities, transfer it ; and any one taking it for value and in good faith will not be affected by any trust in favor of the creditor, nor will he be responsible for the manner in which the surety applies the proceeds.^ 529. But where the creditor's right is one of substitution merely he cannot assert it until the surety's liability has be- come fixed, whether by maturity of the debt, or by demand or by judgment. Until such time the surety has full control of the securities, and may dispose of them as he pleases. Thus where rents were pledged to a surety, and before his liability was fixed, he purchased the fee of the premises, it was held that they were placed beyond the creditor's reach by the merger.^ The doctrine of the creditor's equitable lien has been criticised because it im- pliedly overrides the surety's proper control of his indemnity, while he remains solvent ; and on the other hand the doctrine of subrogation is criticised because it denies to the creditor the just" protection to which he is entitled.^ Until the surety's insolvency he would seem to be primarily entitled to control the security, because until that occurs the presumption is that he will pay the debt ; but in the mean time the creditor should be entitled to enjoin the surety from wilfully misappropriating the security. Upon the insolvency of both the principal and the surety, the creditor is entitled to the benefit of security held by the surety merely for his indemnity ;^ and he is entitled to it upon the in- solvency of the surety alone. It is even said that " While in no view does the insolvency of the principal debtor create the equity, although it may be a material point in defining when the credi- 1 Clark V. Ely, 2 Sandf. (N. Y.) 3 Rankin v. Wilsey, 17 Iowa, 463. Ch. 1G6. 4 14 Am. Law Rev. 852. 2 Commercial Bank v. Rochester ^ Foye, in re, 16 N. Bank R. 572; City Bank, 46 Barb. (N. Y.) 371. Fickett, in re, 72 Me. 266. 412 creditor's rights to surety's securities. [§§ 530, 531. tor's claim matures, excusing demand or the like ; on the other hand, the insolvency of the surety seems an indispensable element to the enforcement of that equity, and to give to it vitality." ^ 530. The discharge of the surety does not bar the credi- tor's right to claim the securities, which the debtor has placed in the surety's hands for the payment of the debtor for his indem- nity, where the creditor does not claim by subrogation, or through the surety, but by virtue of a trust which a court of equity will protect and enforce for the creditor's benefit. The trust survives the surety's discharge.^ But where the creditor's right is one of subrogation, it is clear that the discharge of the surety before his liability becomes fixed, will bear the creditor's right to receive and enforce the surety's securities.^ 531. A surety holding collateral security may transfer it to the principal creditor, who is entitled upon default to pro- ceed to make the money out of such security before suing the principal note. The rule is not changed by the fact that such security is another note and mortgage.* But a surety holding property in pledge to indemnify him for his liability upon a note, has no right to transfer the property to the holder of the note in satisfaction of it ; and if he does, the transfer does not change the status of the property as a pledge, or deprive the pledgor of his right to redeem it.^ If a surety exchanges the securities he has received for others, or receives others in payment for the original securities, he will hold the new securities for the benefit of the creditor upon the same trust that he held the original securities.^ 1 14 Am. Law Rev. 852 ; Lewis v. Bibb v. Martin, 14 Sm. & M. (Miss.) DeForest, 20 Conn. 427; Jones v. 87; Hopewell v. Cumberland Bank, Quinnipiack Bank, 29 Conn. 25. 10 Leigh (Va.), 206. 2 Roberts v. Colvin, 3 Gratt. (Va.) * Wells v. Smith, 2 Utah, 39. And 358, 359; Eastman v. Foster, 8 Mete, see Phillips v. Thompson, 2 Johns. (Mass.) 19 ; Cullum v. Branch Bank, (N. Y.) Ch. 418. 23 Ala. 797 ; Crosby v. Crafts, 5 Ilun ^ IMorgan v. Dod, 3 Col. 551. (N. Y.), 327; Helm i;. Young, 9 B. « (jij^fk y. ^i^,^ 2 Sandf. (N. Y.) Mon. (Ky.) 394. Ch. 8 Osborn v. Noble, 46 Miss. 449; 413 §§ 532, 533.] THE RIGHTS OF A SURETY. 532. One may hold a pledge both as creditor and as surety. Thus it may be given liim to secure a debt due to him- self, and also to indemnify him against a debt for which he is surety ; and in that case though it has been said that as between himself and the creditor the latter is entitled to be first paid out of the proceeds of the property,^ because the surety is regarded as a quasi trustee for the creditor as to such property ; yet the better rule would seem to be to apply the security pro rata^ or if the surety has himself obtained the security, that he should be entitled to appropriate so much of it as might be necessary for the payment of his own demand in fuU.^ A creditor holding in pledge his debtor's goods to a greater value than the debt due him, entered into an arrangement with another creditor of the pledgor whereby he transferred the goods to the other creditor, who thereupon guaranteed the payment of this debt. The debtor, though not a party to this arrangement, afterwards assented to it ; and the goods subsequently having been attached as the debtor's property, it was held that although the first pledgee lost his lien upon the goods by surrendering them to the other creditor and taking his guaranty, the latter by the debtor's assent to the arrangement, acquired as pledgee a valid lien on the goods for the payment of both debts ; a lien for the debt due to him, and a lien to indemnify him against the liability incurred by his guaranty.* 633, A dividend received in bankruptcy or insolvency by a creditor whose claim is in part secured by a pledge given by a surety should be applied ratably to the whole demand ; that is, ratably upon the secured and the unsecured portion of the whole demand. The surety is regarded as having secured a lim- ited part of an entire debt, and not the unpaid balance of a debt with a limitation as to the amount of the liability. If security be given for a separate and distinct part of a debt, then a divi- dend arising from that part of the debt must be applied to the discharge of that part. The intention of the parties to the trans- action is to be considered. If a surety pledge bonds to secure an 1 Ten Eyck v. Holmes, 3 Sandf. (Ky.), 299 ; Ross v. Wilson, 7 Sm. & (N. y.) Ch. 428. M. (Miss.) 753. 2 Moore V. Moberly, 7 B. Mon. » Brown v. Ray, 18 N. H. 102. * Tread well v. Davis, 34 Cal. 601. 414 THE MUTUAL EQUITIES OF CO-SURETIES. [§§ 534, 535. unpaid balance of one hundred thousand dollars upon a much larger debt, and a dividend in bankruptcy of fifty per cent, be paid upon the whole debt, it is immaterial to the surety how or by whom the balance be paid, so long as one hundred thousand dollars remain unpaid ; but if the dividend reduce the balance below that amount the surety is entitled to the benefit of the reduction, because upon payment of the debt he would be sub- rogated to the creditor's lien upon the bonds.^ III. The mutual Equities of Co-Sureties to claim the Benefit of each other s Securities. 534. There is also a mutual equity bet-ween co-sureties that securities placed by the principal debtor in the hands of one surety to indemnify him for his liability, inure to the benefit of all other sureties for the debt.^ Like the other equities already spoken of, this is a natural equity, and does not depend upon any contract ; ^ though it is said that it may be presumed that the debtor in securing one surety intended that all the sureties should share in the benefit of the security unless there be something to show that such was not his intention ; for in securing one surety he may expressly exclude his co-sureties from the benefit of the security given.* 535. But a creditor is not entitled to the benefit of secu- rities placed by one surety in the hands of another for his indemnit}'. Thus where co-sureties upon a bond agreed between themselves that each should be liable for the payment of a cer- tain part of the bond, and that each should indemnify the other from all claim by reason of his liability upon the bond in excess of the sura or proportion which each was to be liable for, and each gave to the other security for the performance of his agree- ment ; it was held upon the insolvency of the sureties as well as the principal debtor, that the securities given by the sureties to each other were not in equity securities for the payment of the 1 Duinont V. Fry (C. C. D. N. Y. Stacy, 8 Allen (Mass.), 41 ; Hart- 1882), 14 Kep. 678. well v. Wliitinan, .-iG Ala. IVl. ^ Hampton V. Phipps, 2 Supreme ^ Derinj; r. Winchelsea, 1 Co.x, 318" Ct. Rep. 622, per Matthews, J. ; Al- Brown v. Ray, 18 N. II. 102. drich V. Ilapgood, 39 Vt. 617 ; Fi.sh- < Moore v. Moore, 4 Hawks. (N. C.) back V. Weaver, 34 Ark. 569; Sliee- 358. han i;. Taft, 110 Mass. 331 ; Lane v. 415 § 536.] THE RIGHTS OF A SURETY. principal debt, -wbicli would inure by way of subrogation to the benefit of the creditor.^ Mr. Justice Matthews, after stating the equitable rule and the grounds of it, as quoted in a preceding section,^ declared that the present case could not be brought within tlie terms or the reason of the rule ; " for as the property, in respect to which the creditors assert a lien, was not the prop- erty of the principal debtor, and has never been expressly pledged to the payment of the debt, so no equitable construction can con- vert it by implication into a security for the creditor. It is urged that the logic of the rule would extend it so as to cover the case of all securities held by sureties for purposes of indemnity of whatsoever character and by whomsoever given. But this sug- gestion is founded on a misconception of the scope of the rule and the rational grounds on which it is established. Of course, if an express trust is created, no matter by whom nor of what, for the payment of the debt, equity will enforce it, according to its terms, for the benefit of the creditor, as a cestui que trust; but the question concerns the creation of a trust, by operation of law, in favor of a creditor, in a case where there was no duty owing to him, and no intention of bounty. A stranger might well choose to bestow upon a surety a benefit and a preference^ from considerations purely personal, in order to make good to him exclusively any loss to which he might be subjected in conse- quence of his suretyship for another. In such case, neither co- surety nor creditor could, upon any ground of priority in interest, claim to share in the benefit of such a benevolence." 536. That one surety has pledged his own property to another surety for the same debt, does not release the principal debtor from his implied contract to repay either surety any sum he may have to pay upon the debt. A private arrangement be tvveen co-sureties for the distribution of liability inter sese, does not, unless expressly so stipulated, release the liability of the com- mon principal to either of them. That one of several signers of a note pledges his own property to another, does not necessarily prove that he is really the principal debtor; for one surety may find it for his interest to pledge his property to another surety.^ ^ Hampton v. Phipps, 2 Supreme ^ Water Power Co. v. Brown, 23 Ct. Reporter, 622. Kans. 676. 2 § 514. 416 THE MUTUAL EQUITIES OF CO-SURETIES. [§§ 537, 538. 637. A surety's right of subrogation does not arise until he has paid the debt. This is true of bis right as against the creditor, and as against his co-surety as well. Therefore if two co-sureties agree between themselves to share the responsibility for the debt in certain proportions, and accordingly indemnify each other by mortgage for such proportions, and both become insolvent without paying any part of the debt, the right of sub- rogation never arises between them ; and for this reason, as well as for the reason that the security was not the property of the principal debtor, the creditor cannot enforce the security for his own benefit. " Unless one of them had been compelled to pay, and had in fact paid, an excess beyond his agreed share of the debt, there could have been no breach of the conditions of the mortgage, and consequently no right to a foreclosure and sale of the mortgaged premises. And the amount which the mortgagor could be required to pay, as a condition of redeeming the mort- gaged premises, in case of foreclosure, would be, not the amount which the mortgagee, as between himself and the common credi- tor, was bound to pay on account of the debt, but the amount which, as between himself and his co-surety, the mortgagor, he had paid beyond the proportion which, by the terms of the agree- ment between them, was the limit of his liability. The mort- gages were not created for the security of the principal debt, but as security for a debt possibly to arise from one surety to the other. As to which of them has there been as yet any default ? Plainly none as to either. And yet the complainants assert the right to foreclose them both ; a claim that is self-contradictory, for, by the very nature of the arrangement, it is impossible that there should be a default as to both. The fact that one mort- gagor had failed to perform his part of the agreement could only be on the supposition that the other had not fully performed it on his part, but had paid that excess against which his co-surety had agreed to indemnify him. There is, therefore, no right to the subrogation insisted on, because there is nothing to which it can apply." 1 538. A surety is subrogated to securities placed in the hands of the creditor by his co-surety only to the amount he has actually paid for such co-surety. Ordinarily and in the 1 Hampton v. Phipps, 2 Supreme Ct. 622, C2G ; per Matthews, J. 27 417 § 639.] THE RIGHTS OF A SURETY. absence of any express agreement co-sureties as between them- selves are liable for equal shares of the principal debt. Thus in case there are two co-sureties, one of them upon paying the whole •debt can enforce against the other the payment of only half of it ; and in case one such co-surety is insolvent, the surety who has paid the debt can prove against his estate for only half the amount of the debt paid by him. He can prove for no more, although in his settlement with the creditor he has received an assignment of the debt and of the proof of the debt, which the creditor has already made for the full amount of the debt against the estate of his co-surety. In such case the creditor's proof for the whole amount of the debt against the estate of the co-surety will be expunged, and the surety who has received an assignment of the debt will be allowed to prove for only half of the amount of it. Mr. Justice Devens, delivering the opinion of the Supreme Court of Massachusetts in a case relating to the rights of co-sureties under such circumstances, said : ^ "If it be conceded that the surety pay- ing the debt is equitably entitled to the benefit of such security as may have been deposited with the creditor by the other surety, or may have been obtained against him, the question still remains whether he is entitled to such security only to the extent of enforc- ing a claim for that which he has paid on behalf of the co-surety, or whether he may enforce the full claim which the creditor had against the co-surety, provided that he does not himself thus obtain more than he has actually paid on behalf of the co-surety. The latter is the contention of the plaintiff. Upon the inquiry involved, the authorities are certainly conflicting." After reviewing the authorities the learned judge continued : " In this conflict of au- thority, we are brought to the conclusion that neither in his own name nor in that of the creditor ought the surety paying the debt to enforce any claim against his co-surety, except for the amount actually paid by him for his co-surety ; and if, by reason of the insolvency of such surety, there is a loss, it is one to which the relation in which they stand to each other compels him to sub- mit." 539. The fact that one surety has misappropriated prop- 1 New Bedford Institution for Sav- 360. See, however, Apperson v. Wil- ings V. Hathaway, 134 Mass. 69. See bourn, 58 Miss. 439 ; Hess's Estate, 69 Bowditch V. Green, 3 Mete. (Mass.) Pa. St. 272. 418 THE MUTUAL EQUITIES OF CO-SURETIES. [§ 539. erty delivered to him by the debtor as collateral security for his liability, is no defence to an action by the creditor against a co-snrety. The creditor having no possession or control of the security in such case, cannot be held responsible for a fraudulent conversion of it by the surety .^ ^ Prather v. Young, 67 Ind. 480. 419 CHAPTER XIV. PAYMENT AND REDEMPTION. I. Effect of payment or tender of payment, 540-547. II. Application of payments, 548-551. III. Redemption in Equity and at Law, 552-560, IV. Action for conversion by the pledgee, 561-580. V. Statute of Limitations, 581-583. I. Effect of Payment or Tender of Payment. 540. Payment of the debt for which the collateral security was taken discharges the pledge, and the security will not apply to any new indebtedness unless there be an agreement of the parties that it shall so apply.^ Whether the security be a chattel or a chose in action, the payment of the debt by the pledgor revests in him the beneficial interest, and he becomes again the absolute owner.^ And payment or tender of payment is the only means whereby the pledgor can by his own act rein- vest himself with the right of possession of the pledge.^ Anything that effects a satisfaction of the debt is payment.* Payment may be made as well by the delivery and acceptance of personal property as by the delivery and acceptance of money. But there must be a substantial satisfaction of the debt in some way in order to discharge the lien. Two notes were delivered as collateral security for advances to be made under certain con- tracts made by the pledgee with the indorser. The creditor afterwards brought an action for a final accounting under the contracts, and obtained a judgment which was satisfied. In this action claims for advances made upon two drafts, each referring specifically to one of the collateral notes, were rejected because not included in the bill of particulars. Subsequently the creditor ^ Biebinger v. Continental Bank, 99 U. S. 143. 2 Lapping v. Duffy, 6.5 Ind. 229; Compton V. Jones, 65 Ind. 117; Ward 420 V. Ward, 37 Mich. 253; Merrifield v. Baker, 9 Allen (Mass.), 29. 8 Henry v. Eddy, 34 111. 508. * Bacon v. Lamb, 4 Colo. 578; Strong V. Wooster, 6 Vt. 536. EFFECT OF PAYMENT OR TENDER OF PAYMENT. [§§ 541, 542. brought suit upon these notes, and it was contended that they were merged in the judgment recovered in the action for an ac- counting ; but it was held that they were not so merged ; that the obhgation of the parties thereto remained until the purpose for which the notes were delivered should be accomplished, namely, the securing the payment of the advances made by the creditor upon the faith of these notes.^ The whole debt must be paid in order to discharge the lien of the pledge. In Louisiana the civil code provides that when several things have been pawned the owner can not retake one of these without satisfying the whole debt, though he offers to pay a certain amount of it in proportion to the thing which he wishes to get. The creditor who is in possession of the pledge can only be compelled to return it, when he has received the whole payment of the principal as well as the interest and costs.^ 541. A renewal of a note secured by a pledge does not extinguish the debt, and is not a payment of it which will dis- charge the creditor's claim upon the collateral security.^ Upon payment of a part of the original note, and the execution of a new note in renewal of the remainder of the debt not paid, a pledge taken as security for the original note will stand as security for such new note, in the absence of any agreement to the contrary.^ 542. A tender of the amount due on a debt for which property is held in pledge, or for which collateral security has been given, at the time the debt is due, wholly discharges the lien of the pledge, and revests the title to the thing pledged in the pledgor, so as to entitle him to maintain trover, or replevin there- for.5 In this respect a tender is equivalent to actual payment. A tender of a part of the amount of the debt will not have the 1 Steele v. Lord, 28 Hun (N. Y.), 6 Ratcliff v. Davies, Cro. Jac. 244; 27. S. C. 1 Bulstr. 29; Coggs v. Bernard, 2 2 R. Civ. Code, 1870, p. 376, Arts. Ld. Raym. 909 ; S. C. Holt, 528; Ryall 3163, 3164. V. Rowles, 1 Atk. 165, 167; Haskins 8 Collins V. Dawley, 4 Colo. 138; v. Kelly, 1 Robt. (N. Y.) 160; 5. C. 1 Pinney v. Kimpton, 46 Vt. 80, 83; Abb. Pr. N. S. 63; Ball v. Stanley, 5 Moses V, Trice, 21 Gratt. (Va.) 506. Yerg. (Tenn.) 199; McCalla v. Clark, * Dayton Nat. Bank i'. ^Merchants' 55 Ga. 53. Nat. Bank, 37 Ohio St. 208. 421 §§ 543, 544.] PAYMENT AND REDEMPTION. effect to revest the title to any part of the property pledged ; ^ the debt must be paid as a whole, and the tender to be effectual must be co-extensive with the whole debt secured.^ In one respect a tender is not equivalent to payment ; for although the lien is discharged by either, the debt is not dis- charged by a tender, but the pledgee may still maintain his action for this. 543. A creditor by refusing a tender properly made of the amount of a debt secured by a pledge, converts it to his own use. He makes it his own so far as to run the chance of any depreciation that may afterwards occur. He cannot sue for and recover the debt without making a proper allowance for the value of the pledge as it was at the time of the tender in reduc- ing or satisfying the debt.^ If in such case there be a surety of the debt, he is released ; for the surety is entitled to have the security delivered up to him upon his paying the debt ; and when the creditor has by his own act destroyed the security or rendered it valueless, or put it out of his power to give the surety the benefit of the substitution, the latter is discharged.* Upon the pledgee's refusal of a tender of the whole amount of the debt secured, the debtor may maintain trover for the prop- erty, and he is entitled to damages to the full value of the prop- erty, without any abatement for the amount for which the property was pledged. The creditor must resort to an action to recover the debt. The refusal of the tender discharges the lien upon the property and places the parties, in relation to the property, in the same position as if the debt had been paid and no pledge had ever existed.^ 544. Upon tender or payment of the specific debt secured by pledge, the creditor has no power over the collateral security except to hold it, and deliver it to the debtor upon demand. The fact that shares of stock have been pledged to secure a promissory note which provided that the holder might ^ Appleton V. Donaldson, 3 Pa. St. 131 Mass. 14; Hancock v. Franklin 381. Ins. Co. 114 Mass. 155. 2 Bigelow V. Young, 30 Ga. 121. ■* Griswold v. Jackson, supra. 8 Griswold V. Jackson, 2 Edw. (N. 5 Ball v. Stanley, 5 Yerg. (Tenn.) Y.) Ch. 461; affirmed 4 Hill, 522; 199. Hathaway v. Fall River Nat. Bank, 422 EFFECT OF PAYMENT OR TENDER OF PAYMENT. [§ 545. sell the collateral on default " he giving me credit for any bal- ance of the net proceeds of such sale, and paying all sums then due from me to said holder," does not give the holder any right to retain the stock as security for any other debt after payment or tender of payment of the note.^ The event upon which the holder was authorized to credit the pledgor with the proceeds of the collateral and to pay therewith other debts due from him, does not occur when payment or tender is made before the credi- tor exercises his power of sale. Upon payment or tender the pledgor or any one standing in his place is entitled to receive the stock discharged of the lien created by the pledge. The pledgor's assignee in insolvency or his assignee for the benefit of his cred- itors would be entitled to his rights in such case, so that in an action to redeem the pledged stock, the creditor could not set off other debts due him from the pledgor at the time the note matvired.2 Moreover it would be no defence to a bill by such assignee that the creditor had applied the pledged stock in pay- ment of other debts due from the pledgor.^ Cases in which it is held that the damages in trover may be mitigated by proof that the goods converted have been restored to the owner, or their proceeds applied to his use or to payment of his debts would have no application as against such assignee, because he repre- sents not merely the pledgor but his creditors. 645. A tender, to have the effect of discharging the lien of a pledge, must be absolute and unconditional, and must in all other ways conform to the general rules relating to the mode of making a tender. The money need not be actually produced, if the debtor has it ready and offers to pay it, but the creditor dis- penses with the production of it in any manner, as for instance, by expressly saying to the debtor that he need not produce the money, as he would not accept it.^ But a bare refusal to receive the sum offered, and a demand of a larger sum are not enough to excuse an actual tender of the money. Thus, where a debtor met his creditor for the purpose of redeeming stock held in pledge, 1 Hathaway v. Fall River Nat. ^ Hathaway v. Fall River Nat. Bank, 131 Mass. 14. Bank, aupra. 2 Hathaway v. Fall River Nat. ■* Thomas v. Evans, 10 East, 101; Bank, supra; Stetson v. Exchange Kraus v. Arnold, 7 Moore, 59; Ilan- Bank, 7 Gray (Mass.), 425. cock v. Franklin Ins. Co., 114 Mass. - 155. 423 §§ 546, 547.] PAYMENT AND REDEMPTION. and the amount due upon it having been agreed upon, the debt- or's agent and broker was about to fill up a check for the amount, when the creditor requested that the business should be post- poned to the next day, and demanded the whole value of the stock, amounting to much more than the sum liquidated, under the pretence that he was responsible as surety for the debtor, on another and separate account, the tender was held to be in- effectual.^ A tender accompanied with a demand for a receipt, or a dis- charge of a lien or a return of securities, is not an unconditional tender. A tender should not be accompanied with a demand for anything more than the production and delivery of any negotiable paper representing the debt which is sought to be paid.^ More- over the tender must at all times be kept good ; that is, the debtor must constantly keep on hand the money tendered separate from his other money ready to pay over to the creditor whenever he might be ready to take it, and must bring the money into court.^ 546. A tender need not include interest upon the debt if none was contracted for, and none has accrued by way of dam- ages after a demand. Thus upon a pledge of a watch by way of a sale of it for eighty-two dollars, with an agreement that the seller should have it again in thirty daj^s, upon the payment of eighty-seven dollars, a tender of the latter sum was held sufficient, the five dollars bonus being regarded as in lieu of in- terest.* 547. Upon the tender of the amount of a debt for which an accommodation note is held as security, the maker of such note, being in effect a surety, is discharged. The creditor by a tender from the principal debtor has in his hands the means of payment, and by his refusal to accept it discharges the surety ; and in an action by the creditor upon the collateral note, the maker of that need not plead the tender, or bring the amount into court. ^ 1 Dunham v. Jackson, 6 Wend. (N. ® Cass v. Higenbotam, supra. Y.) 22. ^ Hines v. Strong, 46 How. (N. 2 Cass V. Higenbotam, 27 Hun (N. Y.) Pr. 97; affirmed, 56 N. Y. 670. Y.), 406 ; Brooklyn Bank v. DeGrauw, ^ Appleton v. Donaldson, 3 Pa. St. 23 Wend. (N". Y.) 342. 381. 424 APPLICATION OF PAYMENTS. [§§ 548-551. II. Applicatio7i of Payments. 548. Where a pledge covers several distinct debts, con- tracted at divers times, the moneys arising from the pledge should be applied to the discharge of the debts, in the order in which they were contracted, provided the circumstances are such that neither the debtor nor creditor has the right to determine the application of the proceeds, and the pledge was made in security of the several debts in such a way, that the debtor pledged for each debt what remained of the pledge, after payment of the next previous debt.^ 549. A general payment may be applied by the creditor as he may determine. A creditor holding security for various notes of his debtor, some of which bear the names of sureties, may apply general payments, or sums of money received from the security, to the payment of such of the notes as may be nec- essary for his own protection ; and the sureties xipon other notes cannot avail themselves of the security in any way, without pay- ing or tendering the whole amount of the debts for which the security was given. ^ 550. The proceeds of the property pledged must be applied in the first instance to the payment of the debt secured.^ If a pledgee assign the pledge to secure a debt of his own, he cannot provide that the assignee shall apply the proceeds of the pledge in the first instance to the payment of the pledgee's debt, for the assignment is necessarily subject to the lien of the original debt secured by the pledge, and the pledgee cannot change the appro- priation except with the consent of the debtor.* 551. A creditor has no right to apply collateral security for any purpose other than that for -which it was specially given.^ Thus an agent having procured a discount of his principal's note secured by another larger note belonging to his principal as col- ^ Jones V. Benedict, 83 N. Y. 79 ; ^ -Wilcox v. Fairhaven Bank, 7 Al- affirniing S. C. 11 Hun, 128; 11 N. len (Mass.), 270. Y. Weekly D\%. 428. See Pattison v. » Marziou v. Pioche, 8 Cal. 522. Hull, !) Cow. (N. Y.) 747, and note, * Ware v. Otis, 8 Me. 387. 777. ^ Phillips v. Thompson, 2 Johns. CN. Y.) Ch. 418. 425 §§ 552, 553.] PAYMENT AND REDEMPTION. lateral, the creditor upon the maturing of the collateral note, be- fore the principal note, applied the proceeds of it to take up a note made by the agent's firm. Although the agent when obtain- ing the discount told the creditor to collect the collateral note and credit the proceeds to his firm, the creditor, knowing when he dis- counted the note that the collateral note was the property of the principal, or at any rate knowing enough to put him upon inquirj'^, had no right to apply such note otherwise than for the principal's benefit. The collection, therefore, of the collateral note, operated as payment of the principal's note upon the maturity of that, and made the pledgee the debtor to the principal for the difference between the two notes.^ An agent who has obtained a loan for his principal upon a pledge of goods belonging to the latter, cannot in the absence of a special agreement, appropriate the proceeds of a sale of the goods to the payment of a debt due to himself by the principal.^ III. Redemption in Eqiiity. 552. In general. — When personal property is conveyed as se- curity by way of mortgage, the legal title passes to the creditor, and his title becomes absolute at law upon breach of the con- dition. The debtor has no legal right to redeem, and it is only in equity that he can be relieved from the forfeiture and allowed to redeem. He has no legal right to redeem unless such a right be given by statute.^ But in case of a pledge, as has already been noticed, the pledgor does not part with the general title, but only with the possession and a special property. Upon de- fault the debtor still retains the general title. The property is not conveyed upon a condition that the conveyance shall be void upon performance of the condition. There is no conveyance of the thing pledged, and no condition upon the breach of which the property becomes absolute in the creditor. Therefore the debtor has a legal i-ight to redeem, although he has not paid the debt secured at its maturity, or otherwise performed the con- ditions of his contract. 553. A right of redemption attaches to every pledge. 1 Geffcken v. Slingerland, 1 Bosw. ^ Jones on Chattel Moi'tgages, § (N. Y.)449. 683. ^ James's Appeal, 89 Pa. St. 54. 426 REDEMPTION IN EQUITY. [§ 553. This right is a part of the contract whether, it be express or im- plied ; and the parties can make no valid agreement that there shall be no redemption after default. " Once a mortgage always a mortgage," is one of the most important maxims in the law of mortgages.^ With a change of terms it is equally applicable in the law of pledges. " The right of redemption attaches equally to both, and it is as difficult to transmute the one as the other into a sale, by the operation of the original contract. Though anciently at Rome, the creditor and debtor were permitted, by the lex cornmissoria, to make an agreement at the date of the pledge whereby it would, on a prescribed contingency, become the absolute property of the pawnee ; sucb a power was not in- dulged, even at Rome, since the days of Constantine, who abol- ished the law by which it had been sanctioned. Every agree- ment for preventing redemption of pawns is proscribed by the common law as emphatically as are similar agreements in mort" gages of real estate." ^ Therefore, if in a written or verbal contract of pledge it is stipulated that the property shall be absolutely the property of the pledgee, if the debt be not paid at a time stipu- lated, the right to redeem exists, notwithstanding the agreement of the parties. The law recognizes no agreement to prevent a re- 1 Jones on Mortp;ages, §§ 7, 340 , of Constantine prohibiting such con- Clark V. Henry, 2 Cow. (N. Y.) 324; tracts, has been imported into the Hughes V. Johnson, 38 Ark. 285 ; law of France (Poth. Nantissement, Hart V. Burton, 7 J. J. Marsh. (Ky.) 18), and into the modern law of Con- 322; Baldwin v. Bradley, 69 111. 32, tinental Europe. The creditor can- 36. not stipulate that if he is not paid at "By the early Roman law, the the time appointed, the thing pledged debtor and creditor might agree that shall become his own property, for if the debtor did not pay the debt such an agreement would be contra within a time specified, the thing 6o?ios 7?iores ; for the pledge is given to pledged should be forfeited and be- the creditor only as a security for the come the absolute property of the debt, and not to enable him to profit creditor. But a law of Constantine by the indigence of his debtor. Do- prohibited such contracts, on the mat, lib. 3, tit. 1, §§ 3, 11 ; " Folkard's ground that they were unjust and op- Law of Pawnbrokers, p. 11, n. f. pressive to debtors; and declared that ^ jj^^j-t v. Burton, 7 J. J. Marsh, every contract should be null and void Ky. 322, 323, per Robertson, C. J. which j)rovided that the thing pledged And see Wadsworth i'. Tliompson, 8 should pass to the creditor without 111.423,427; Marshal t;. Williams, 2 sale or apprisement, or that the debtor Hayw. (N. C.) 405 ; Luckctt v. Town- should forfeit his right of redemption send, 3 Tex. 119; Hnglie.s v. Johnson, if lie failed to pay a the pro[)er time, supra. Cod. lib. 8, tit. '.ifj, 1, 3. 'J'his law 427 § 554.] PAYMENT AND REDEMPTION. demption of the pledge. Any contract which is a pledge in the beginning continues a pledge until the debt is paid or the right o£ redemption is foreclosed. The parties may, by a subsequent agree- ment for a valid consideration, release the right of redemption ; but they cannot in the original contract agree that no right of re- demption shall attach to it. Thus a stipulation made by a mort- gagee in the assignment of a mortgage as collateral security, that he shall forfeit all interest in it if he fail to pay his debt at maturity does not cut off his right to redeem it afterwards.^ 554. An agreement by a pledgor that the property pledged shall become the pledgee's absolutely upon his failure to pay the debt at the time specified, will not be enforced ; but in a suit by the pledgee to recover the principal debt he will be held to account for the proceeds of the property pledged, if this has been sold.^ Moreover, the pledgor upon a tender of the full amount of the debt, may, in replevin, recover the thing pledged, or may recover its value in action of trover ; or in exceptional cases may maintain bill in equity to redeem.^ A creditor holding notes of third persons as collateral security must account for them or their proceeds, although his debtor has agreed with him, that if the debt be not paid at a specified time, the collateral notes shall become his absolutely. If the creditor in such case bring suit upon the principal debt, recover judgment and collect it in full, and, pending the suit or afterwards, he sells the collateral notes, and fails to account for their proceeds to the debtor, the latter may recover the same of the creditor. " Courts of law as well as of equity very frequently refuse to carry out the express agreements of parties where the result would be gross injustice to one, without any corresponding loss to the other, calling for such injustice. Especially should this be the case where an agreement made between mortgagor and mort- gagee, or borrower and lender, is sought to be enforced or inter- posed as a defence. The law should and does scrutinize closely all such agreements, and refuses to enforce them, especially where, as in this case, to do so would be both unjust and un- conscionable." '^ 1 Hughes V. Johnson, 38 Ark. 285. 3 Stoker v. Cogswell, 25 How. (N. '^ Dorrill v. Eaton, 35 Mich. 302; Y.) Pr. 267. Kingsbiu-y v. Phelps, AVright (Ohio), * Dorrill v. Eaton, supra. . 370. 428 REDEMPTION IN EQUITY. [§§ 555-557. 55b. The parties may at a time subsequent to the pledge agree that the creditor shall take the pledge in satisfaction of the debt, and their contract to this effect if clearly proved will be enforced. They may also agree that the creditor may sell the pro]3erty pledged at a stipulated price, or may himself take the property at that price and credit the pledgor with the amount. But to prevent a redemption there must be clear and satisfactory proof not only of the contract itself, but of the creditor's elec- tion to take the property at the price agreed upon, either by his giving personal notice of such election, or by his crediting the amount upon his books. A mere resolution in the creditor's own mind to take the opportunity is not sufficient. The appropria- tion must be such that the debtor could have availed himself of it.i Such an arrangement, moreover, will not be sustained if the creditor has made any fraudulent or oppressive use of his position and power over the debtor. 656. In general a bill in equity does not lie to redeem property from a pledge, because the remedy at law upon a tender of the money is ample ; ^ the remedy at law being either a possessory action to recover the thing pledged, or an action of trover to recover its value. A special ground for proceeding in equity must be shown, as that a discovery is necessary or that an account is wanted, or that there has been an assignment of the pledge.^ 557. A bill in equity may be maintained to redeem a pledge, if an account is wanted, or if there has been an assign- ment of the pledge, notwithstanding the pledgor has a remedy at law, in an action of trover.* But if the ground be the necessity of an account, the account must be a real one ; that is, there 1 Beatty v. Sylvester, 3 Nev, 228. Story Eq. Juris. § 1032; Hasbrouck v. 2 Boakv. Bank of the State, 6 Ired. Vandervoort, 4 Sandf. (N. Y.) 74. (N. C.) 309; Durant v. Einstein, 5 * Kemp v. Westbrook, 1 Ves. 278; Robt. (N. Y.) 423 ; S. C. 35 How. Pr. Vanderzee i;. Willis, 3 Bro. Ch. 21 ; 223 ; Genet v. Ilowland, 45 Barb. (N. White Mountains R. 11. v. Bay State Y.) 500; Flowers v. Sproule, 2 A. K. Iron Co. 50 N. li. 57 ; Hart v. Ten Marsh. (Ky.) 54, 56. Eyck, 2 Johns. (N. Y.) Ch. G2, 100, ^ ^ Kemp V. Westbrook, 1 Ves. 278; per Chancellor Kent. 429 §§ 558, 559.] PAYMENT AND REDEMPTION. must be a series of transactions on both sides, and not merely one item on one side and a number of set-offs on the other.^ If the pledge secures a money account of such a nature that the debtor would not be presumed to know the amount of his in- debtedness, it is not essential that he should tender the amount before filing a bill to redeem. In fact, in such case, to obtain an accounting is one of the objects of the bill, and it is sufficient if the debtor proffers to pay whatever is found due on such ac- counting.2 558. Where the property pledged is stock in a corpora- tion, and the shares have been transferred upon the books of the company to the name of the pledgee so that he has the legal title, equity alone can restore possession of the shares to the pledgor, by an order for redeliver3^ The transaction is a pledge although the legal title passes to the pledgee ; but it partakes of the na- ture of a mortgage, and it would seem that the remedy for re- demption should be the same as upon mortgages. If the pledgor seeks for an account of receipts and dividends, although the law could afford a remedy by assumpsit for these alone, equity has also jurisdiction, and more particularly where the relief could not be obtained at law except by a multiplicity of suits.^ When stock is held as collateral security for an anticipated loss upon a mortgage not yet foreclosed of a house, upon a bill to redeem the stock, the court in order to ascertain the amount of such loss, will order the house to be sold, unless the pledgee will accept the decision of a master as to the value.* The pledgor in such case having authorized the pledgee to let the mortgaged house until it should be sold, but never afterwards having re- quested him to sell it, the pledgee is not guilty of laches by wait- ing more than five years without selling it. Such delay does not show an election on his part to take the property for his own, at its cost, and to waive all claim against the pledgee for the loss.^ 559. It has also been held that a court of equity may com- 1 Durant v. Einstein, 35 How. (N. S. C. 29 Md. 473; Hasbrouck v. Van- Y.) Pr. 223 -,8.0.0 Robt. 423. dervoort, 4 Sandf. (N. Y.) 74. 2 Beatty v. Sylvester, 3 Nev. 228. •* Bartlett v. Jolinson, 9 Allen « Bryson v. Rayner, 25 Md. 424 ; (Mass.), 530. Bartlett v. Jolinson, supra. 4ao ACTION FOR CONVERSION BY THE PLEDGEE. [§§ 560, 561. pel a specific delivery to the pledgor of a note or mortgage held in pledge after the debt secured has been paid, on the ground that the pledgee's retention of the property is in viola- tion of a trust.i But such a proceeding in equity is exceptional in practice and questionable in principle because full compensation for a failure or refusal to surrender the property pledged after payment of the debt secured, can be. had in a suit at law, except in case the pledge be an ornament or heir-loom having a special value to the owner, for the loss of which damages in money would be no adequate compensation. 560. Upon the death of the pledgor, his right to redeem may be enforced by his representatives : and on the other hand upon the death of the pledgee the pledgor may enforce his right of redemption against the pledgee's representatives.^ IV. Action for Conversion hy the Pledgee. 561. An action to redeem the pledge is not the pledgor's only or usual remedy for the recovery of it after payment or tender. He may sue in trover for a conversion of it, and this is the more usual and the better remedy when the pledgee either refuses to return it upon demand or has wilfully disposed of it so as to put it out of his power to return it.^ " Whatever rights the pledgee may have during the continuance of his special prop- erty, when the obligation is discharged and the property released, the pledgor is entitled to the thing pledged. When the special property of the bailee ceases, the general owner may have his property, and if it has been converted by the bailee, or lost through his 'default or neglect, trover will lie. The right to use ^ Brown v. Runals, 14 Wis. 693. pledged until his debt is paid, and By the court, Cole J.: " Where a party then he is bound to restore it to the 'obtains possession of chattels through pledgor. Thus a fiduciary relation is some trust or fiduciary relation to the created between the parties in respect owner, and then attempts to hold the to the pledge, from which arise va- possession wrongfully, a court of rious obligations and duties." equity may entertain a suit for spe- ^ Cortelyou v. Lansing, 2 Caines, cific delivery of the thing withheld. Cas. 200. The subject of trusts is a matter pe- * Luckey v. Gannon, 37 How. (N. culiarly of equitable cognizance, and Y.) Pr. 134 ; S. C. 1 Sweeny, 12; we suppose a pledge of personal Campbell v. Parker, 9 Bosw. (N. Y.) property creates a trust in respect to 322; Flowers v. Sproule, 2 A. K. such property. The pledgee lias a Marsh. (Ky.) 54. right to retain and hold the property 431 §§ 562, 563.] PAYMENT AND REDEMPTION. as well as the right to retain the pledge ceases the instant the lien is discharged by the tender or payment of the debt, or the performance of the covenant or engagement for which the secu- rity is given." ^ There may be a conversion of a chose in action which has been pledged, as well as a conversion of a corporeal chattel, and trover will lie for such conversion.? 562. Trover may be maintained for the conversion of bank bills specially pledged. During the civil war a customer of a bank in South Carolina left with the bank four thousand dollars in its own bills as security for the return of a like sum in Con- federate Treasury notes, borrowed for a short limited time. Within this time he tendered this sum in Treasury notes, and de- manded the return of the bank bills, and upon refusal of the bank to deliver them brought trover for their conversion. It was held that his right to recover was not prejudiced by the fact that the property pledged was money, or the bills of the bank itself ; but that the same principle was to govern as if the article de- posited had been a watch or a jewel.^ 563. A sale by a pledgee for non-compliance with a de- mand which he has no right to make, or after tender of the debt actually due, is a conversion. Thus a broker having pur- chased gold for a customer upon a pledge of bank stock as collat- eral security, the customer gave an absolute order to the broker to sell the gold at a stipulated price, at which it might have been sold ; but the broker, claiming the order to be discretionary, failed to do so, and the gold was subsequently sold for a less price ; the customer thereupon tendered the broker a sum sufficient to pay the balance of the account, if the gold had been sold in pursuance of his order. After such tender the broker sold the bank stock.* It was held that this was a conversion of the stock, and that the 1 Lawrence v. Maxwell, 53 N. Y. Baltimore Marine Ins. Co. v. Dalryni- 19; per Allen, J. pie, 25 Md. 269. 2 Campbell v. Parker, 9 Bosw. (N. ^ Abrahams v. South Western R. R. Y.) 322; Luckey V. Gannon, 37 How. Bank, IS. C. 441; Willard, J., dis- (N. Y.) Pr. 134; S.,C. 1 Sweeny, 12; senting. Decker v. Mathews, 12 N. Y. 313; 432 ACTION FOR CONVERSION BY THE PLEDGEE. [§§ 564-566. customer was entitled to recover its value after deducting the actual indebtedness for which the stock stood in pledge.^ 564. A pledge obtained by false representations of the creditor vests no title in him, and the pledgor may recover it without redeeming it by paying the debt. The pledgee is liable as for a conversion of the property in such case if he does not surrender it upon demand. The contract though perfect in form, being obtained by fraudulent means, is void in law. The omis- sion of the pledgor to make inquiries as to the truth of the rep- resentations, cannot be imputed to him as negligence, and is no defence to his recovery of the pledge by such false representa- tions.^ 565. A principal is liable for a misappropriation of nego- tiable collaterals by his agent, through whom the transaction was made. The test of the principal's liability in such a case is found in the answer to the inquiry, whether the fraudulent act of the agent was done in the course of his agency, and by virtue of his authority as agent. If it was, then the principal is respon- sible, whether the act was merely negligent or fraudulent. If the agent misappropriates collateral security which he has pos- session of by virtue of his agency, his principal is liable for his fraudulent act.^ 566. A conversion of the pledge occurs immediately upon the creditor's refusal of a proper tender of the debt upon the day of its maturity or afterwards.^ To lay the foundation for an action for conversion of a thing pledged as security for a debt payable on a fixed day, the debtor's tender and demand should be made on the day of the maturity of the debt, though a tender and demand made after default would be sufiicient to enable the pledgor to redeem.^ But if the tender as made is insufficient, or does not include lawful charges upon it paid by the creditor, such, for instance, as an assessment rightfully paid 1 Hope y. Lawrence, 1 Ilun (N.Y.), Ratcliflf v. Vance, 2 Mills (S. C), 317. Const. 239. 2 Mead v. Bunn, 32 N. Y. 275. ^ Butts v. Burnett, 6 Abb. (N. Y.) 3 Reynolds v. Witte, 13 S. C. 5. Pr. N. S. 302. * McCalla v. Clark, 55 Ga. 53 ; 28 433 § 567.] PAYMENT AND REDEMPTION, by the creditor upon stock which is the subject of the pledge, a refusal of the tender does not constitute a conversion, especially if the creditor offer to accept the tender and restore the pledge, if the charges upon it be also paid.^ After payment of the specific debt for the security of which a pledge is made, and a demand and refusal to surrender tlie pledge, the pledgee's reten- tion of it as security for another debt is a conversion.^ 567. If the pledgee has been sued by a third person claiming title to the property pledged, his refusal to return it to the pledgor, upon a tender of the debt, does not amount to a conversion. In a case where the pledgor, in a suit against him for the debt, set up a counter-claim for the conversion of the pledged property by the pledgee, it appeared that the pledgor offered payment and made demand for the property, after the pledgee had been sued by a third person for a portion of the property, and the pledgee, upon the tender, offered to return the property not claimed by the third person, but refused to return the property so claimed. It was held that, under these circumstances, such refusal did not amount to a conversion. The court, upon this point, said : " In the action brought by the third party against the present plaintiff the title was in dispute, and as the defendant in this action was made a party defendant to that, the question of the title was, of course, at issue in that action. Under such a state of facts, there was, we think, no conversion by the plaintiff. He offered, as it appears, on pay- ment of the note, interest and costs, all the property pledged, except that portion for which the action was pending, and this, we think, under the circumstances, was all he was bound to do. To deliver the whole property to the present defendant would have been a conversion as against the other claimant, if she could establish that she had title to the portion she had sued for. But as the present defendant, as well as the plaintiff, was impleaded in the action in which the question of title was to be tried, we think the court below was correct in holding that, under such circumstances, no such conversion was shown as entitled the 1 McCalla v. Clark, 55 Ga. 53. But ^ Luckey v. Gannon, 1 Sweeny see Ponce v. McElvy, 47 Cal. 154; (N. Y.), 12; S. C. 37 How. Pr. 134; Flowers v. Sproule, 2 A. K. Marsh. 6 Abb. Pr. (N. S.) 209 ; Hardy v. (Ky.) 54. Jaudon, 1 Robt. (N. Y.) 261. 434 ACTION FOR CONVERSION BY THE PLEDGEE. [§ 568. defendant to counter-claim the value of the property pledged. He should have received the portion of the property pledged, which was offered to be returned, and paid the amount of the note, interest, and costs, which would have disposed of the present action. But, standing in his position as guarantor of the title to the plaintiff as pledgee, and knowing of the pend- ency of the action in which he was bound to defend that title, he could not, we think, by a simple demand, put the present plaintiff in the position of a wrong-doer, in converting the prop- erty for which the other action was pending." ^ 568. The pledgee may show in defence to an action for the conversion of the pledge that it was the property of a third person, to whom he has returned it.^ Though the pledgee impliedly undertakes to return the pledge to the pledgor, the latter, in the first place, impliedly warranted the property to be his own ; and if this warranty turns out to be false, the pledgee is absolved from his undertaking to restore the property to the pledgor, but should restore it to the true owner. " My impres- sion is," said Chief Baron Pollock,^ " that if a person pledges with another property to which he has no title, and which he has no right to pledge, the real owner may interpose and get posses- sion of the property. In the administration of the criminal law it constantly occurs that where stolen property has been pledged the pawnbroker is called upon to deliver it to the rightful owner. If a servant illegally pledges his master's plate, the servant can- not recover it by an action, since the pawnbroker may inquire who is really the true owner, and deliver it to him." And Baron Parke, in the same case, said : " In the ordinary case of a pledge, the pledgee impliedly undertakes to deliver back the property to ^ Cass V. Higenbotam, 27 Hun Duer(N. Y.), 79; Hayden v. Davis, 9 (N, Y.), 406, 408; S. C. 15 N. Y. Cal. 573; Palmtag v. Doutrick, 59 Weekly Dig. 135. Cal. 154; S. C. 8 Pac. Coast L. J. ■^ Ogle V. Atkinson, 5 Taunt. 759; 884; Dodge v. Meyer, 10 Pac. Coast Wilson V. Anderton, 1 B. & Ad. 450; L.J. 169, 182; Pitt v. Albrittou, 12 Dixon V. Yates, 5 lb. 313 ; Watson u. Ired. (N. C.) 74. Lane, 11 Exch. 769; Sheridan v. New ^ Clieesnian v. Exall, 6 Excb. 341. Quay Co. 4 C. B. N. S. 618; Biddle The contract in this case, however, V. Bond, 6 Best & S. 225; Thorne v. was held not to be a pledge, but the Tilbury, 3 H. & N. 534; The Idaho, dicta of the learned judges deservedl 93 U. S. 575, 579; Bales v. Stanton, 1 have great weight. 436 §§ 569, 570.] PAYMENT AND REDEMPTION. the pledgor, when the sum for which it is pledged is paid. On the other hand, the pledgor impliedly undertakes that the prop- erty pledged is his own property, and may be safely returned to him." The true ground on which a pledgee or other bailee may set up the right of a third person to the thing bailed is that indi- cated in a case decided in the fourteenth year of the reign of Elizabeth,! namely, that the estoppel which arises against the bailee, through his contract with the bailor, ceases when the bail- ment on which it is founded is determined by what is equivalent to eviction by title paramount.^ A second pledgee may discharge himself from liability to the owner of the thing pledged b}'^ showing that he returned it to his own pledgor before the owner offered to redeem.^ 569. A pledgee in setting up the rigfit of a third person to the thing pledged, of course takes upon himself the burden of proof that such third person is the rightful owner.^ Ordi- narily he will have the aid of such third person in establishing the title of the latter ; for the pledgee can only set up such title by the authority of such third person.^ 570. A tender is necessary to a recovery of the securities. Except in case there has been a wrongful conversion of collateral securities, the owner cannot recover them without first paying or tendering the amount due on the pledge.^ Such a tender is equally necessary whether the securities be in the hands of the original pledgee, or have been repledged or sold by him to one who has loaned upon them or purchased them in good faith with- out notice of the owner's rights. If the owner can enforce any right whatever to them he can only do so after tendering the 1 Shelbury v. Scotsford, Yelv. 23. ^ Palmtag v. Doutrick, 59 Cal. 154, 2 Biddle v. Bond, 6 Best & S. 225. 168, per Thornton, J. Per Parke, B. This is the view ap- ® Donald v. Suckling, L. R. 1 Q. B. proved in Palmtag v. Doutrick, 59 Cal. 585; Talty v. Freedman's Savings 154, per Thornton, J. & Trust Co., 93 U. S. 321 ; Jarvis v. 3 Jarvis v. Rogers, 15 Mass. 389. Rogers, 15 Mass. 389; S. C. 13 Mass. 4 Cheesman v. Exall, 6 Exch. 341; 105; Amos v. Sinnott, 4 Scam. (111.) Sheridan v. New Quay Co. 4 C. B. 440; Henry v. Eddy, 34 111. 508; N. S. 618 ; Biddle v. Bond, supra. Cooper v. Ray, 47 111. 53. 436 ACTION FOR CONVERSION BY THE PLEDGEE. [§ 571. debt secured. One so taking the securities from the pledgee ac quires at least the latter's lien and interest, whatever-that may be. A mere offer by the original pledgor to pay the assignee the amount due on the securities, unattended with an actual tender of the original debt secured, is insufl&cient to extinguish the lien and entitle such pledgor to a return of the securities. Such offer to pay is not equivalent to an actual tender.^ A tender is not excused by the fact that the pledgor's note is in the hands of his pledgee. If the note has matured, the pledgor can safely pay the amount of it to the purchaser or second pledgee taking the security in good faith, because he could suc- cessfully defend a suit upon the note, whether brought by the original pledgee, or by his indorsee taking it after maturity. The pledgor may also, after making tender, instead of suing at law for the recovery of the securities, file a bill in equity, making his pledgee and the second pledgee or purchaser defendants, and thus settle the rights of all parties in that litigation.^ 571. An unauthorized sale of the pledge by the pledgee is not of itself a conversion, and does not against the will of the pledgor create a cause of action in his favor. His cause of action does not arise until he tenders payment and demands a return of the pledge, and the pledgee neglects or refuses to return it.^ Such a sale is not so far tortious as to render the contract void ah initio.'^ " Outside of authority, the rule that a sale by the pledgee is not ipso facto a conversion, seems to be good sense. The rights of the parties are based upon the contract. The sale by the pledgee is wrongful. If that sale in and of itself deter- mines the contract without more, then the pledgee by his wrong- ful act may rescind his contract in spite of the wish of the other party to it. I am not aware of any other case in which this can be done, and I can conceive of no reason for permitting it in this case. It may be for the interest of the pledgor to keep his con- tract alive, and, if it is so, I cannot see why he may not do it. The maxim that no one shall take any advantage by his own 1 Lewis V. Mott, 36 N. Y. 395, 401. 8 HiiHiday v. Ilolgate, L. R. 3 Exch, The securities were canal scrip of 299; Hopper v. Smith, 63 liow. Pr. the State of Illinois; overruling Lewis (N. Y.) 34, 38; Butts i'. Ikirnett, 6 V. Graham, 4 Abb. (N. Y.) Pr. 106. Abb. (N. Y.) Pr. N. S. 302, 304. 2 Talty V. Freedman's Savings & * First Nat. Bank v. Boyce, 78 Ky. Trust Co. 93 U. S. 321. 42; S. C. 19 Am. L. Reg. (N. S.) 503. 437 §§ 572, 573.] PAYMENT AND REDEMPTION. wrongful act, raa}'^ fairly apply to this case, and we may hold that, although the unlawful sale does not j?er se operate as a con- version, yet the pledgor may, at his option, so consider it, and that he may regard the contract as at an end, tender or offer to pay his debt and demand his pledge, or may sue for damages for the sale. I think the cases sustain that rule, and that it recon- ciles the cases which otherwise appear to conflict, but do not in fact.^ I do not think that the plaintiff was called upon to notify defendant of his disaffirmance of the sale at the time defendant told him of it. There is no pretence of any estoppel. Nothing has occurred to give defendant reason to believe that the contract was waived, and he took no action afterwards on the strength of plaintiff's silence. As long as the contract was in force both parties were bound by it. The plaintiff might rely upon it, and the defendant must keep ready to perform it. Neither party by his own act simply could free himself from its obligations." ^ 572. But no formal demand or tender by the pledgor af- ter an unauthorized sale by the pledgee is necessary, if he has substantially offered to redeem, by paying whatever is due. Thus a watch having been pledged for the payment of a loan made without a specified time for repayment, the creditor subsequently notified his debtor that he must redeem the watch or it would be sold. The latter thereupon deputed an agent to effect a redemption. The agent called upon the defendant a number of times, with money sufficient for the purpose, and offered to pay even more than the amount which the creditor claimed to be owing him, but, upon one and another pretence, the agent was put off for several months, when the creditor de- clared that he had disposed of the watch in exchange for another and a sum of money. It was held that the debtor could maintain a suit for the conversion of the watch without any formal demand, and without a formal tender of the money due.^ 573. A tortious conversion by the pledgee through an illegal sale of the pledge may be waived, by the debtor's pre- ^ Strong V. Nat. INIecbanics' Bank- ^ pgr Rumsey, J., Hopper v. Smith, ing Asso. 45 N. Y. 718 ; Bryan v. 63 How. Pr. (N. Y.) 34, 38. Baldwin, 52 N. Y. 232. 3 Rosenzweig v. Frazer, 82 Ind. 342. 438 ACTION FOR CONVERSION BY THE PLEDGEE. [§§ 574, 575. senting a statement showing the amount he claimed to be due and offering to receive the same in full satisfaction. ^ 574. Measure of damages. — The value of the property at the date of the conversion is the true criteinon of damages.^ If at the maturity of the debt for which the pledge was made the debtor tenders payment of it, and demands the return of the security and this is not returned, the conversion is made at that time, and the valuation of it in a suit for such conversion should be made as of the time of such demand and refusal.^ 575. A conversion of negotiable paper by one who holds it as collateral security renders him liable to the general owner for its value at the time; and this value is, prima facie^ the sum represented upon the face of the paper with interest according to its terms.* If the property be negotiable bonds the measure of damages is the value of the bonds, and of the mature coupons at the time of the conversion, with interest from that time.^ If a creditor holding a mortgage note as collateral security pledge it as his own, he is liable to the owner for the full amount of the note, unless he clearly proves that the note was worth less than its face. The burden is upon him to prove that the note is not worth what it calls for.^ If a pledgee of a note does not return it to his debtor after the payment of the debt, and he shows no legal reason for not doing it, he is liable in damages to the full amount of the note. It might be a defence in such case that the maker of the note is not able to pay it, or tliat it is barred by the statute of limitations ; but it is no ground for reducing the damages, that the pledgee has filed in court an obligation to indemnify the pledgor against any act done or to be done by the pledgee in respect to the note, unless he is able to prove the loss of the note.' 1 Butts V. Burnett, 6 Abb. (N. Y.) s Reynolds v. Witte, 13 S. C. 5. Pr. N. S. 302. 4 Hazzard v. Duke, 64 Ind. 220 ; 2 First Nat. Bank of Louisville v. St. John v. O'Connel, 7 Port. (Ala.) Boyee, 78 Ky. 42; Newcomb v. Bas- 466. kett, 14 Bush (Ky.), 658, 667; Robin- 5 Merchants' & Planters' Nat. Bank son v. Hurley, 11 Iowa, 410; Ainsworth v. Masonic Hall, 62 Ga, 271. V. Bowen, 9 Wis. 348; Loomis t'. Stave, « Laloire v. AViltz, 29 La. Ann. 329. 72 111. 623; Eisendratli v. Knuuer, 64 ' Thomas v. Waterman, 7 Mctc. 111. 396. (Mass.) 227. 439 §§ 576-578.] PAYMENT AND REDEMPTION. 576. It may be shown in mitigation of damages in an ac- tion by the pledgor for the conversion of a pledge, that the pledgee has applied the proceeds thereof to the use of the pledgor in pay- ment of the debt secured or of other debts due from him to the pledgee.^ This is upon the principle that the owner of property, who has received the value of the property wrongfully converted or kept from him, shall not recover that value a second time in an action therefor. 577. In an action against the pledgee for a conversion of the pledge, he may recoup or offset the debt secured ,2 though this right does not exist in favor of one who is sued for the conversion of a chattel on which he has merely a lien.^ A conversion of negotiable bonds by a pledgee does not pre- vent his recovery of what is due him, but only entitles the pledgor to offset the value of the converted security.'* And so a conversion by a broker of stock pledged to him does not oper- ate to extinguish his entire claim against his customer, but simply to give the customer a cause of action for the damages he has sustained, which would be offset against any sum found due to the brokers.^ Whether in a suit by the pledgee upon the debt secured, the pledgor can take advantage of an irregular or prejudicial sale of the security by recoupment, is a question left undecided by early cases in New York.^ 578. Counter-claim. — An action by a pledgor for the pledgee's wrongful refusal to deliver the property pledged after payment of the debt is an action for the conversion of the pledgor's property, and is founded upon his own title, and not 1 Hathaway v. Fall River Nat. zweig y. Frazer, 82 Ind. 342; Shaw Bank, 131 Mass. 14, 17, per Soule, J. v. Ferguson, 78 Ind. 547. Bailey v. Godfrey, 54 111. 507 ; Bald- ^ MuUiner v. Florence, 3 Q. B. D. win V. Bradley, 69 111. 32; Belden v. 484. Perkins, 78 111. 449 ; Loomis v. Stave, ^ Levy v. Loeb, 47 N. Y. Superior 72 111. 623. Ct. 61. 2 Johnson v. Stear, 15 C. B. (N. S.) ^ Gruman v. Smith, 81 N. Y. 25 ; 330; Jarvis v. Rogers, 15 Mass. 389; S. C. 9 Rep. 748, reversing S. C. 44 Stearns v. Marsh, 4 Denio (N. Y.), Superior Ct. 389. 227; Ward y. Fellers, 3 Mich. 281,288; ^ WiUoughby v. Comstock, 3 Hill, Belden i'. Perkins, 78 111. 449; Rosen- 389; Taggard v. Curtenius, 15 Wend. 155. 440 ACTION FOR CONVERSION BY THE PLEDGEE. [§ 579. upon any promise of the pledgee. A counter-claim to such suit for a debt not secured by the pledge cannot be set up by the pledgee.! But the pledgee is allowed to recoup the amount of the debt secured ; or, in other words, the pledgor is allowed to recover the value of the stock at the time of the conversion, less the amount of the debt.^ 579. In case of a rehypothecation, the original contract of pledge not being destroyed, the pledgor can recover from the second pledgee the thing pledged only by paying to him the amount of debt due to the first pledgee.-^ In trover, by the owner against a second pledgee, he may recover the value of the property, after allowing the amount due from the owner to his pledgee in reduction of the damages.* It is essential, how- ever, that the second pledgee should have acted in good faith in taking the property in pledge, and should have taken it for value without knowledge of the prior pledge. If the factor, or original pledgee, had all the indicia of the right of property in the thing pledged, and his pledgee was without knowledge of the plaintiff's rights, and gave a valuable consideration, the measure of damages is always the actual loss the plaintiff has sustained ; and this is the value of the property, less the sum due the plaintiff from the factor or original pledgee.^ 1 Smith V. Hall, 67 N. Y. 48. but operates to put an end to the con- 2 Jarvis v. Rogers, 15 Mass. 389; tract altogether, so as to entitle the cited and approved in Johnson v. pawnor to have back the thing pledged Stear, 15 C. B. (N. S.) 330; Smith v. without payment of the debt. I am HaW, supra ; Baker i-. Drake, 53 N. Y. of opinion that the transfer of the 211; S. C. 66 N. Y. 518 ; Stearns v. pledge does not put an end to the con- Marsh, 4 Denio (N. Y.), 227 ; Balti- tract, upon which the owner may bring more Marine In?. Co. v. Dalrymple, 25 an action for nominal damages, if he Md. 242, 269, 307. has sustained no substantial damages, 3 Donald v. Suckling, L. R. 1 Q. B. for substantial damages if the thing 585, 597; Johnson v. Stear, supra; pledged is damaged in the hands of flalliday v. Holgate, L. R. 3 Ex. the third party, or the owner is preju- 299; Evans r. Potter, 2 Gall. 13; diced by delay in not having the thing Talty V. Freedman's Savings & Trust delivered to him on tendering the Co. 93 U. S. 321; Lewis v. Mott, 36 amount for which it was pledged." N. Y. 395, 400. * First Nat. Bank of Louisville v. In Donald v. Suckling, supra, Cock- Boyce, 78 Ky. 42 ; Neiler v. Kelley, burn, C. J., says : " The question 69 Pa. St. 403 ; Work v. Bennett, 70 here is, whether the transfer of the Pa. St. 484 ; Baltimore Mar. Ins. Co. pledge is not only a breach of the v. Dalrymple, sujira. contract on the part of the pawnee, ' '' First Nat. Biuik of Louisville v. 441 §§ 580, 581.] PAYMENT AND REDEMPTION. 580. If the pledgee has sold the pledged chattels and con- verted them into money the pledgee may, if he choose, bring assumpsit for the money, in which event he can recover only the amount actually received by the pledgee for the prop- erty, less the amount of the debt secured by the pledge.^ V. Statute of Limitations. 581. A pledgee has no right to treat the property pledged as absolutely his own after the note or other obligation given by the pledgor is barred by the statute of limitations. After the maturity of such obligation, the pledgee may, upon giving notice to the pledgor, sell the property and apply the proceeds to the debt. If he does not do this he continues to hold it in trust for the benefit of all parties. The statute affects merely the personal remedy against the pledgor, and does not, on the one hand, defeat the lien of the pledgee upon the property, nor, on the other, enlarge that lien to an absolute title to the prop- erty .^ It is true, however, that after a long lapse of time without any claim on the part of the pledgor to redeem, his right might be deemed to be extinguished and the title absolute in the pledgee.^ Thus where certain shares of bank stock were assigned as collateral security for the payment of a time note, and six years after the maturity of the note the stock was not of sufficient value to pay the debt, and the creditor had then and always treated the shares as his own, a court of equity after the lapse of eleven years, when the shares had risen in value, refused to grant relief.* In another case the pledgor was not allowed to redeem after the lapse of ten years from the time the debt secured became due.^ The property pledged in this case consisted of shares in Boyce, 78 Ky. 42; S. C. 28 Am. Law bankrupt law prohibiting suits by or Reg. 503. against assignees after two years from 1 Cusliman v. Hayes, 46 111. 145; the accruing of the right of action. Read v. Lambert, 10 Abb. (N.Y.) Pr. Moses v. St. Paul, supra. N. S. 428. 8 Story on Bailments, § 298 ; 2 Kemp V. Westbrook, 1 Ves. 278; Mims i'. Mims, 3 J. J. Marsh. (Ky.) Hancock v. Franklin Ins. Co., 114 103, 106. Mass. 155; Whelan v. Kinsley, 26 ^ Waterman v. Brown, 31 Pa. St. Ohio St. 131; Moses v. St. Paul, 67 161. Ala. 168, 172, per Brickell, C. J. ^ Roberts i'. Sykes, 30 Barb. (N. Y.) This principle has no application 173. to the provision of the United States 442 STATUTE OF LIMITATIONS. [§§ 582, 583. a corporation which was paying dividends and the debtor con- tended that the statute of limitations would not commence run- ning until the debt should be paid out of the dividends ; but in the absence of any allegation or proof of an agreement that the pledgee should keep the stock until he should be repaid out of the dividends, the court held that the pledgor was not entitled to be relieved from the statute of limitations. ^ In Louisiana it is provided by the code that the creditor can not acquire the pledge by prescription, whatever may be the time of his possession.^ 682. On the other hand a debtor cannot by reason of his debt becoming barred by the statute recover back the se- curity pledged. Nothing short of payment or tender of the debt will discharge the lien and entitle the debtor to its return. The statute of limitations does not extinguish the debt but only the remedy to enforce it.^ 583. The statute commences to run after a tender by the pledgor and refusal by the pledgee to restore the thing pledged;"* or after any act on his part which would show his determination to dissolve his trust relation to the pledgor.^ 1 Roberts v. Sykes, 30 Barb. 4 Jb. 221 ; Oakley, in re, 2 Edw. (N. (N.Y.)173. Y.)Ch. 478. 2 R. Civ. Code, 1870, Art. 3175. ^ Whelan v. Kinsley, 26 Ohio St. 8 Jones V. Merchants' Bank of 131, per Mcllvaine, C. J, Albany, 6 Robt. (N. Y.) 162; S. C. ^ Jones v. Thurmond, 5 Tex. 318. 443 CHAPTER XV. BANKRUPTCY AND INSOLVENCY. 584. Upon the bankruptcy of the pledgor, the pledgee is still entitled to hold possession of the property pledged, except in case the pledge was made in fraud of the bankrupt law, and is consequently void, when of course the assignee in bankruptcy may disregard the contract of pledge, and recover the property for the benefit of the creditors. The only rights of the assignee as regards a valid pledge are either to redeem the property or under order of court to sell it subject to the lien of the pledge.^ The latter may at his option rely wholly upon his security and refuse to prove his claim in the bankruptcy court ; and in doing so he only loses the privilege of participating in the distribution of the bankrupt's estate. The pledgee may, notwithstanding the pledgor's bankruptcy, proceed upon default to sell the pledge in the usual way ; ^ but it would seem that after the assignment, notice of the sale should be given to the assignee in bankruptcy. 585. As a general rule an assignee for the benefit of credi- tors holds the property assigned subject to the same equities as the debtor held it.^ But this general proposition is subject to exceptions. There are many transactions which are binding on the debtor while not binding on the assignee. Pledges made for the actual purpose of defrauding creditors are of this class, and so are pledges made contrary to statute or to the policy of the law. The general rule 1 Yeatman v. Savings Inst. 95 U. S. Mitchell v. Winslow, 2 Story, 630 ; 764; Jerome v. McCarter, 94 U. S. Gibson u. Warden, 14 Wall. 244; Cook 734 ; Moses v. St. Paul, 67 Ala. 168 ; v. Tullis, 18 Wall. 332 ; Partee v. Corn- Dayton Nat. Bank v. Merchants' Nat. ing, 9 La. Ann. 539; Casey v. La Bank, 37 Ohio St. 208; Dowler v. Societe de Credit Mobiher, 2 Woods, Cushwa, 27 Md. 354. 77, 84, per Woods, J. ; Dowler v. 2 Jerome v. McCarter, supra. Cushwa, supra. 3 Mitford V. Mitford, 9 Ves. Jr. 87; 444 BANKRUPTCY AND INSOLVENCY. [§§ 586, 587. is restricted to cases in which the creditor claiming adversely to the assignee has a clear legal or equitable title to the property- claimed ; and does not apply to cases in which the creditor claims a security denied by the law.^ An assignee or trustee for credi- tors may well oppose any security claimed by a creditor, when the law, unaided by a bond fide purchase or judgment, would re- gard the security as void against the general creditors in a direct contest between them and the creditor claiming such security or preference ; even though the debtor himself, on account of some personal disability arising from his own acts or engage- ments, could not resist the claim.^ A receiver of a national bank, which cannot be put into bankruptcy, but can only be wound up under the peculiar provisions of the banking act, has the same power in this respect that an assignee has ; otherwise the absurd consequence would follow, that the property of a bank disposed of by voluntary conveyances, or pledges not good as to third persons, would be beyond the reach of creditors.^ 586. An assignee who collects securities pledged by the bankrupt will be directed to apply the proceeds for the bene- fit of the pledgee. Thus a debtor having pledged a promissory note already pledged and delivered as security by him, his assignee received it from the first pledgee, and collected it ; but the second pledgee was allowed upon petition to follow the proceeds into the hands of the assignee. This right does not depend upon any regulation of the Bankrupt Act, but upon the general prin- ciple of equity that a party interested in property may follow his interest into any new form into which it may have been changed without his fault or consent.* 587. The pledgor may prove his whole claim against the pledgor's estate in insolvency without deducting the value of his security. This is the rule more generally adopted in the absence of a statutory requirement. If the dividend so reduces the debt that the collateral security will more than pay it, the ^ Casey v. Cavaroc, 96 U. S. 467, ^ Casey v. Cavaroc, supra. See 487; Bank of Alexandria v. Herbert, Casey v. La Societd de Credit Mobi- 8 Cranch, 36. Her, 2 Woods, 77, 84. 2 Casey v. Cavaroc, supra, per ^ Wiley, m re, 4 Biss. 171. Bradley, J. 445 § 587.] BANKRUPTCY AND INSOLVENCY. security must be redeemed for the benefit of the general cred- itors.i This rule gives effect to the equitable principle that a creditor's diligence shall be rewarded by giving liim liis full legal rights.2 Aside from the accidents of the insolvency or death of the debtor, a creditor holding a mortgage or a pledge has a double security. " He has a right to proceed against both, and to make the most he can of both ; why he should be deprived of this right because the debtor dies insolvent, is not very easy to see." ^ Thus a creditor holding a mortgage was allowed a dividend under his debtor's assignment for the benefit of his creditors upon his whole claim, although he had collected the greater part of the claim out of the mortgaged property, the amount collected and the dividend together not being sufiicient to satisfy the debt ; and was not restricted to a dividend on his claim as reduced by the proceeds of the mortgage. It is true that before the proceedings on the mortgage, the account of the assignees had been filed, and an auditor had reported a scheme of distribution, but the dividend apportioned to the claim was retained under control of the court until the proceedings on the mortgage were terminated. Then he was permitted to take the dividend on his whole claim as it was before any portion of it had been paid.* But under an assignment for the benefit of creditors, a creditor holding notes of third persons as collateral security, upon collect- ing these notes before a dividend is made, under the assignment, must credit the amount upon the principal debt, and take a divi- dend under the assignment upon the remainder only of the debt; he cannot collect the colhxterals and then claim a dividend upon the principal debt as it was at the time of the assignment. The law applies the collections to the payment of the debt, so that the creditor ceases to be the holder of the collateral notes.^ 1 Story's Eq. Jur. § 564; Moses v. (N. Y.) Pr. 423; S. C. 2 Abb. Pr. N. Kanlet, 2 N. H. 488; Putnam v. Rus- S. 275. sell, 17 Vt. 54; West y. Bank of Rut- ^ jg^vis i;. Smith, 1 Sheldon (N. land, 19 Vt. 403; Walker v. Barker, Y.), 189, 194; ^S. C. 7 Abb. Pr. (N. S.) 26 Vt. 710; Findlay v. Hosmer, 2 217, per Hasten, J. Conn. 350 ; Jervis v. Smith, 1 Sheldon 3 Mason v. Bogg, 2 Mylne & C. 443, (N. Y.), 189; S. C. 7 Abb. Pr. 448, per Lord Chancellor Cottenham. (N. S.) 217; Van Mater i;. Ely, 12 N. J. * Morris v. Olwine, 22 Pa. St. 441. Eq. 271 ; Shunk's Appeal, 2 Pa. St, See also Miller's Appeal, 35 Pa. St. 304; Wurtz v. Hart, 13 Iowa, 515; 481. Logan V. Anderson, 18 B. Mon. (Ky.) ^ Midgeley v. Slocomb, sujira. 114; Midgeley v. Slocomb, 32 How. 446 BANKRUPTCY AND INSOLVENCY. [§ 588. 688. But the rule adopted by other courts is, that a credi- tor holding a pledge is admitted to prove only the balance of his debt, after deducting the value of his security, in proceedings under bankrupt or insolvent laws of this countr}' and of Eng- land.^ " The reason is obvious," said Lord Eldon.^ " Till his debt has been reduced by the proceeds of that sale, it is impossible correctly to say what the actual amount of it is ; and with this further consideration, that in the event of any doubt attaching upon his right to retain the security, he is enabled in a contest with the rest of the creditors to sustain his disputed title in a situation of predominant advantage." But it is a disputed point whether this rule is altogether one of statute, or whether it is founded upon principles of equity, and is therefore applicable to cases not governed by the statute, such as voluntary assignments by insolvent debtors in trust for the benefit of their creditors. Thus on the one hand the statute rule in bankruptcy was applied in Massachusetts to the settlement of estates of deceased insol- vent debtors, the court saying : ^ " The rule adopted by the Court of Chancery in England, and enforced by the Commissioners of Bankruptcy, is certainly just and equitable ; requiring that every creditor having a mortgage or other security, shall, before he is admitted to prove his debt, surrender his security for the benefit of the other creditors, the proceeds of the sale going into the common fund ; or shall suffer the pledge to be sold, taking the proceeds towards his debt, and proving under the commission for the residue. If it were not so, the equality intended to be pro- duced by the bankrupt laws would be grossly violated ; and the creditor holding the pledge would, in fact, have a greater security than that pledge was intended to give him. For originally it would have been security only for a proportion of the debt equal to its value ; whereas by proving the whole debt, and holding the pledge for the balance, it becomes security for as much more ^ This was the rule under the re- 308 ; reaffirmed in Farnuna v. Boutelle, cent Bankrupt Act of the United 13 Mete. 159 ; Richardson v. Wynian, States. Brand, in re, 3 N. Bank R. 4 Gray, 553 ; Haverhill Loan & Fund 324; Newland, mre, 7 lb. 477; ,S'. C 6 Asso. v. Cronin, 4 Allen, 141, 144; Ben. 342; Streeper v. McKee, 86 Pa. Middlesex Bank v. Minot, 4 Met. 325; St. 188. Lauokton v. Wolcott, G Met. 305. This is also the rule in Massachu- ^ Smith, ex parte, 2 Rose, 63. setts: Amory v. Francis, 16 IMass. * Axwovy v. Vvancis, supra. 447 § 588.] BANKRUPTCY AND INSOLVENCY. than its value, as is the dividend which may be received upon the whole debt." But it is obvious that this rule can have no proper application to a case where the collateral security is furnished by a third person not primarily responsible for the debt, but as a surety ; because, if the security were first applied to the reduction of the debt, it would eo instanti create a new debt of equal amount in favor of the surety whose property is thus expended.^ And so if a debtor die and his estate be declared insolvent, a creditor who holds property of such debtor in pledge cannot prove his claim against the estate, until he has first sold the property and deducted the proceeds from his claim, or until the value of the property has been ascertained, by a jury or otherwise, and that value deducted. Proof can only be made for the remainder of the claim after deducting the value of the security as ascer- tained in one mode or the other.^ A creditor after having his collateral securit}^ appraised, and proving his debt for the balance, may then proceed to collect or enforce the collaterals ; and his right to do so is not affected by the fact that these were appraised at a nominal value.^ 1 Savage v, Winchester, 15 Gray ^ Streeper v. McKee, 6 Weekly (Mass.), 453. Notes Gas. 169; .S". C. 86 Pa. St. 188. 2 Middlesex Bank v. Minot, 4 Mete. This ease arose under the United (Mass.) 325. States Bankrupt Act. 448 CHAPTER XVI. REMEDIES OF THE PLEDGEE AFTER DEFAULT. L Suit upon the debt, 589-598. II. Attacliment of the pledged property, 599-001. III. Sale of the pledge at common law, 602- 615. IV. Statutory provisions regulating sales of property held in pledge, 610-639. V. Sales under powers of sale, 031-639, VI. Sales under proceedings in equity, 640-648. VII. Surplus proceeds of sale, 649, 650. I. Suit upon the Debt. 589. In general. — As with a mortgage so with a pledge, the creditor may u|^on default pursue any or all of his several reme- dies. The remedies upon a pledge are also similar to those upon a chattel mortgage. They are, 1, by. action upon the debt secured; 2, by sale of the pledge at common law without judicial proceed- ing ; 3, by sale under statutory provisions ; 4, by sale under a decree of a court of chancery ; 5, by sale under a special power of sale. The remedy by sale, however, does not apply in case of pledges of negotiable paper and other choses in action, which have no recognized market value, unless a special power of sale be given.^ 590. The holding of collateral security for a debt does not impair or suspend the right of action upon it, unless so agreed upon by the parties, whether the collateral be given at the time the debt was contracted or afterwards.^ " If I pawn goods to A 1 See Chapter xvii. 153; Rozet v. McClellan, 48 III. 345; 2 South Sea Co. u. Duncomb, Str. 2 Archibald v. Argall, 53 111. 307; Du- 919; Ernes v. Widdowson, 4 Car. & gan v. Spvn^uQ, 2lnd. GOO; Komniil v. P. 151; Whitwell v. Brigham, 19 Wilson, 4 Wash. C. C 308; Jones r. Pick. (Mas?.) 117; Beokwith v. Sib- Scott, 10 Kans. 33; Bank r. Wood- ley, 11 lb. 482; Cornwall v. Gould, 4 ruff, 34 Vt. 89; Robinson v. Ilnrlcy, lb. 444, 448; Whilakcr t\ Sumner, 20 11 Iowa, 410; Butterworlh v. Ken- Pick. (Mass.) 399; Darst r. Bates, 95 nedy, 5 Bosw. (N. Y.) 143; Lang- Ill. 493; AVilhclm v. Schmidt, 84 111. don v. Bucl, 9 Wend. (N. Y.) 80, 83; 187; Cushman v. Hayes, 46 111. 145, Elder v. Rouse, 15 lb. 218; Sonoma 29 449 §§ 591, 592.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. for such a sum," says Chief Justice Holt, " A. may have debt for the money, notwithstanding his having a pawn." ^ The pledgee may also have his remedy against the person of the debtor and arrest and imprison him upon execution for the debt, where that remedy is given, without impairing his right to enforce the pledge.2 He may attach and levy upon other property of the debtor without forfeiting his pledge." In short, in the case of a pledge just as in the case of a mortgage,^ the creditor may use any remedy he has against the debtor or his property for the col- lection of the principal debt, without destroying or impairing his security for the debt until it is actually paid."^ A creditor is en- titled to hold his securities, whatever they may be, until he gets his pay. The securities belong to him, and he may enforce the debt without surrendering them. 591. The recovery of a judgment upon the principal debt does not affect the pledgee's right to hold and enforce a pledge taken to secure that debt. Though the original debt is merged in the judgment, and is thenceforth evidenced by a higher secu- rity, the debt in fact remains in a new form and the property pledged for its payment still remains liable therefor.^ Neither does the creditor lose his right to hold the collateral security by suing the principal debt, recovering execution, and arresting the debtor thereon. It is of the very nature of collateral security that it may be resorted to for a satisfaction of the principal debt, if its payment shall not otherwise be ob- tained.^ 592. The debt may be enforced though the pledge has been discharged by a tender of the debt at its maturity, unless the debt be payable in specific articles of personal property, when a tender of such articles may discharge the debt, and the articles Valley Bank v. Hill, 59 Cal. 107; 5. * See Jones on Mortgages, § 1215; C 9 Rep. G8; 8 Pac. Coast L. J. 666. Jones on Chattel Mortgages, § 758. 1 Anon. 12 Mod. 564. 6 jo^gg ^,_ ^^^^^^ jq j^jj°g_ 33. g^jj^jj 3 South Sea Co. v. Duncomb, 2 Str. v. Strout, 63 Me. 205 ; Charles v. Co- 919; Morse v. Woods, 5 N.H. 297. ker, 2 S. C. 122; Sonoma Valley 8 Taylor v. Cheever, 6 Gray Bank v. Hill, supra. (Mass.), 146; Cleverly v. Brackett, 8 « Smith v. Strout, supra; Morse v. Mass. 150, to the contrary, is without Woods, supra. support and is not good law. 450 SUIT UPON THE DEBT. [§ 593. tendered will become the property of the creditor, and may after- wards be kept at his risk and expense. Bat ordinarily a tender does not relieve the debtor from his personal liability to pay the debt.i 693. The return of the pledge is not a condition to be performed before or concurrently with the payment of the debt secured.^ If one loans money upon the security of a gun, the lender may recover the amount of the loan, without first re- turning the giui.^ Even an agreement that npon a partial pay- ment of the debt, a proportionate part of certain shares pledged to secure it shall be given up, is construed to mean, that the shares are to be returned after the money is paid. The creditor may bring suit upon the debt without first returning the shares ; thougli of course if he should not return the shares after payment of the debt or after judgment recovered upon it, trover would lie against him for their value.* Even a covenant on the part of the pledgee not to sue until the securities shall be given up, cannot be set up in bar to a suit by him brought before giving up the securities. The damages to be recovered for a breach of covenant not to sue within a lim- ited time, may be much less than the demand ; and it would therefore be unjust to allow the covenant to bar the whole demand. Such a covenant is distinguished from a perpetual covenant not to sue, which is held to be a bar, to avoid circuity of action, as the damages, if cross-actions were brought, would be the same.^ In California under a statute which in effect makes the stock- holders in a corporation, as regards its creditors, principal debtors and not merely sureties, it is held that a pledgee of the corpora- tion may maintain a suit against a stockholder although he still retains in his hands property which he has received from the corporation in pledge.^ 1 § 542 ; Mitchell v. Roberts (C. » Lawton v. Newland, 2 Stark. 72. C. E. D. Wis. 1883), 17 Fed. Rep. — . * Scott v. Parker, supra. 2 Scott V. Parker, 1 Q. B. 809 ; Chap- ^ Foster v. Purdy, 5 Mete. (Mass.) man v. Clough, 6 Vt. 123; Morse v. 442. Woods, 5 N. II. 297, 300; Taylor v. « Sonoma Valley Bank v. Hill, 69 Cheever, G Gray (Mass.), 146. Cal. 107. 451 §§ 594-596.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. 594. The pledgor cannot set up in defence to a suit upon the debt a claim for the value of the pledge by way of set-off or recoupment. There is no liability on the part of tlie pledgee to return the pledge till the debt is paid, and therefore at the time of making this defence there is nothing upon which the defendant could found a cross action ; and a claim by way of set- off or recoupment can only be sustained for what the defendant could maintain such an action for. Recoupment can be availed of only when the liability of both parties arises out of the same trans- action or from mutual and dependent covenants or agreements. The giving of a pledge may, perhaps, be a part of the transac- tion of creating the debt secured. The debt is a contract inde- pendent of the giving of the pledge, and com])lete in itself.^ The implied agreement on the part of the pledgee for the safe keeping and return of the pledge, is independent of the debt, and not a condition upon which the debt becomes payable. In the absence of an agreement to resort first to the pledge, it is no defence to an action on the debt secured that tlie property pledged has greatly depreciated in value between the time of de- fault and the commencement of the suit on the debt.^ 595. But under codes of procedure in several states the pledgor may set up as a defence to an action for the debt a con- version of the pledge ; and he may take this defence by way of counter-claim.^ In a suit by a pledgee upon the debt he must account for the value of pledged goods which with the consent of the debtor he has committed to a factor for sale and the factoi- has sold but has failed properly to account for. The amount rightfully due from the factor is to be considered in the nature of a fund provided by the debtor to be applied to the satisfaction of his indebtedness; but the creditor having dealt directly with the factor, it is his right and duty to require of the factor a full and just accounting.* 596. In an action upon a debt secured by collateral in such states it is incumbent upon the plaintiff to produce 1 Winthrop Bank v. Jackson, 67 (N. Y.), 40U; Scott c. Crews, 2 S. C. Me. 570. 522; Bank of Brili.-h Columbia v. 2 Bozet V. McClellan, 48 111. 345. Marshall (C. C. Dist. Oregon), 11 Fed. 8 Stearns v. Marsh, 4 Denio (N. Y.), Rep. 1 9. 227; Cass v. Higenbotam, 27 Hun * Bigelow r. Walker, 24 Vt. 149. 452 SUIT UPON THE DEBT. [§ 596. or restore the collateral, or to account satisfactorily for its non- production ; ^ and he cannot absolve himself from this duty by showing that the colhiteral security has become worthless since it was deposited in his hands, because it does not follow that he may not have disposed of it for value before it became worth- less.2 I-i'or this reason it is, in such case, incumbent upon him to produce the identical securities deposited with him, and not merely other securities of the same kind, unless he can show that he has always had in hand other securities of the same kind of a sufficient amount to enable him to return to the pledgor at any time, upon demand, the securities deposited as collateral ; for otherwise the pledgee may have sold the securities at their face- value before their depreciation, and afterwards have replaced them with others purchased at a small price after their depreciation. If a pledgee is unable to return the identical bonds received in pledge, the burden of proof is upon him to show that he has at all times since the pledge was taken had other bonds of the same kind on hand not required to meet other obligations. The fact that he has not tlie identical bonds in his possession when their return is demanded, is evidence which a jury may consider as tending to prove a conversion by him. This fact is enough to throw upon him the burden of showing what he did with the pledged securities, or of proving that he all the while had other securities of the same kind which he could return in place of those received,^ As security for a loan of money, the borrower deposited cer- tain coupon bonds. The lender afterwards becoming insolvent made an assignment for the benefit of creditors, leaving his affairs in great confusion. His assignees failed to find among his assets the identical bonds deposited by the borrower, but discovered many other bonds of the same kind. The bonds, although at the time of their deposit of considerable value, had in the mean- time become worthless. The borrower tendered to the assignees the full amount of his debt, demanding from them the bonds deposited by him. These they declared themselves unable to 1 Stuart V. Bigler, 98 Pa. St. 80; Bank v. Fant, 50 N. Y. 474; Smith v. Spaldin;r v. Bank of Susquelianna Co. Roekwi;!!, 2 Hill (N.Y.), 482. 9 Pa. St. 28; Bank of U. S. ?;. Pea- ' Stuart u. Bigler, ,s-u/jm. body, 20 Pa. St. 454; Ocean Nat. » Stuart w. Bigler, 98 Pa. St. 80,84. Per Paxson, J. 453 §§ 597, 598.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. restore, but tendered instead a like number of the similar bonds found by them among the lender's assets. This tender the bor- rower refused to accept. In an action by the assignees against him to recover the amount of money loaned to him, it was held that there was evidence to go to the jury of a conversion of the bonds by the pledgee, and that if the jury found that there had been such conversion the plaintiffs were not entitled to recover without accounting to the pledgor for the proceeds of the bonds. It Avas held, further, that the burden was upon the plaintiffs to rebut the primd facie presumption that such a conversion had taken place, by either producing the bonds or satisfactorily ac- counting for their non-production, and that in case they failed to do this they were not entitled to recover. It was further held that the tender by the plaintiffs of the other bonds found among the lender's assets, of the same kind as those deposited by the borrower, was not good, for the reason that there was no proof that those bonds had been continuously in the lender's possession from the time the loan was made, and therefore might have been purchased by him after they became utterly worthless. It seems that if the bonds had been in the pledgee's possession from the time of the loan by him, the tender of them by his assignees would have been good, and the pledgor would have been bound to accept them.^ 597. The pledgee may also maintain a suit for a de- ficiency existing after applying the proceeds of the pledge to the payment of the debt.^ 698. A pledgee is not obliged to present his claim to the administrator of the pledgor, unless he seeks recourse against other property of the estate than that pledged.^ In Texas the holder of a mortgage or lien upon the property of a deceased debtor must prove his claim in the Probate Court, from which he may afterwards obtain an order for the sale of the property. But the holder of negotiable paper as collateral security is not a mere mortgagee or lien-holder, who, in case of the death of his debtor, must prove his claim against the estate, and ask the aid of the Probate Court to enforce it. He has in 1 Stuart V. Bisler, 98 Pa. St. 80. » Kibbe, in re, 57 Cal. 407. a Mauge V. Heringhi, 26 Cal. 577. 464 ATTACHMENT OF THE PLEDGED PROPERTY. [§ 599. his own hands the means of paying himself, and may, at any time after the principal debt is due, collect the collaterals when they become due, and appropriate the proceeds to the payment of the debt. If, however, the securities prove to be uncollect- able, and the creditor be driven to treat them merely as personal property pledged to secure a debt, and to invoke the aid of the courts to realize upon the security, then the matter may come within the reach of the Probate laws, and the creditor may be compelled to prove his claim, and have the securities administered by the Probate Court. But there is no provision of the Probate laws which reaches a creditor who has in his own hands that which may be treated by him as so much money, and appro- priated as such to the payment of a debt due him.i In Arkansas it is provided by statute that upon the death of a pledgor the court, on the application of any person interested, may order the executor or administrator to redeem the property out of the assets in his hands, if it would be beneficial to the estate, and not injurious to the creditors; but if such redemp- tion would be injurious to the estate or the creditors, or there should not be assets to redeem the property after the payment of debts, the court may order the interest of the deceased in such property to be sold at public auction.^ II. Attachment of the Pledged Property. 599. A pledgee generally waives his lien by attaching or levying upon the property held in pledge in a suit upon the very debt which the pledge was given to secure.^ But he may do this if he choose, and have the property levied upon and sold as property of the judgment debtor. In such case the purchaser, whether he be a third person or the judgment creditor, there- after holds title by virtue of the sale, and not by virtue of the pledge.* 1 Hurler v. Dahoney, 48 Tex. 234. Legg v. Willard, 17 Pick. (TVTass.) 140; The ri<^ht of a holder of a trust deed Whitaker v. Sumner, 20 lb. 399; Buck or mortgage to sell under a power is u. Ingersoll, 11 Met. (Mass.) 226; con- suspended in case of the death of the tra, Arendale v. Morgan, 5 Sneed mortgage debtor, by force of the Pro- (Tenn.), 703. bate laws. Jones on Mortgages, § * Sickles v. Richardson, 23 Hun ^''92. (N. Y.), 559, and see Arendalo v. » Dig. 1874, § 183. • Morgan, supra. ' Jacobs V. Latour, 5 Bing. 130 ; 455 § 600.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. But a pledgee may attach property of tlie pledgor's other than that held in pledge without waiving or affecting his lien.^ It has been held, however, that property exempt from execution, pledged to secure a debt, raa}^ upon the recovery of a judgment upon the debt, be sold on execution .^ The grounds of the deci- sion are, 1st, that pledgor may waive such exemption, and effec- tually pledge such property ; 2d, that the recovery of judgment upon the debt does not destroy or affect the lien of the pledge ; and 3d, that it being conceded that the creditor might have given notice and sold the property himself, without judgment or execution, there could be no valid objection to a sale by an oflBcer in the manner and form prescribed for sales upon execu- tion, for no greater care is required in the sale of such property than is required in the sale of any personal property on execu- tion.^ But in such case, is the sale made solely by virtue of the lien of the pledge, or merely by virtue of the seizure on execu- tion ? It would seem that it must be by virtue of the lien of the pledge, for the legal exemption would prevent a sale by virtue of the execution. A sale in this form, by virtue of the pledge, is so different from the sale of a pledge sanctioned by the common law, that its validity might well be doubted in a state where it has not been established by a decision of the highest court. If a promissory note be placed in the hands of a slieriff as collateral security for the payment of an execution which he holds against the owner of the note, an attempt by the sheriff to hold the note under a void levy of the execution upon it will not operate as a waiver of the lien.^ 600. If one holding goods in pledge in the hands of an agent, attach them for the same debt secured by the pledge, he thereby relinquishes the lien of his pledge.* And so, if the pledgee transfer the debt secured by the pledge without a transfer of the lien, and points out to his assignee the pledged property to be attached by him and other creditors, and no notice is given to the officer of the existence of any such lien, the pledgee having thus put it beyond his power, or that of his 1 Whitwell V. Brigham, 19 Pick. s pi^ijer ^, j\£eek, 38 111. 92, (Mass.) 117. * Swett v. Brown, 5 Pick. (Mass.) 2 Jones V. Scott, 10 Kans. 33. 178t 456 SALE OF THE PLEDGE AT COMMON LAW. [§§ 601-603. assignee, to restore the pledged property upon payment of the debt, is regarded as having waived his lien.^ 601. But an attachment of the same goods by the pledgee on another demand, with notice to the officer that lie did not waive his lien, and also with notice to him to hold possession for the pledgee, and to maintain his lien, would not amount to a waiver.2 III. Sale of the Pledge at Common Laiu. 602. In General. — A pledgee of goods does not acquire an absolute title thereto simply by the failure of the pledgor to pay the debt or redeem the property at the time specified. His in- terest is a special property to retain the goods for his security* There is no forfeiture until the pledgor's rights are foreclosed." In this respect a pledge differs from a chattel mortgfTge, under which the title of the mortgagee becomes absolute upon default.* A sale of the pledge, according to the rules of tlie common law, is the usual method of foreclosing this lien, where the par- ties have not expressly agreed that the sale shall be made in a definite manner, under provisions which are usually termed a power of sale ; and even where there is such a power of sale, the sale may be made according to the rules of the common law, unless the conditions prescribed in the power of sale are impera- tive. But both the common law form of procedure and that which the parties have agreed upon must yield to statutory regu- lations, when these are imperative and not permissive merely. 603. It is a well-settled rule of the common law that a pledgee, upon default, may sell at public auction the chattel pledged, without judicial process and decree of foreclosure, upon giving the debtor reasonable notice to redeem ; ^ although the MVhitaker v. Sumner, 20 Pick. < Jones on Chattel Mort{ino;ps, § 699; (Mass.) 399. Brown v. Bement, 8 Johns. (X. Y.) 96. * Whitakcr v. Sumner, supra; ^ Tucker v. Wilson, 1 P. Wms. 261; Townsend v. Newell, 14 Pick. (Mass.) Lock wood v. Ewer, 2 Atk. 30.J; S. C. 332. 9 Mod. 275, 278; Pothoniir r. Dawson, 8 Brownell v. Hawkins, 4 Barb. Holt, 385 ; Kemp c. \\'estbro()k, 1 Ves. (N. Y.) 491; Mitchell v. Roberts (C. 278; Pigot v. Cubley, 15 C B. (N. C. E. D. Wis. 1883), 17 Fed. Rep.—, S.) 701 ; Martin r. Reid, 11 II). 730; per Caldwell, J. Vaupell v. Woodward, 2 Saiidf. (N. 457 § 604.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. old rule, existing in the time of Glanville, required a judicial sentence to warrant a sale, unless there was a special agreement to the contrary .1 This right to sell upon default is implied in the contract of pledge, and does not depend upon any express stipulation .2 604. If the pledgor has only a limited interest in the thing pledged, the pledgee can sell only the interest which was transferred in pledge. The pledgor's interest may be such that the pledgee cannot make any sale of the thing pledged, but can only continue to hold it. " He may have only an interest for life, or for a term of years, or he may have simply a lien, or a right by a former pledge ; still he may pledge the property to the extent of his interest. But the pledgee in all such cases has no right to sell the property on the non-fulfillment of the contract, although he may pursue the proper course for the purpose, for the pledgor has no such right to confer. The pledgee must con- tent himself, in such cases, with holding the possession of the property till his debt is paid, or the interest of his pledgor in the property has expired." ^ Accordingly where a husband held, as trustee, certain chattels belonging to his wife, and she pledged them, with his consent, to secure a liability assumed by him, and a statute then provided that no transfer by a husband of the personal property of his wife should be valid unless she should join with him in a written conveyance of the same, it was ques- tioned whether the pledgee could sell the property, because the sale, coupled with the pledge, might be regarded as amounting to a transfer of the property, and therefore invalid under the statute ; but it was not doubted that the pledgee would have a right to hold the property without a sale.* Y.) Ch. 143; Hart v. Ten Eyck, 2 Lansing, 2 Caines' Cas. 200; Stearns Johns. (N. Y.) Ch. 62, 100; Garlick v. v. Marsh, 4 Denio (N. Y.), 227, per James, 12 Johns. (N.Y.) 146; Cush- Jewett, J. man t>. Hayes, 46 111, 145; Luckett v. ^ Lockwood v. Ewer, 9 Mod. 275, Townsend,3 Tex. 119; Brightman r. 278; Jerome v. McCarter, 94 U. S. Keeves, 21 Tex. 70; Mauge v. Her- 734. inghi, 26 Cal.577; Wilson f. Brannan, A similar right to sell upon default 27 Cal. 258; Union Trust Co. v. Rig- exists in case of a chattel mortgage. don, 93 111. 458; Robinson v. Hurley, Jones on Chattel Mortgages, § 707. 11 Iowa, 410; De Lisle v. Priestman, ^ Robertson v. Wilcox, 36 Conn. 1 Browne (Pa.), 176. 426, 430, per Park, J. 1 1 Reeves, 161-163 ; Cortelyou v. * Robertson v. Wilcox, supra. 468 SALE OF THE PLEDGE AT COMMON LAW. [§§ 605-607. 605. The pledgee's assignee has the same right to sell the pledge upon reasonable notice after default that the pledgee himself had. The power to sell property pledged does not arise from any peculiar trust reposed in the original creditor, but is an incident to the pledge and a part of the security of the debt.^ 606. A pledgee is not obliged to sell the pledge even when requested so to do by the pledgor, for his only right is to re- deem. Therefore in a case where the pledgor demanded a sale of the greater portion of the property pledged upon an offer pro- cured by him, and the pledgee refused to make the sale, and it also appeared that if the sale had been made and the money col- lected thereon, the proceeds of the sale would have paid the debt secured excepting a small sum, and the remainder of the property pledged would have sold for a greater sum than the balance re- maining unpaid, but all the property was afterwards sold by the pledgee for a sum much less than the debt, leaving a deficiency to be paid by the debtor, it was held that the pledgee was not liable for the loss occasioned by his refusal to sell as requested, this refusal being made in the exercise of an honest judgment on his part.2 607. There are two kinds of notice which a pledgee may be bound to give to the pledgor. Notice of his intention to sell, and of the time and place of sale, is always necessary for the making of a binding sale of the property pledged, unless by agreement of the parties such notice has been expressly or impliedly waived- Again, if the debt secured is not one which becomes due at a fixed time, there maybe no default upon the occurrence of which a sale of the pledge can be made until the pledgee makes demand of payment or gives notice of the occurrence of the event which constitutes a default; or it may be that the event upon wliich a default occurs is one peculiarly within the knowledge of the pledgee ; or it may be that such event is one which it is his option to declare. In such cases of course there is no default until the pledgee makes demand of payment, or gives notice of the default. ^ Loiul V. Burke, 22 Gratt. (Va.) 215. So under a cliattel mort^jage ; 254, 263; per IMonciire, C. J. Jones on Chattel Mortgages, § 702. 2 Field V. Leavitt, 5 J. & S. (N. Y.) 459 §§ 608, 609.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. 608. A demand of payment may be necessary in some cases to create a default. Thus when the default upon which a pledgee is authorized to sell arises upon a decline in price of the propert}' pledged, or in other words when the debtor has agreed to maintain a certain margin of value in the security above the advances made upon it, it is the duty of the pledgee to give notice of an}' deficiency of margin that may have occurred, and to demand the making good of the margin, before proceeding to sell the pledged property. Thus where a consignee of cotton made advances upon it under an agreement that the consignor would maintain a certain margin, and that the consignee might sell the cotton at public or private sale, in case there should be a decline in the market price of cotton so as to impair the margin, and the consignor should fail on demand to make it good, it was held that the consisfuee was bound to give notice of a decline and make an actual demand for the margin before selling.^ It is true that in this case it was expressly agreed that the default upon which the pledgee was authorized to sell the cotton should arise upon the failure of the pledgor to make good the margin upon demand. But this agreement of the parties merely ex- pressed the rule of law which would have determined their rights had the agreement been silent in regard to a demand. If the debt secured is not payable at a fixed time, a demand of payment, or that the pledge securing the debt be redeemed, should be made before the creditor can properly dispose of the pledged property. If in such case the debtor be absent or can- not be found, judicial proceedings should be had to bar his right of redemption.^ If the debt is expressly payable on demand the pledgee cannot sell without first making demand.^ 609. The fact that the debt secured is payable at a future day certain, does not dispense with a want of notice of the time and place of sale. The non-payment of the debt at ma- turity does not work a forfeiture of the pledge : it merely author- izes the pledgee to sell the pledge upon reasonable notice and to reimburse himself for the debt and expenses. As regards notice of sale there is no distinction between a pledge for a debt due 1 Milli'cen V. Dehon, 27 N. Y. 364. s Wilson v. Little, 1 Sandf. (N. Y.) 2 Garlic-k v. James, 12 Johns. (N. 351. Y.) 146. 460 SALE OF THE PLEDGE AT COMMON LAW. [§ GIO. presently and one for a debt due upon time. " In either ease the pledgor is eqnall}' interested to see to it that the pledge is sold for a fair price. The time when the sale may take place is as un- certain in the one case as in the other ; both depend upon the will of the pledgee, after, the lapse of the term of credit in the one case, and after a reasonable time in the other ; unless, indeed, the pledgor resorts to a court of equity to quicken a sale. Personal notice to the pledgor to redeem, and of the intended sale, must be given as well in the one case as in the other, in order to au- thorize a sale by the act of the party." ^ Thus a pledge of goods was made to secure a promissory note payable in four months, A few days afterwards the pledgor authorized the pledgee to sell a designated portion of the goods at public sale then about to occur at a certain place, and to apply the proceeds on the note. This privilege the pledgee did not avail himself of ; but after the maturity of the note, without notice to the pledgor, he caused the goods to be sold at public auction at the same place at which the sale of a portion had been previously authorized ; and thereupon brought suit against the pledgor for the balance due on the note. The sale was held to be tortious, and the pledgee a wrong-doer.^ 610. A sale of the pledge can only be made after reason- able notice to the pledgor of the tim$ and place of sale, unless such notice has been waived by agreement.^ 1 Stearns f. Marsh, 4 Denio(N.Y.), Minn. 27; Goldsmith v. Methodist 227, 230; {rt Jewett, J. Church Trustees, 6 Rep. 435. '■^ Stearns v. ]\Iar^ll, supra. New York: Garlick v. James, 12 3 England: Tucker y. Wilson, 1 P. Johns. 14G ; Hart v. Ten Eyck, 2 Wms. 261; Lockwood v. Ewer, 2 Johns. Ch. 62, 100 ; Stearns r. Mar^h, Atk. 303; S. C. 9 Mod. 275, 278. supra; Wheeler v. Newbould, 16 N. California: Deivey v. Bowman, 8 Y. 392; Bryan v. Baldwin, 52 N. Y. Cal. 145; Gay r. Moss, 34 Cal. 125. 232; Milliken v. Dehon, 10 Bosw. Illinois: Cu,-hman i\ Hayes, 46 111. 325; Jaroslauski v. Saunderson, 1 145 ; Kozet v. IMcClellan, 48 111. 345; Daly, 232; Lewis v. Graham, 4 Ahb. Belden v. IVrkins, 78 111. 449. Pr. 106 ; Brown v. Ward, 9 IIow. Indiana : Indiana & 111. Cent. Pr. 497; S. C. 3 Duer, 660 ; Nelson Ily. Co. V. M.Kt-rnan, 24 Ind. 62 ; r. P^dwards, 40 Barb. 279 ; Ogden v. Evans v. Darliri'^ton, 5 Blackf. 320; Lathrop, 65 N. Y. 158. Rosenzweiii v. Frazer, 82 Ind. 342. Pennsylvania: De Lisle v. Priest- Massachusetts: \Vashburn v. Pond, man, 1 Browne, 176; Davis v. Funk, 2 AUfu, 474; Paiker v. Brancker, 22 39 Pa, St. 243; Conyngham's Aj)peal, Pick. 40. 57 Pa. St. 474. Minnesota : White v. Phelps, 14 Other States: Stevens v. Ilurlbut 4til § 611.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. The reasons assigned for the rule are that the pledgor should have an opportunity to attend the sale, and see that it is fairly- conducted ; that he may exert himself in procuring buyers, and thus enhance the price ; and that he has the right to redeem the pledge at any moment before the sale is actually made, and should be afforded an opportunity to exercise this right.^ The right of redemption incident to every pledge would be valueless, if the creditor could in the absence of any agreement, dispensing with notice of sale, sell the property pledged without demand of payment and without notice of the time and place of sale.2 611. A waiver of the requirement of notice of the pledgee's intention to sell, and of the time and place of sale, may be made by agreement of parties.^ A waiver of the common law rule of notice is generally made when the parties agree upon a special power of sale ; for under such a power it is usual either to waive notice of sale altogether, or else to provide for a special notice. Such notice is waived by giving the pledgee the option to sell at private sale. Under authority given a pledgee to sell at public or private sale, at his option, he may sell without notice in the usual manner of selling such property in the market.* Thus, a consignee of cotton made advances upon it to be paid at a day certain, under an agreement that should there be a decline in the market price of cotton, the consignor should, on demand, deposit cash sufficient to cover such decline ; and in case he failed to do so, or to repay the advances at the day fixed upon, the consignee was authorized to sell the cotton at public or private sale, or otherwise at his option, for the most it would bring. The con- signor having failed to make good a decline, the consignee sold the cotton by sample in the usual mode of selling cotton in the market, without giving notice of his intention or of the time and place of sale. It was held that he had a right so to do.^ But the contract in this case was a peculiar one. It included more Bank, 31 Conn. 146 ; Morgan v. Dod, « Loomis v. Stave, 72 111. 623. 3 Colo. 551; Chouteau v. Allen, 70 * Robinson v. Hurley, 11 Iowa, Mo. 290; Loud v. Burke, 22 Gratt. 410. (Va.) 254. 5 Milliken v.Dehon, supra; revers- 1 Milliken v. Dehon, 27 N. Y. 364, ing i". C. 10 Bosw. 325. 373, per Marvin, J. 2 Wilson V. Little, 2 N. Y. 443. 462 SALE OF THE PLEDGE AT COMMON LAW. [§ 612. than an ordinary pledge, and was construed according to its lan- guage and attendant circumstances.^ Of course a private sale without notice may be made by the direction or with the consent of the pledgor, who cannot afterwards object that the sale was not made in accordance with the requirements of a statute relat- ing to sales of pledged property .^ An agreement that the pledgor shall have the right to deter- mine the time when the sale shall be made, does not affect the legal character of the pledge. If the pledgee sells without the consent of the pledgor, and without notice to him of the time and place of sale, he is liable to the pledgor for the market value of the property at the time it was sold ; but the pledgee is en- titled to offset or recoup the amount of the debt secured. The pledgee's assignee, in such case, is subject to the same liability, and entitled to the same right of set-off.^ 612. The notice must be given to the general owner of the pledge or to his agent. If notice be given to an agent who has no authority to act in the matter for the owner, the notice is without effect.* Notice to the owner after the sale, though an opportunity be allowed him to redeem the pledge within a limited time, is of no effect. The pledgor might not be able to raise funds to redeem, while he might have been able to advance his interests in obtain- ing a higher price by procuring the attendance of bidders, and securing greater competition among purchasers ; and he is en- titled to have the opportunity of knowing that the sale was con- ducted in a proper manner.^ Notice of the time and place of sale left, in the absence of the pledgor, at his office, with a person in charge, is sufficient.^ So is a notice, properly directed, sent through the post office.'' 1 For a case where a contract which ^ Hamilton v. State Bank, 22 Iowa, was more than a pledge and depended 306. for its construction altogether ujjon its ^ Belden v, Perkins, 78 111. 449. peculiar terms, see Murdock v. Colum- * Washburn v. Pond, 2 Allen bus Ins. Co. 59 Miss. 152, where also (Mass.), 474. it was held that the debtor was not ^ Washburn v. Pond, supra, per entitled to a demand of payment, or Dewey, J. to notice of the time and place of sale. '' Potter v. Thompson, 10 K. I. 1 ; ■J Worthington v. Tormey, 34 Md. 182. 463 §§ 613, 614.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. A notice without date and without signature left at the pledgor's ofBce, would be insufficient.^ 613. Formal notice of the time and place of sale is not necessary if the pledgor has actual notice,^ " The onl}' object of requiring notice to be given in such a case, is to inform the debtor of the time and place of sale; and when he is already otherwise fully informed on the subject, to require a further and more formal notice to be given him, is to require a vain thing. The case is not like a legal proceeding, in which service, or waiver of notice, should appear in the record. Here the whole matter is m pais, and the question is, did the debtor have actual notice of the -time and place of sale. The safest course is to have a formal written notice served upon him, for then the fact of notice can be easily proved. If this safe course be not pursued, the creditor must, at his peril, be prepared to prove otherwise that the debtor was informed of the time and place of sale a reasonable time before the same was to take place." ^ In the case before the court it appeared that a written notice to redeem was given to the debtor, wherein he was notified that unless pay- ment of the debt should be made on or before a certain day, the creditor would proceed to sell the property pledged, and apply the proceeds to the payment of the debt. The debtor having failed to pay the debt at the time named, the creditor proceeded directly to advertise a sale of the pledge in a newspaper ; and that the debtor had actual knowledge of this advertisement ap- peared from the fact that a week before the sale he obtained an injunction against the sale, and his bill asking for the injunction recited a copy of the advertisement. He was held to have had actual and sufficient notice of the time and place of sale. 614. A notice of an intention to sell, without specifying time or place, does not justify a sale.^ Bryan v. Baldwin, 7 Lans. (N. Y.) constructive notice, and to have the 174, where is cited the rule declared legal eifect of actual notice." by Shaw, C. J. in Granite Bank v. i Genet ;;. Ilowland, 45 Barb. (N. Ayers, IG Pick. (xMass.) 392, '• that all Y.) 560 ; S'. C. 30 How. Pr. 360. notices at one's doinicil, and all notices ^ Loud v. Burke, 22 Gi-att. (Va.) respecting transactions of a commer- 264, 264. cial nature at one's known place of ^ Loud v. Burke, supra, per Mon- business, are deemed in law to be good cure, C. J. 464 * Wheeler v. Newbould, 16 N. Y. 392- STATUTORY PROVISIONS REGULATING SALES. [§§ 615, 616. A notice by a pledgee that he will sell, unless an excessive sum be paid him immediately, does not justify a sale.^ 615. An extension of the time of payment of the debt secured suspends the pledgee's right to sell the thing pledged until the expiration of the extended time of payment ; and the time of payment may be effectuall}'' extended by parol agreement.^ If by any subsequent agreement between the par- ties, the stipulated time for payment has been rendered in- definite, it is not competent for the pledgee to sell until he has made a demand for payment.^ IV. Statutory Provisions Regulating Sales of Property Held in Pledge. 616. In general. — In several states there are statutory pro. visions regulating sales of property pledged for the enforcement of debts. These statutes differ materially ; for while some of them exclude sales at common law or under powers of sale^ others are permissive merely, and simply provide another mode of enforcing the lien, in addition to those sanctioned by the com- mon law. Moreover, in several states these statutory provisions apply only to pawnbrokers, other pledgees being left to pursue their common law remedies without restriction. In a few states there are special provisions upon this subject applicable to pawn- brokers, in addition to the general provisions regulating sales by pledgees. In several states the rate of interest that may be charged by a pawnbroker or pledgee is regulated by statute.* Under such Goldsmidt v. First Methodist Church, California : Not exceeding two per 25 Minn. 202. cent, per month. Stat. 1881, c. C5. 1 Pigot V. Cubley, 15 C. B. (N. S.) Connecticut : Not exceeding 701. twenty-five per cent, per annum. 2 Wadsworth v. Thompson, 3 Gilm. Acts 1875, c. 82. (111.) 423. Illinois : Not exceeding three per 3 Pigot V. Cubley, supra; Martin v. cent, per month. 11. S. 1880, c. 107, Reid, 11 C. B. (N. S.) 730. §2. * Arizona Territory : Not exceed- Maine: Not exceeding twenty-five ing live per cent, per month, in ad- per cent, per annum, on loans less vance, on loans exceeding twenty dol- than twenty-five dollars; and not ex- lars. Penalty is a forfeiture of three ceeding six per cent, per annum on times the value of the article pledged, larger sums. R. S. 1871, c. 35, § 3. Compiled Laws, 1877, § 3610. Missouri: Not exceeding five per 30 4G5 §§ 617, 618.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. statutes a borrower who has contracted to p;iy a higher rate to a pawnbroker can recover possession of the tiling pawned upon a tender of the debt, with interest at the higliest rate which the pawnbroker is aUowed to charge.^ And, of course, upon a sale bv the pawnbroker he is entitled to retain interest only at the highest rate allowed by the statute. 617. Arizona Territory.^ — No pawnbroker or pledgee shall sell or dispose of any aiticle pledged to him, and unredeenied, until it has remained in ]iis,her, or their possession three months after the last day of redemption ; and all such sales shall be at public auction, upon notice of five days, published in some news- paper printed at the place where the sale takes ]»lat'e ; and if no newspaper is there printed, then by posting notices in two public places five days before the sale, giving the plaice where the article will be sold, and a list of said articles, which sales shall, in all eases, take place in the town or city where such articles are pledged. After deducting from the proceeds of any sale, as aforesaid, the amount of the loan, the interest then due, as herein provided, and ten per cent, on the loan additional, for the expense of the sale, such pawnbroker or pledgee shall pay the balance to the person entitled to redeem such property ; if no sale had been made, and if not so paid on demand, three times the amount thereof shall be forfeited, to be recovered by the owner or pledgor, in a civil action to be brought by him therefor. 618. California 3 and Dakota Territory.* — When perform- ance of the act for which a pledge is given is due, in whole or in part, the pledgee may collect what is due to him by a sale of property pledged, subject to the rules and exceptions hereinafter cent, per month on sums less than New Mexico: Not exceeding ten twenty dollars; and not exceeding per cent, per mouth. G. Laws, 1880, three per cent, per month on sums p. 421. above. Laws, 1879, p. 1G2, § 1; R. S. ^ Jackson v. Shawl, 29 Cal 267. 1879, § 64G8. "^ Compiled Laws, 1877, §§ 3618, New Jersey : Not exceeding 3619. twenty-five per cent, per annum on ^ Codes & Stats. 1876, §§ 8000- sums of twenty-five dollars or less; 8011 of Civil Code, and ten per cent, per annum on sums * Rev. Codes, 1877, §§ 1771-1782 of above. R. S. 1877, p. 812, § 2. Civil Code. 466 STATUTORY PROVISIONS REGULATING SALES. [§ 618. prescribed. Before property pledged can be sold, and after per- formance of the act for which it is security is due, the pledgee must demand performance thereof from the debtor, if the debtor can be found. A pledgee must give actual notice to the pledgor of the time and place at which the property pledged will be sold, at suah a reasonable time before the sale as will enable the pledgor to attend. Notice of sale may be waived by a pledgor at any time ; but is not waived by a mere waiver of demand, of performance. A debtor or pledgor waives a demand of perform- ance as a condition precedent to a sale of the property pledged, by a positive refusal to perform after performance is due ; but cannot waive it in any other manner except by contract. The sale by a pledgee of property pledged must be made by public auction, in the manner and upon the notice to the public usual at the place of sale, in respect to auction sales of similar prop- erty ; and must be for the highest obtainable price. A pledgee cannot sell any evidence of debt pledged to him, except the obligations of governments, states, or corporations ; but he may collect the same when due. Whenever property pledged can be sold for a price sufficient to satisfy the claim of the pledgee, the pledgor may require it to be sold, and its proceeds to be applied to such satisfaction, when due. After a pledgee has lawfully sold property pledged, or otherwise collected its proceeds, he may deduct therefrom the amount due under the principal obli- gation, and the necessary expenses of sale and collection, and must pay the surplus to the pledgor, on demand. When prop- erty pledged is sold by order of the pledgor, before the claim of the pledgee is due, the latter may retain out of the proceeds all that can possibly become due under his claim until it becomes due. A pledgee, or pledge-holder, cannot purchase the property pledged, except by direct dealing with the pledgor. Instead of selling property pledged as hereinbefore provided, a pledgee may foreclose the right of redemption by a judicial sale, under the direction of a competent court ; and in that case may be author- ized by the court to purchase at the sale. It is further provided in California^ that every pawnbroker who sells any article pledged to him, and unredeemed, until it has remained in his possession six months after the last day fixed 1 Co(ks & Stats. 1876, §§ 13, 341, & 13, 342; §§341, 342 of renal Code. 4G7 §§ 619-621.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. by contract for redemption, or who makes any sale without pub- lishing in a newspaper printed in the city, town, or county, at least five days before such sale, a notice containing a list of the articles to be sold, and specifying the time and place of sale, is guilty of a misdemeanor. Every pawnbroker who wilfully refuses to disclose to the pledgor, or his agent, the name of the purchaser, and the price received by him for any article received by him in pledge, and subsequently sold, or who, after deducting from the proceeds of any sale the amount of the loan and interest due thereon, and four per cent, on the loan for expenses of sale, refuses, on demand, to pay the balance to the pledgor, or his agent, is guilty of a misdemeanor. 619. Connecticut.! — It is unlawful for any pawnbroker, loan-broker, or any person who lends money on pledge of personal property, to sell or. dispose of any personal property left with him in pledge for money loaned, in less than six mouths from the day when the same is left in pledge, as aforesaid. 620. Georgia.^ — The pawnee may sell the property received in pledge after the debt becomes due, and remains unpaid ; but he must always give notice, for thirty days, to the pawnor of his intention to sell, and the sale must be in public, fairly con- ducted, and to the highest bidder, unless otherwise provided by contract. 621. Louisiana.^ — The creditor cannot himself, in case of failure of payment, dispose of the pledge; but where there have been pledges of stock, bonds, or other property, for the payment of any debt or obligation, it is necessary before such stocks, bonds, or other property so pledged shall be sold for the payment of the debt for which such pledge was made, tliat the holder of such pledge be compelled to obtain a judgment in the ordinary course of law ; and the same formalities in all respects shall be observed in the sale of property so pledged as in ordinary cases. Any provision which should authorize the creditor to appropriate 1 Acts, 1875, c. 82; Acts, 1877, c. ^ ]^. Civ. Code, 1870, p. 376, Art. 126. 3165. 3 Code, 1873, §2140. 468 STATUTORY PROVISIONS REGULATING SALES. [§ 622. the pledge to liimself, or dispose of it, without the prescribed formalities, is null. But a pledgee of a negotiable note may collect it by suit.^ 622, Maine.^ — The holder of stocks, bonds, or any other per- sonal property in pledge for the payment of money or the performance of any other thing, may, after failure to pay or perform, give written notice to the pledgor that he intends to enforce paiyment by a sale of the pledge ; which notice shall be served by leaving a copy with the pledgor, if he resides within this state and his residence is known to the holder, otherwise by publishing it at least once a week for three successive weeks, in one of the principal newspapers in the city or town where the pledgee resides, or if there is no such paper, in one of the prin- cipal newspapers published in the county, or in the state paper. Such notice, together with an affidavit of service, shall be re- corded in clerk's office of the city or town where the pledgee resides. If the money to be paid or the thing to be done is not paid or performed, or tender thereof made within sixty days after such notice is so recorded, the holder may sell the pledge at public auction, and apply the proceeds to the satisfaction of the debt or demand, and the expenses of the notice and sale, and any surplus shall be paid to the party entitled thereto on demand. It is also provided 3 that no pawnbroker shall sell any property pawned until it has remained in his possession three months after the expiration of the time for which it was pawned ; and all such sales shall be at public auction by a licensed auctioneer, and after notice of the time and place of sale. The name of the auc- tioneer, and a description of the property to be sold are published in a newspaper in the town where the pi'operty is pawned, if any, and if not, posted in two public places therein at least two weeks before the sale ; and all sales of such property otherwise made, shall be wholly void, and the pawnbroker undertaking to make the same, shall forfeit twenty dollars for every such offence. After deducting from the proceeds of any sale as aforesaid the amount of the loan, the interest then due, and the proportional part of the expenses of sale, such pawnbroker shall pay the bal- 1 Ducasseu. McKcnna, 28 La. Ann. ^ Acts, 1875, c. 53. 419; Dolbonde's Succession, 21 lb. 3, » R. S. 1871, c. 35, §§ 4, 5. 469 §§ 623, 624.] REMEDIES OF THE PLEDGEE AFTER DEFAULT. ance to the person entitled to redeem such property if no sale had been made ; and if not so paid on demand, he shall forfeit double the amount so retained, one half to the use of the pawnor, and the other to the use of the state. 623. Massachusetts.^ — The holder of personal property in pledge for the payment of money or the performance of any other thing, may, after failure to pay or perform, give written notice to the pledgor that he intends to enforce payment or per- formance by a sale of the pledge, and such notice shall be served, and together with an affidavit of service be recorded in the clerk's office of the c\tj or town where the pledgee resides, in the man- ner and with like effect as provided for notices of foreclosure.^ If the money to be paid or other thing to be done is not paid or performed, or tender thereof made, within sixty days after such notice is so recorded, the pledgee may sell the pledge at public auction and apply the proceeds to the satisfaction of the debt or demand, and the expenses of the notice and sale, and any surplus shall be paid to the party entitled thereto on de- mand. The preceding sections shall not authorize the pledgee to dis- pose of the pledge contrai-y to the terms of the contract under which it is held, nor limit his right to dispose of it in any other manner allowed by the contract or by the rules of law.^ 624. Missouri.* — In case the person obtaining the loan from a pawnbroker fails to pay the interest when due, the pawnbroker shall not sell the article or articles so pawned with him as secu- rity for such loan till after the expiration of sixty days from the 1 G. S. 18fi0, p. 767, §§ 9-11 ; P. S. be admitted as evidence of the giving 1882. c. 192, §§ 10-12. of such notice. P. S. c. 192, §§ 7, 8. 2 That is, the notice shall be served ^ This statute not only authorizes a by leaving a copy witli the pledgor or sale of the thing pledged under a for- by publishing it at least once a week mal power of sale agreed upon in tlie for three successive weeks, in one of contract of pledge, but also a sale in the principal newspapers, published in accordance with an informal or verbal the town or city where the property is consent of the j)ledgor given any time situated, or if there is no sucli paper, in before the sale uj)on default. Covell v. one of the principal newsjjapers pub- Loud, 134 Mass. — ; ife Ins. Co. 7 goods have been intrusted to an agent Daly (N. y.), 303 ; Selden v. Ver- or factor to sell, no action will lie milya, 3 N. Y. 525 ; Jones on Chat- against him for the proceeds until de- tel Mortgages, § 712; Jones on Mort- niand. With stronger reason, the doc- gages, §§ 1^27-1940. trine apjjlies where property lias been < Earle v. N. Y. Life Ins. Co. supra, intrusted to a pledgee, with power to s Looinis u. Stave, 72 HI. G23; Tay- sell and apply the proceeds to the lor V. Turner, 87 111. 29G. payment of debts." 483 CHAPTER XVII. REMEDIES UPOX PLEDGES OP NEGOTIABLE PAPER. I. Collateral paper cannot be enforced by 1 IV. Negjotiable paper taken in^ payment, sale except by special power, 651-663. 687-691. 11. Suit upon collateral paper, 664-680. I V. Diliijence in collecting collateral paper, III. Enforcing principal debt, 681-686. 692-719. I. Collateral Paper Cannot he Enforced by Sale Except hy Special Power. 651. Collateral paper cannot be enforced by sale. A pledgee of commercial paper as collateral security cannot, in the absence of a special authority for that purpose, sell it upon the non-payment of the debt, and upon notice to the pledgor, either at public auction or private sale ; but he is bound to hold and collect the same when it falls due, and apply the money to the payment of the debt secured.^ The reason for this exception to the general rule in relation to the sale of property pledged is that such paper has no established market value, and it cannot be presumed it was the intention of the parties thus to deal with it. A usage among the bankers of New York to dispose of notes held as collateral, hj making sale of them, was held by the Court of Appeals of New York to be void, because it was in opposition to this rule of law.^ The ground of the decision is, that notes, not being usually marketable at their fair value, must generally be sold at a sacrifice, and so injustice would be likely to be done to the debtor, even if the sale were at public auction and with notice. 1 Fletcher v. Dickinson, 7 Allen 2 Wheeler v. Newbould, 16 N. Y. (Mass.), 23; Morris Canal & Banking 392; S. C 5 Duer, 29; Brown v. Co. V. Lewis, 12 N. J. Eq. 323 ; Garlick Ward, 3 Duer (N. Y.), G60 ; Atlantic U.James, 12 Johns. (N. Y.) 14G ; Joliet F. & M. Ins. Co. v. Boies, 6 lb. 583 ; Iron & Steel Co. v. Scioto Fire Brick Moody v. Andrews, 3D Superior Ct, Co., 82 111. 548; White v. Phelps, 14 (N. Y.) 302; affirmed, 64 N. Y. 641 ; Minn. 27; Union Trust Co. v. Rigdon Morris Canal & Banking Co. v. Lewis, 93 111. 458; S. C. 9 Cent. L. J. 480; 12 N. J. Eq. 323. Zimpleman v. Veeder, 98 111. 613. 484 COLLATERAL PAPER CANNOT BE ENFORCED BY SALE. [§ 652. A special power to sell negotiable paper taken as collateral security upon default in payment of the debt is not exclusive of every other means of rendering the security available. The pledgee has the right to receive payment of such collateral paper and to enforce payment of it b}'- action. ^ Such a right is in- cident to every pledge of negotiable paper. When, therefore, an express power is given the pledgee to sell such paper upon de- fault, the necessary conclusion is that the power of sale is given, not for the purpose of restricting or curtailing the rights of the pledge, but for the purpose of enlarging his rights and making the pledge more advantageous to him by giving him a more ef- fectual and speedy means of obtaining money from his security .^ 652. This rule may be suspended by agreement of the parties; and such is the effect of a written agreement, that, upon default, the creditor may collect the pledged notes, or may negotiate them for the purpose of liquidating the debt.^ But the sale in such case must be made in good faith and for a rea- sonable price, and must be exercised in the usual manner of a sale of a pledge, and as a trust for the debtor's benefit as well as for the creditor's own benefit.^ Thus, certain promissory notes were pledged to a trust company as collateral security for a debt of a smaller amount, with authority to sell the same on maturity of the principal debt, " at public or private sale, without advertis- ing the same, or demanding payment, or giving notice." The debt not being paid at maturity, the trust compau}^, without demanding payment of the collateral notes, which had also ma- tured, wrote to the maker of them that these notes would be sold to satisfy the debt, and offering him the first chance to purchase. A few days later the company surrendered the notes to the maker upon his paying the amount of the debt for which they were pledged as security, this amount being much less than the 1 Nelson v. Wellington, 5 Bosw. 8 Fraker v. Reeve, 36 Wis. 85; (N. Y.) 178; Brookman v. Metcalf, Brightman v. Reeves, 21 Tex. 70; lb. 429, 445 ; Whitteker v. Charleston Goldsmidt v. First Metlio;list Church, Gas Co., 16 W. Va. 717; First Nat. 25 Minn. 202; 5. C. 6 Rep. 435. Bank of AVelUbiirg v. Kiniberlands, ^ Union Trust Co. v. Rigdon, 93 111. lb. 555; Third Nat. Bank v. Ilarri- 458; S. C. 9 Cent. L.J. -486; Bright- son, 3 McCrary, 316. man v. Reeves, supra; Uoldsniidt v. 2 Per Woodruff, J., in Nelson v. First Metliodist Ciiurch, .s'7>ra ; Spar- Wellington, supra. hawk v. Drexel, 12 N. Bank, R. 450. 485 § 652.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. amount of the collateral notes. The question presented was, therefore, whether an arrangement made between the pledgee of past-due negotiable paper and the maker of such paper, whereby he transfers such paper to the maker for less than its face, and for an amount precisely sufficient to pay the principal debt, is a sale within the meaning of the power conferred. It is certain that this could not be done without the aid of the special power ; and it is equally certain that such an arrangement was not within the scope of the power given. The Supreme Court of Illinois^ so deciding, say : " The intention of the parties to the contract is the real point of inquiry. When the pledgor authorized the trust company to sell the securities at public or private sale, what was understood and intended by the parties ? Was not an ordinary sale and purchase in their minds, — a contract whereby the seller parted with property and title, and the buyer obtained property and the title thereto? Can we suppose they contemplated a transfer whereby the property would be destroyed and the title extinguished ? If the pledgor had intended a transaction such as is here involved, would he not have used languao^e such as is used in the books or by the courts, or other apt language, to designate such transaction ? Would he not have given authority to com- promise or surrender the securities ? Is it not a latitudinarian, if not a strained, enforced construction, to call the ti*ansaction here a sale? In its ordinary sense and according to the common use of language, as also in the strict and proper acceptation of the word, a sale is not understood as designating a transfer such as this. Again, the power under consideration is in derogation of common-law duties, and wipes out wise and equitable safe- guards interposed by that law for the protection of the pledgor, and relieves the pledgee from just duties imposed upon him; and which safeguards and duties are intended to prevent fraud and a breach of the trust imposed." The court furthermore held irrelevant and inadmissible evidence that the trust company made reasonable efforts to sell the notes and failed to find a pur- chaser, and that the sale and transfer to the maker of the notes was in fact without any collusion or actual fraud, and for the best price that could be obtained for them. An offer to show that the maker of the collateral paper gave other paper to the debtor for no value received, or that he had other claims against 1 Union Trust Co. v. Rigdon, 93 111. 458 ; 5. C. 9 Cent. L. J. 486. 486 COLLATERAL PAPER CANNOT BE ENFORCED BY SALE. [§§ 653, 654. the debtor, was also disallowed ; inasmuch as this was not an offer to prove tliat these particular notes were accommodation paper, or that the maker had a legal defence to them. The pre- sumption of law is that the notes were given for a good and valuable consideration, and it is also the presumption that the maker was solvent; and, therefore, the measure of damages in a suit by the debtor against the trust company was the amount due upon the notes, less the amount paid on them. 653. A promissory note may be sold by a pledgee under a power of sale conferred upon him, and such sale made in good faith to one capable of buying, will pass the title to the note beyond the pleilgor's reach, although it be sold for less than the sum due upon it.^ If, however, the maker of the pledged note negotiates with the pledgee for its purchase for the amount due the latter upon the principal debt, which is much less than the face of the pledged note, and the maker is informed of the time of the sale, while the pledgor is not, and the maker purchases the note at a formal public sale, this will not be regarded as such a sale as the law requires, but rather as a compromise between the pledgee and the maker of the note.^ But if a promissory note be pledged with the agreement, that if the debt for which the note is pledged be not paid at maturity, the pledgee may make the money out of it in the best way he can, and that he may sell the note for that purpose, he is not authorized to sell it without notice to the debtor to redeem, and of the time and place of sale. A notice after maturity of the debt, that if it is not paid within a specified time, the pledgee will make the best disposition he can of the pledged note, either by public or private sale, is not sufficient.^ 654. Yet, contrary to the prevailing and better rule, there are authorities which hold that commercial paper pledged as ^ Zimpleman y. Vcedor, 98 111. 613. merely given, the power will be con- 2 Zimplenan v. Vceder, supra. striied to be such a power as exists in ' Goldginiilt I'. First Methodist respect to pledges generally, and must Church, 25 Minn. 202, 205. Per Gil- be exercised in the same way. In fillan, C. J. " It was competent for the respect to pledges generally, tiie power parties to agree how the sale shoidd can be exercised only upon reasonable be made; hut witliout any such agree- notice to the debtor to redeem, and of ment, and where the power to sell is the time and place of sale." 487 § 655.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. collateral security may be sold after its maturity in the same manner that any other pledge may be sold.i The Supreme Court of Rhode Island, deciding to this effect, say .-^ ''It may be that, in the absence of any express authority, no authority should be implied to sell the paper before it matures ; but must we hold that no authority can be implied to sell the paper after it matures if unpaid, thus obliging the pledgee to involve himself in a law- suit, and possibly in several lawsuits, if he would be indemnified out of the paper ? We think not. Tlie general rule is, that the pledgee of personal property has authority to sell in case the pledgor makes default, and the rule should have no exceptions which are not based on good reasons. It may be a reasonable exception to the rule that the pledgee of commercial paper soon to mature should not sell it immediately upon the pledgor's de- fault, but should wait for it to mature, and then present it for payment. It is not probable that a court of equity, if asked to sanction the sale of such paper, before it matured, for the benefit of the pledgee, would refuse the request; but if the same request were made after the paper had matured, and payment thereof had been refused, we are inclined to think the request would be deemed reasonable, and would be granted. We see no good reason for requiring that the pledgee should be at the expense of a suit in equity to authorize a sale, if a sale is to be had, except it be for the protection of the pledgor ; and the pledgor, if duly notified, can protect himself, provided the sale is made in a proper place and at public auction." 655. Sale under Decree in Equity. — In California it is held that, under special circumstances, a pledgee of negotiable paper may resort to a court of equity for a sale of the security, and may foreclose the pledge in the same manner and with like effect as if the transaction were a mortgage ; and it is rather intimated that the same rule would apply in case of an ordinary pledge of such paper.3 The fact that the maker of the paper pledged resides in a remote country, or in a different state, and that it does not appear that he has any property subject to seizure and 1 Davis V. Funk, 39 Pa. St. 243; 2 Potter v. Thompson, 10 R. I. 1, 8. Richards v. Davis, 5 Clark (Pa. Law « Donohoe r. Gamble, 38 Cal. 340. J. Rep.), 471; Brightman v. Reeves, 21 Tex. 70. 488 COLLATERAL PAPER CANNOT BE ENFORCED BY SALE. [§§ 656, 657. sale within tlie jurisdiction of the former, is at any rate sufficient to autliorize the holder of the pledge to resort to a court of equity for a foreclosure and sale. It would be a hardship upon the pledgee to be forced to attempt the collection of tlie paper under such circumstances, and a burden upon him which could' not have been within the contemplation of the parties to the con- tract. The pledgee, instead, being forced to incur the trouble, expense, and hazard of pursuing the maker of the paper pledged through the courts of a foreign country or state, is allowed to go into equity for a foreclosure and sale of the note for whatever it will bring in the market at a judicial sale. The pledgor must necessarily have due notice of the proceeding, and if the security brings an inadequate price at the sale, it is his misfortune, which he might have guarded against by a proper stipulation in the contract.^ 656. In Texas a creditor holding negotiable paper as col- lateral security, may collect it at maturity, and apply the pro- ceeds to the payment of the debt, even after the death of the debtor; although, in this state, a mortgagee or lien-holder is re- quired to prove his claim against the estate of the deceased, and ask the aid of the Probate Court to enforce the lien. The pro- bate laws suspend the right of a mortgagee or lien-holder to sell the property by making the lien subordinate to other claims ; but these laws do not apply to a creditor who holds negotiable paper of a third person as security, and thus has in his own hands that which may be treated as so much money, and appro- priated to the payment of the debt secured.'^ If, however, such paper prove to be uncollectable, and the creditor be driven to treat it as mere personal property, pledged to secure a debt, and to invoke the aid of the courts in enforcing his lien by sale, then the matter might come within the reach of the probate laws.^ 657. An ordinary mortgage and note, or bond, cannot be sold by the pledgee on default any more than a promissoiy note alone may be sold ; but, of course, such a sale may be made by 1 Donolioi; r. Gamble, 38 Cal. 310. « Iluyler v. Dalioney, suj)rci, per 2 Iluyler o. Dahoiiey, 48 Tex. 234; Gould, J. Morpliy V. Garrett, lb. 24 7. 489 § 658.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. force of an express agreement by the pledgor,^ and power to negotiate a note and mortgage for tlie purpose of satisfying the principal debt, is held to authorize their sale.^ If a mortgage be transferred as collateral security for an amount less than its face, and tlie pledgee refuse to foreclose it after maturity, the pledgor may maintain an action of foreclosure. He has an in- terest in the mortgage, and is not restricted to the remedy of tender or repayment. The pledgee will be protected in his rights in such foreclosure suit by an order that he shall be first paid out of the fund derived from the sale of the mortgaged property.^ A non-negotiable warrant or order upon a town or city is sub- ject to the same rule, and cannot be sold by the pledgee, or a Court of Chancery at his instance. It must be collected.* A non negotiable order upon a private corporation is also sub- ject to the same rule.^ 658. But a mortgagee of a note, or of a note and mort- gage, may sell the security upon his debtor's default, because, in case of a mortgage, the title vests absolutely in the mortgagee upon default, and, unless restrained by. statute, he may deal with the mortgaged property as his own ; he may sell it without formal foreclosure.^ If, therefore, a note and mortgage be assigned as security by an assignment conditional in form, and therefore, in fact, a mort- gage, the assignee may sell the note upon default of the assignor in paying the debt secured, without being liable to the assignor as for a conversion of the note.'' ^ Fletcher v. Dickinson, 7 Allen est in the pledge, by the proceeding to (Mass.), 23; Morris Canal & Banking enforce It as against the debtor in the Co. J'. Fi^her, 9 N. J. Eq, G67, 701, pledge." And see Newport & Cin- per Elmer, J. cinnatl Bridge Co. v. Douglass, 12 2 Frak.r i'. Reeve, 36 Wis. 85. Bush (Ky.), 673. 3 Binliiijanie v. Parce, 12 Hun (N. * Whitteker v. Charleston Gas Co. Y.), 140; Wells v. Wells, 53 Vt. 1, 5, 16 W. Va. 717. per Baniett, J. : " The court would ^ First Nat. Bank of Wellsburg v. see to It that the rights and interests Kimberlands, 16 W. Va. 555. of the pledgee were protected in refer- " Jones on Chattel Mortgages, ence to the collateral, at the same time §§ 699-712. that the pledgor was acting in regard ' Fraker i'. Reeve, supra. to his own existing reversionary inter- 490 COLLATERAL PAPER CANNOT BE ENFORCED BY SALE. [§§ 659, 660. 659. One holding a mortgage as collateral security may- foreclose it upon a breach of the condition. If the foreclosure be by sale the pledgee holds the proceeds of the sale in place of the mortgage. If the foreclosure be a strict foreclosure, or be by writ of entry, or by entry and possession, the pledgee there- after holds the land as security in place of the mortgage upon it. The foreclosure does not work a payment of the priiKtipal debt. In case the foreclosure has resulted in giving the pledgee the possession and title to the land, the pledgor has the right to redeem the land upon paying the debt for which the pledge was made, so far as this has not been paid by the rents and profits of the land. The pledgee holds the land by title absolute as against the mortgagor, but as security merely as against the pledgee. Accordingly, where a mortgage for four thousand dollars was assigned as collateral for a loan for two thousand dollars, with an agreement that the lender, on receiving payment of the mort- gage, would pay to the borrower the excess above the amount of the loan, and there was no agreement about foreclosure, and sub- sequently the lender foreclosed the mortgage without making the borrower a party, and himself purchased the premises at the foreclosure sale, for the amount of the principal debt, and after- wards sold the premises for five thousand dollars, it was held that the borrower was entitled to recover of the lender the value of the mortgage, or the amount of its proceeds, less the amount of the principal debt secured. The equitable interest which the borrower retained in the mortgage attached to the land upon the purchase of it by the lender, and the borrower was entitled to the surplus above the loan secured, upon the sale of the land by the lender for more than the amount of his claim.i 660. A pledgee's interest by foreclosure of the mortgage becomes a mortgagee's interest. The pledgee beconies a mort- gagee. The land in his hands is affected by a trust, to convert it into money, and pay over any balance of the proceeds remaining after payment of the debt due from his debtor to hiui, or, upon the debtor's payment of the debt, to release and quit-t hum the land to him.2 But, in such case, the debtor must bring his bill 1 Diilton V. Sinitli, 8G N. Y. 17G. citing Brown v. Tyhr, 8 Gi-iiy (Mass.), 2 Stevens ('. Ded ham Inst, for Sav- l.'iS; Rlontagno v. Boston & Albany ings, 129 Muss, 547, per Soule, J., 11. R. Co. 121 Mass. 212. 4'Jl §§ 661-663.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. to redeem ^vitliin twenty years from the time that possession was obtained, no interest having been paid meanwhile ; this being the period wliich equity has adopted, beyond which a mortgagor will not be admitted to redeem without special cause.^ If a pledgee holding a mortgage as collateral security fore- closes it by a suit in equity, to which he makes the pledgor a party, and the latter takes no appeal, and claims no defence, he will not afterwards be allowed any relief as regards the mort- gage or the mortgage note, on the ground that he had suffered loss through the negligence of the pledgee in not sooner enforcing the security .2 661. A pledge of any chose in action other than stocks and bonds should be enforced by collection, rather than by sale. Tluis a pledge of a contract for building a road should be enforced by collecting the amount due upon the contract.^ 662. A pledge of a savings-bank book, and of the deposit represented by it, would not ordinarily be sold under proceedings in equity ; but the court, after the failure of the administrator to pay the debt, with interest and costs, within a time designated, would appoint an officer to receive the deposit, and make proper disposition of it.* And so a pledgee of any chose in action, such as a contract for the payment of a sum of money, is ordinarily bound to collect the amount due and reimburse himself out of the proceeds.^ 663. A creditor may pursue his remedies simultaneously or successively upon the principal debt and upon the collateral obligation. If the collateral note be secured by mortgage, the creditor nuiy have his remed}^ upon this also, at the same time with the personal remedies. And in like manner he may pro- ceed to enforce any other collateral security or lien. Thus, a mechanic or contractor, having a lien under the mechanics' lien law, and also a collateral note of a third person, to secure him for work done, may simultaneously enforce the principal debt, the collateral note, and the statutory lien by legal proceedings 1 Jon'^s on Mort Wri'^ht v. Crockery Ware Co. 1 Noel V. Murray, 13 N. Y. 167; and N. II. 281 ; Whitney r. Coin, 20 lb. see Burlington Gas Light Co. W.Greene, 354; Noel v. Murray, 13 N. Y. 167, 22 Iowa, 508. In Youngs v. Staheiin, per Miirvin, J. 84 N. y. 258, there is a dictum by " Atlantic F. & M. Ins. Co. r. Boies, Smith, J., that the presumption is that 6 Duer (N. Y.), 583. 607 § 688.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. meiit of the collaterals, which are less in amount than the debt, ■will be considered as intrinsically improbable.^ The fact that a pledgee of corporate stock has voted upon it at a stockholders' meeting does not show that he has agreed to accept it in payment of the debt, nor does it constitute a conversion of the stock.^ Af- ter a creditor has obtained judgment upon the collateral note, and transferred this to his debtor, and the latter has received the benefit of it, he is estopped from setting up the defence tliat the collateral note was taken by the creditor towards payment of the debt.3 The taking of a note of a third person for an existing debt is deemed a conditional and not an absolute payment of the original debt, unless otherwise agreed between the parties.^ 688. There is a distinction, however, between a note of a third person taken for an antecedent debt, and one accepted for property sold; for wliile a note taken for an antecedent debt is regarded only as a conditional payment, and in effect operates as collateral security, a note taken for goods sold is a payment.^ In Whitbeck v. Van Ness,^ where a note of a third person was taken upon the sale of a horse, and the note not being paid at maturity, the vendor brought suit against the purchaser for the 1 Brown r.Hiatt,l Dill. 3 72; Kiser v. Mundal, 1 Salk. 124; S. C. 12 V. Ruddick, 8 Blackf. (Ind.) 382 ; Kel- Mod. 203 ; Ward v. Evans, 2 Ld. sey V. Rosborough, 2 Rich. (S. C.) Raym. 928; Owenson r. Morse, 7 T. 241. R. 60; Whitbeck v. Van Ness, 11 2 Heath y. Silverthorn Lead Mining Johns. (N. Y.) 413; Breed v. Cook, & Smelting Co. 39 Wis. 146. 15 lb. 241; Noel v. Murray, 1 Duer 8 Hulin^s V. Lykins, 50 Mo. 399. (N. Y.), 385; Ferdon ?;. Jones, 2 E. D. 4 Kephart v. Butcher, 17 Iowa, 240; Smith (N. Y.), 106; Rew v. Barber, 3 Muldon r. Whitlock, 1 Cow. (N. Y.) Cow. (N. Y.) 272 ; Wise v. Chase, 44 290, 30G; Whitbeck r. Van Ness, 11 N.Y. 337. In Clark i'. Mundal, sj/pra, Johns. (M. Y.) 408 ; Johnson u. Weed, Lord Holt said, that if A. sells goods 9 lb. 310 ; Glenn v. Smith, 2 G. & J. to B., and B. is to give a bill in satis- (Md.) 493 ; McConnell v. Stetfinius, 2 faction, B. is discharged though the Gilm. (111.) 707 ; Shipman r. Cook, 16 bill is never paid, for the bill is pay- N. J. Eq. 251; Tobey v. Barber, 5 nient; but oiherwise a bill should Johns. (N. Y.) 68; Butler i'. Haight, 8 never discharge a precedent debt or Wend, 535; Vail v. Foster, 4 N.Y. contract; but if part be received, it 312; Partee v. Bedford, 51 Miss. 84 ; shall be only a discharge of the old Taylor y. Conner, 41 lb. 722; Guion debt for so much. Bayard v. Shunk, V. Doherty, 43 lb. 538; Lear v. Fried- 1 W. & S. (Pa.) 92; Bicknell v. Wa- lander, 45 lb. 559. terman, 5 R. I. 43. 6 Emly V. Lye, 15 East, 7, 12 ; Clark « 11 Johns. (N. Y.) 409, 413. 508 NEGOTIABLE PAPER TAKEN IN PAYMENT. [§ 689. price, the court said : " The intrinsic circumstances of this case plainly show that the plaintiff considered himself as taking the note at his own risk. It was made payable to the plaintiff him- self, and the defendant, by not indorsing it, or guaranteeing the payment, clearly declined pledging his own responsibility. The offer was made of the note for the horse ; the plaintiff took time to consider whether it was advisable to take the note, and, after deliberation, and we must presume, too, after inquiry, agreed to sell the horse for the note." In like manner, in Breed v. Cook,i it was considered that the purchaser's declaration, that he would not indorse the note, authorized the presumption that the note was taken in absolute payment. In accepting such a note with- out the purchaser's indorsement, the seller is considered as part- ing with his goods for the note, and as relying exclusively upon the credit and solvency of the parties thereto, and as waiving recourse upon the buyer, if it should turn out not to be good. In the cases mentioned it would seem that it was a matter of agree- ment, either express or to be implied from circumstances, that the transfer of the note at the time of the purchase of property should operate as payment absolutel3^ Of course it would be competent for the parties to agree that such a transfer should operate only as collateral security, and such an agreement might also be inferred from circumstances attending the transaction. 689. Of course the parties may, by express agreement, make a third person's note payment of an existing demand. Thus, where a debtor offered to deliver to his creditor such a note, or to pay him the money at an early date, and the creditor chose the note, and thereupon received it and credited it to the debtor, the note was held to have been received in payment.''^ When, upon a sale of goods, the note of a third person is ex- pressly received in payment, the purchaser's indorsement of the note does not change the legal effect of the transfer as payment. ^ 15 Johns. (N. Y.) 241 ; and see it does not become a new security." Bank of England v. Newman, 1 Ld. And see Union Bank of Tennessee v. Raym. 412; S. C. 12 Mod. 241, per Smiser, 1 Snced (Tenn.), '^Ol; Long Lord Holt, C. J. "If a man has a v. Spruill, 7 Jones (N. C.) L. 90. bill payable to him or bearer, and he ^ gt, John v. Purdy, 1 Sandf. (N. delivers it over for money received, Y.) 9; and see Mosley v. Floyd, SI without indorsement of it, this is a Ga. 5G4 ; Union Bank of Tennessee v. plain sale of the bill, and he who sells Smiser, supra. 509 § 690.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. The vendor cannot in such case maintain an action for the price of the goods, although he produces the note and offers to sur- render it upon the trial. In such case, the only engagement made by the purchaser is that of a commercial indorser. In strictness, he does not agree to pay for the goods, but agrees that, if the note be not paid upon due demand thereof at maturit}"^, he will, on receiving due notice, pay the same. " The vendor may sell and does sell upon any terms that please him, and his con- tract of sale is a single contract. If by that contract he gives his goods for half their value, he is bound. If he gives them for a note of the purchaser, he must abide its tenor. If he sells for the note of a third person, it is a mere exchange of property, and he cannot look to the purchaser. If he requires a guaranty, general or conditional, he must pursue it. If he requires the purchaser to indorse the note for which he makes the sale, he holds such pur- chaser's liability as indorser, and nothing more." ^ The circum- stance that the purchaser of goods, in transferring to the seller the note of a third person, with a view to add his own responsibility, indorses thereon an absolute guaranty, is evidence, and perhaps conclusive evidence, that the note was given and received in pay ment.^ 690. The inclination of courts to regard the obligation of a third person as collateral security, when there is no express agreement that it shall be taken as payment, is shown in the fol- lowing case : A farmer desiring to obtain a loan of two thousand dollars to pay off two mortgages upon his farm, one of which was not then due, negotiated for a loan of that sum upon a first mort- gage of the farm. The lender applied to his own banker for the money ; but the banker, though owing him more than that sum, could not well pay this amount at once, and it was therefore ar- ranged that one half the amount should be paid over to the bor- rower, out of which one of the mortgages should be satisfied, and that the banker should give his certificate of deposit for the re- maining half, payable to the order of the borrower at the time the other mortgage should become due ; and tlie lender took a mortgage for two thousand dollars upon the farm. The banker failed before the certificate of deposit became payable, and upon 1 Sofie V. Gallagher, 3 E. D. Smith 2 Monroe i;. IIo£f, 5 Denio (N. Y.), (N. Y.), 507, per Woodruff, J.; and 3C0. see Shipnian v. Cook, IG N. J. Eq. 251. 510 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§§ 6 1,692. the question whether the certificate of deposit was received as paj'ment or as security only, it was held that the fair inference from all the facts was that it was only held as collateral, and that the loss upon the certificate should be borne by the lender.^ 691. But in the absence of any agreement, either express or implied, the transfer of a note of a third person at the time of the purchase of property is presumed to be a pay- ment.2 " Where there is no debt existing between the parties, and the one delivers property to the other, and receives in return the note of a third person in full or part payment, and gives a receipt saying that it is received in full or part payment, the presumption is that it was so received, and the onus is then upon the p:irty receiving such note to show the contrary." 3 If a purchaser deliver the note of a third person for goods purchased, knowing that the maker is insolvent, but representing him as a man of property, the taking of the note under such fraudulent misrepresentation will not be held to be payment for the goods.* But knowledge of the fact that the maker of a note given in exchange for merchandise had asked and obtained from one of his creditors a renewal of one of his notes, without security, alleging as an excuse — a fair one for a small manufacturer — that he had been short of water, is far from being knowledge of the insolvency of the maker, or of a fact from which insolvency should reasonably be inferred.^ V. Diligence in Collecting Collateral Paper. 692. A pledgee of negotiable paper is bound to use reason- able diligence in the collection of it.^ The diligence required of 1 Burrows v. Bangs, 34 Mich. 304. Roberts v. Thompson, 14 Ohio St. 1; 2 Partee v. Bedford, 51 Miss. 84; Muirhead v. Kirkpatrick, 21 I'a. St. Bayard t?. Sliunk, IW. & S. (Ta.) 92. 237; Sellers v. Jones, 22 lb. 423; « Noel V. Murray, 13 N. Y. 1G7, per Lyon v. Huntingdon Bank, 12 S. & R. Dean, J.; and see i^. C. 1 Duer, 335, (Pa.) Gl, G7; Miller r. (Gettysburg per Oakley, C. J. Bank, 8 Watts (Pa.), 1U2; BanH of U. * Wilson V. Force, G Johns. (N. Y.) S. v. Peabody, 20 Pa. St. 454 ; J^ishy HO. r. O'Brien, 4 Watts (Pa.), 141; Girard 6 Burgess v. Chapin, 5 R. I. 225. F. & M. Ins. Co. v. Marr, 4G Pa. St. « Ex parte Mure, 2 Cox, G3; VVil- 504; Lamberton v. Windoni, 12 Minn. Hams V. Pi ice, 1 Sim. & Stu. 681; 232; ii. C. 18 lb. SJJG; Cul(iuilt v. Lawrence v. McCalmont, 2 How. 42G; Stultz, G5 Ga. 305; Blouint'. Hurt, 30 Slevin v. Morrow, 4 Jnd. 425; Ki^cr La. Ann. 714. V. Ruddick, 8 Blackf. (Ind.) 382; 511 § 693.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. him is the same in effect as that required of an agent or attorney employed to collect the demand.^ In the first place, he is bound to exercise this diligence in fixing the liability of the parties to such paper, when necessar}^, by due demand of pa^nnent and notice of non-payment ; ^ and, in the next place, he is bound to exercise this diligence in the collection of the paper. If he neglects, after the maturity of the paper, to enforce payment, he is liable to the pledgor for any loss upon the paper which might have been prevented by proper diligence in proceedings to collect it.^ The creditor is not excused from attempting to collect a bill or note taken as collateral security, on the ground that the maker has declared that he has a defence which he will interpose.^ 693. Reasonable diligence upon the part of the creditor in making demand and giving notice, so as to preserve the legal liability of indorsers of the collateral note, is preliminary to diligence in enforcing payment of the note at maturity, and the requirements in both cases rest upon the same principle, and are of equal obligation.^ The reason for thus requiring the preserva- ^ Buckingham v. Payne, 36 Barb. (N. y.) SI Tllazard v. Wells, 2 Abb. (N. Y.) X. C. 444; Kephart v. Butch- er, 17 Iowa, 240; Lawrence v. Mc- Calmont, 2 How. 426. For a case of an attorney taking collateral for a claim in his hands for collection, and agreeing with the debtor to collect the security, see Bradford v. Arnold, 33 Tex. 412. 2 Foote V. Brown, 2 McLean, 369; Peacock v. Pursell, 14 C. B. (N. S.) 728; ISl'LugLan v. Bovard, 4 Watts (Pa.), 308; Ornisby v. Fortune, 16 S. & R. (Pa.) 302; Russell v. Hester, 10 Ala. 535; Charter Oak Life Ins. Co. V. Smith, 43 Wis. 329 ; Jennison V. Parker, 7 Mich. 355. ^ Pickens v. Yarborough, 26 Ala. 417; May v. Sharp, 49 Ala. 140; Reeves v. Plough, 41 Ind. 204; Suc- cession of Liles, 24 La. Ann. 550; Cardin v. Jones, 23 Ga. 1 75 ; Barrow V. Rhinelander, 3 Johns. (N. Y.) Ch. 614; Hall v. Green, 14 Ohio, 499; Charter Oak Life Ins. Co. v. Smith, 512 supra; Bonta r. Curry, 3 Bush (Ky.), 678; Noland i'. Clark, 10 B. Mon. (Ky.) 239; Word v. Morgan, 5 Sneed (Tenn.), 79. * Wakeman v. Gowdy, 10 Bosw. (N. Y.) 208. 5 Peacock v. Pursell, 14 C. B. (N. S.) 728. Earle, C. J., said: " The legal effect of taking a bill as collateral security is, that if, when the bill ar- rives at maturity, the holder is guilty of laches, and omits duly to present it, and to give notice of its dishonor, if not paid, the bill becomes money iu his hands as between him and the person from whom he received it." Williams, J.: "I am of the same opinion. The laches of the plaintiffs in not duly presenting the bill constituted this a payment before action brought." Willes, J.: "I am of the same opinion. If a creditor, when the bill falls due, is guilty of laches, whereby the se- curity becomes deteriorated or value- less, it becomes equivalent to actual payment." DILIGENCE IN COLLECTING COLLATERAL PAPER. [§ 693. tion of the legal validity of the pledge by the pledgee must be for the purpose of preventing its pecuniary value from being impaired, and because the pledgee only can do it. Upon what principle, then, can it be said that the pledgee is not required to use ordinary diligence to preserve the pledge from loss by the in- solvency of third parties who are liable thereon ? It is to be observed that it is not the insolvency of the debtor himself that is to be guarded against, but that of a third person ; the great object in both cases is to preserve the pecuniary value of the property ; to do this, active measures involving expense are re- quired in the one case and are necessary in the other ; the same degree of diligence is required in each case, and in both the pledgee alone can resort to the means necessary for the preserva- tion of the pledge. But further, if the pledgee is not bound to do this, the debtor may be left entirely without remedy. A note given as collateral security may be due long before the principal debt matures. In such case the creditor is not bound to receive the debt until it is due, yet he has entire control of the collateral security, which may be the note of a third person who is on the eve of insolvency, and the creditor refuses to preserve the col- lateral security by its collection ; the hands of the debtor are tied ; he is in no default whatever, yet he must stand b}^ and see his property becoming utterly worthless by the insolvency of the maker of the note ; or if a remedy exists, it is to compel the creditor to active measures for the preservation of the debt, which is the very ground of objection to this defence. " In case of an ordinary pledge of tangible personal property, the pledgee is bound to ordinary diligence in the preservation of the property, whether it be perishable or not. What would be ordinary diligence in one case would not be in the other; but the diligence is required, whatever may constitute it. The identical property, when it can, must be preserved ; but if it cannot, then the value must be preserved. Why will not the same rule apply to bills, notes, bonds, and other choses in action ? It is not alone the bill, note, or bond that is pledged, for those are but the evi- dence of the indebtedness, but the indebtedness itself is the sub- stantial matter of the pledge : it is as capable of protection as the paper or contract which is the evidence of it ; the latter may be lost without impairing the former, but if the former is lost the latter is valueless. The indebtedness, then, is the substantial aa 613 § 694.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. pledge ; and as men in the exercise of ordinary care generally pre- serve property of their own of this character, they may also by the same care preserve it when it is the subject of a pledge ; and as between the parties to a contract of pledge like the one under consideration, we see no reason why the pledgee is not answer- able when the pledge is lost through his negligence." ^ In the exercise of such ordinary care and diligence to preserve the col- lateral note from being lost by reason of the insolvency of the maker, it is requisite that the pledgee shall resort to active ef- forts to collect the note by action.^ The ground of a creditor's liability for a loss to his debtor, occurring through the creditor's negligence in enforcing the col- lateral security, is said to rest in the privity in contract between the debtor and creditor, established by the debtor's assignment of the collateral, which invests the creditor with the ownership of the collateral, for all pui-poses of dominion over the debt as- signed. He alone is empowered to receive the money to be paid upon it, and to control it, in order to protect his right under the assignment.^ 694. A delay of three days after the maturity of a draft held as collateral before presenting it for payment renders the holder liable for a loss occasioned by the insolvency of the drawer occurring immediately after this.^ " The fair construction of the contract of the parties is, that the creditor will use proper dili- gence in the collection of the security, and will account for the same, and he is certainly forbidden such negligence as shall pro- duce loss to the debtor who transfers the paper to him. His duties arise out of the transaction. He receives from his debtor a draft or negotiable paper, which, by law, is due on a certain day. It is his duty to present the paper for payment on that 1 Lamberton v. Windom, 12 Minn. 3 Hanna v. Holton, 78 Pa. St. 334, 232, 247, per McMillan, J. per Agnew, J. ; Lyon v. Huntingdon 2 Whitin V. Paul, 13 R. I. 40 ; Bank,^ 12 S. & R. (Pa.) 61, 68, per Wakeman v. Gowdy, 10 Bosw. (N. Tilghnian, C. J. ; Beale v. Bank, 5 Y.) 208; Slevin v. Morrow, 4 Ind. Watts (Pa.), 529. 425; Lyon v. Huntingdon Bank, 12 ^ Betterton t'. Roope, 3 Lea (Tenn.), S. & R. (Pa.) 61; Hoard v. Garner, 215; Smith v. Miller, 43 N. Y. 171; 10 N. Y. 261; Williams v. Price, 1 S. C. 3 Am. Rep. 690. S. & St. 581 ; Mure, ex parte, 2 Cox, 63. 514 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§§ 695, 696. day, and, as he has the indorsement of his debtor on- the paper, he ought probably to give him notice of the faihire to pay ; cer- tainly so if he seeks to hold him on the paper or his indorsement. The question of notice to the indorsing debtor in this case is not, however, material. The question is whether there was a neglect of duty on the part of the creditor receiving the draft, by reason of which the debtor has been injured. That this is true is beyond question. If the creditor had received of his debtor a check and failed to present it, the principle would have been the same precisely." ^ 695. A pledgor is not entitled to strict notice of the dis- honor of a collateral note, which he has not indorsed, but has delivered without indorsement, or has caused to be made payable directly to his pledgee.^ Although the pledgor in such case con- tinues liable for his own debt in the event of a failure of the maker of the collateral note to pay it, yet he is not, within the custom of merchants, an indorser of it, so as to be entitled to strict regular notice of non-payment. He is not subject to the obligations nor entitled to the advantages which belong to a party to negotiable paper. He stands rather in the position of a guarantor. His original liability remains as it was ; and he can avail himself of the negligence of the pledgee to give him notice of the dishonor of the collateral note only to the extent of the loss he may have suffered thereby. If he has suffered no loss by reason of delay or failure to receive notice of the dishonor of the collateral paper, he cannot avail himself of this as a defence to his liability to his creditor. 696. The collateral security should be in hand in making demand upon the maker of a note in order to charge an indorser ; for it may be essential to have the collaterals deposited as security for the note in readiness to deliver up at the time, if the maker demands them. Thus, a demand by a notary upon the maker of a note which contains a statement that certain negotiable bonds had been deposited as collateral security is insufficient to charge an indorser, if the maker at the time of the demand asks for a return of the collaterals, and states that he is ready and willing 1 Bettcrton V. Roope, 3 Lea (Tenn.), ^ Chitty on Bills, 441, 498; Hunter 215, per Freeman, J. v. Moul, 98 Pa. St. 13. 615 §§ 697-700.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. to pay the note on production of the collaterals, and refuses to pay solely on the ground that they are not produced. It is as much the right of the maker to receive the collaterals upon the payment of the note, as it is to receive a surrender of the note itself ; and it would be unreasonable to require him to pay such a note in the absence of the collaterals, and trust to his legal remedies against the holder to recover them.^ 697. The neglect or omission of an officer of government, who has received a note as collateral security for a debt due the state, to perform the duties which the law, in ordinary cases, imposes upon a party so receiving a note, cannot be taken advantage of by the debtor. And it would seem that even if the officer expressly assumed the responsibility of prosecuting such note to judgment, the state would not be responsible for his laches. 2 698. The character of the transaction is a question of fact for the jury when the circumstances of the case leave it in doubt whether a note was deposited as collateral security or merely for the convenience of the owner; as, for instance, where a note was payable in metal, and the owner left it in care of a creditor, and the owner contended that the note was de- posited as collateral security ; but the creditor claimed that he received it merely for the owner's convenience, that the metal in which it was payable might be received by him and accounted for by credit on book account.^ 699. The insolvency of the maker of the collateral note has been held not to dispense with a demand of payment within a reasonable time, for the reason that the maker may pay this particular debt, although he is unable to pay all his debts, or is without visible property.^ 700. What constitutes negligence in the collection of such collateral security is a question of fact to be determined 1 Ocean Nat. Bank of N. Y. v. » Sellers v. Jones, 22 Pa. St. 423. Eant, 50 N. Y. 474. * Stocking v. Conway, 1 Port. 2 Seymour v. Van Slyck, 8 Wend. (Ala.), 260, (N. Y.) 403. 516 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§ 700. according to the circumstances of the case.^ Greater dih'gence may be required in case the creditor is aware that the maker of the collateral paper is in embarrassed circumstances, than would be required in case the maker were supposed to be wholly re- sponsible.2 A delay to collect which would amount to negligence in the former case, might not be so in the latter. Diligence which is reasonable under the circumstances of the case, and not extraordinary diligence, is wbat is required.^ Ordinary care and diligence must be used,* and the circumstances of the case are to be considered in determining the extent of this responsibility. This responsibility is not determined by the strict rules of com- mercial law applicable to negotiable paper ; but rather by the principles of the general law of agency.^ Negligence of the creditor in collecting collateral security may be taken advantage of by the surety of the principal debt as well as by the principal debtor himself,^ but a general creditor can- not complain.'^ The creditor's obligation to collect the collateral ceases upon the payment to him of the principal debt. It is his duty then to return the collateral to his debtor.^ A creditor holding negotiable paper as collateral security is required to use a different kind of diligence from that required of one holding merchandise or other corporeal property ; and yet the diligence in each case is only such as is appropriate to the nature of the property. If the property be precious stones, safe 1 Word?;. Morgan, 5 Sneed(Tenn.), Ann. 344. " The duty of a pledgee 79 ; Bufkingliam v. Payne, 36 Barb, cannot be considered as more onerous (N. Y.), 81 ; Sellers v. Jones, 22 Pa. and stringent than that of an agent; St. 423; Davis v. Alston, 61 Ga. 225. and the law is well settled that where, But it is sometimes said that the de- in the course and from the nature of gree of diligence required under the the business, it becomes necessary to cii'cumstances of the case is a ques- employ sub-agents, by reason of their tion of law. Wakeman v. Gowdy, 10 particular profession or skill, the agent Bosw. (N. Y.) 208. will not, in such cases, be responsible 2 Slevin v. IMorrow, 4 Ind. 425. for the negligence or misconduct of 2 Slevin r. Morrow, supra; Kiser v. the sub-agent, if he has used reason- Ruddick, 8 Blackf. (Ind.) 382; Whitin able diligence in his choice as to the V. Paul, 13 R. I. 40. skill and ability of the sub-agent." 4 Roberts v. Thomson, 14 Ohio St. Per Slidell, J. 1 ; Whitin v. Paul, supra. So by stat- ^ Hoffman v. Johnson, 1 Bland ute in Georgia, Code 1873, § 2145; (Md.), 103. Cardin v. .Jones, 23 Ga. 175. "< Dyott's Estate, 2 W. & S. (Pa.) ^ Roberts v. Thompson, supra; 463. Commercial Bank, i'. Martin, 1 La. » Qverlock v. Hills, 8 Me. 383. O 17 §§ 701, 702.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. keeping is all that is required. If it be grain, it must be prop- erly stored and protected from all injury. The diligence required of the holder of promissory notes or other securities for the pay- ment of money has reference to the danger that the parties liable on them may become insolvent and unable to pay. A prudent business man will collect such obligations when they are due, or will endeavor to enforce them by suit ; if, therefore, a creditor neglects to enforce the collection of such securities held in pledge, and delays till the parties liable become insolvent, he is as much guilty of neglect as if he had suffered grain held in pledge to be destroyed by dampness or heat for lack of proper storage. ^ Negligence which will discharge the drawer or indorser of a bill of exchange will make one who holds it as collateral security liable for the loss. 701. Whether the creditor's negligence conclusively makes him liable, as, for instance, whether his failure to protest a note for non-payment at maturity so as to charge an indorser thereby conclusively makes the paper his own, or whether he may show that bis debtor sustained no actual damage by failure to charge the indorser, for the reason that the indorser was insolvent when the paper matured, and has continued so up to the time of trial, — is a question upon which the authorities are not agreed. On the one hand, it is claimed that to allow such evidence would in- troduce an element of uncertainty as to the rights and liabilities of parties to negotiable paper, and give rise to much needless litigation. Moreover, the paper may be valuable to the pledgor by way of set-off, although uncollectable by the pledgee. Upon this ground, it is held in Michigan that the creditor is in every case chargeable with the amount of the note.^ 702. On the other hand, it is held that actual loss or prejudice to the pledgor is the criterion of the pledgee's lia- bility for failure to charge the indorser,^ or for negligence in prosecuting the collection of the collateral. Mere neglect on 1 Hazard v. Wells, 2 Abb. (N. Y.) dissenting ; Phoenix Ins. Co. v. Allen, N. C. 444, per Smith, J. 11 lb. 501. 2 Whitten v. Wright, 34 Mich. 92 ; « Story on Notes, § 405; Chitty on Rose tJ. Lewis, 10 lb. 483, 485; Jenni- Bills, 441, 498; 2 Parsons on Bills son D. Parker, 7 lb. 355, Campbell, J., and Notes, 184; Cumber u. Wane, 1 518 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§ 702. the part of the creditor in collecting the securities, without proof that loss has occurred through such neglect, will not make the securities his own.i In Kephart v. Butcher,^ Judge Dillon, after examining the conflicting authorities upon this question, said it was one difficult of determination upon authority, but easy of solution upon reason and principle, and declared the opinion of the court to be that the better and true rule and criterion are actual loss or prejudice ; and consequently the creditor who has taken the note of a third person for a preexisting debt is not debarred from resorting to the original consideration, although he has not presented the instrument nor given notice of its dis- honor, provided he can clearly and satisfactorily show that the debtor has not, in consequence of such omission, sustained any injury. It would seem that, in order to hold the creditor liable for negligence or delay in enforcing the collateral note, it should be made to appear that the maker of that note was solvent at the time it matured, and afterwards became insolvent.^ " There is a distinction taken between the liability of a creditor to a princi- pal debtor for negligently failing to collect collateral securities pledged by such debtor, and the liability of a creditor to a surety for neglecting to proceed against a principal. We can, however, conceive of no reason why the rule, which in the latter case re- quires that, in order that the creditor be held liable, the principal debtor should be solvent at the time when the surety requests the creditor to proceed against him, should not apply in principle in the former case. In the case of Herrick v. Borst,* it is said. Smith's Lead. Cas. 8th Eng. ed. 357; 519; Aldrich v. Goodell, 75 111. 452; Chaniberlyn v. Delarive, 2 Wilson, Steger v. Bush, S. & M. (Miss.) Ch. 353; Wardu. Evans, 2Ld. Raym. 928; 172, 189. "Something more than Van Wart v. Woolley, 3 Barn. & C. mere delay is necessary in such cases ; 439 ; Peacock v. Pursell, 14 C. B. (N. because mere delay, i£ no loss followed S.) 728; Clark v. Young, 1 Cranch, as a consequence thereof, could not 181; Kephart v. Butcher, 17 Iowa, be made the foundation of any com- 240; Powell v. Henry, 27 Ala. 612. plaint on the one hand or of responsi- See dissenting opinion of Campbell, J., bility on the other." Per Buckner, in Jennison v. Parker, 7 Mich. 361; Chancellor. Grove V. Roberts, 6 La. Ann. 210; 2^7 lo^a, 240. Hunter u. Moul, 98 Pa. St. 13 ; Hanna ^ Lamberton v. Windom, 18 Minn. V. Ilolton, 78 Pa. St. 334; Westphal 606, 514; S. C. 12 lb. 232; Westphal V. Ludlow (C. C. D. Minn. 1881), 6 v. Ludlow, supra. Fed. Rep. 348. ■» 4 Hill (N. Y.), 650, 653. 1 Gilbertj;. Marsh, 12 IIun(N.Y.), 519 § 703.] BEMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. ' The question to be decided is, whether under our rule for the protection of sureties a jury should be allowed to speculate on the event, and bar the creditor accordingly, as they may guess that the suit against the principal would have been successful or not. I understand the rule to be, not that the jury can appraise the possibility, and relieve the surety in proportion to the value of the chance, but that if the principal was solvent when the notice was given, and the neglect to sue be followed by subse- quent insolvency, the whole action is barred.' It seems to us that these reasons for making the solvency of the principal necessary to the creditor's responsibility to the surety apply with equal force in a case like this at bar. There is the same danger and impropriety in the latter as in the former, in permitting a jury to speculate upon the chances of success in collecting a debt of a person who is not solvent; a person, according to the definition given in the case cited, who is not able to pay all his debts from his own means, or whose property is not in such a situation that all his debts may be collected out of it by legal process. To make the liability of the creditor depend upon his ability to col- lect from a person in this condition would be, it seems to us, to ingraft an element upon commercial law altogether inconsistent with its characteristic and necessary certainty." ^ If the debtor has in his hands good security for the payment of the collateral note, he cannot be prejudiced by the failure of the pledgee to protest the note, and in that case the pledgee can- not be held liable for his neglect.^ 703. If it appears that upon the maturity of the collateral note it could not have been collected except b}^ the exercise of extraordinary diligence, or if a suit brought upon it as soon as it matured, and prosecuted with reasonable diligence to judg- ment and execution, would not have resulted in the collection of the note, in the absence of a demand by the debtor that such a suit be brought, the creditor in a suit upon the principal debt will not be prevented from recovering because he did not attempt to collect the collateral.^ 1 Lamberton v. Windom, 18 Minn. ^ Marschuetz v. Wriglit, 50 Wis. 506,515, per Berry, J. 175; Westphal v. Ludlow (C. CD. 2 Kephart v. Butcher, 17 Iowa, 240. Minn. 1881), 6 Fed. Rep. 348. 520 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§§ 704-706. 704. If the pledgor desires a prompt collection of the col- lateral, he should demand this ; and unless he do this the pledgee is not bound to act immediately upon the maturity of the principal debt, but only to exercise ordinary diligence and a reasonable discretion in the matter.^ 705. The burden is upon the debtor to show that the cred- itor has, by his negligence in collecting the collateral security, oc- casioned a loss.^ When Si primd facie case of negligence in the creditor is shown, the burden is then cast upon him to show some excuse for his failure to collect the security. Such 2i ])rimd faeie case is made out by proof that the creditor, to whom a loss upon a policy of insurance was payable, neglected, for a month after the loss was adjusted and payable, to collect the amount, during which time the insurer was able and willing to pay, but after- wards became insolvent, and most of the insurance money was lost.3 706. Delay by a creditor to bring suit upon the collateral for three months may make him liable for a loss occurring mean- while, through the insolvency of the parties liable upon it ; and it is no excuse for such delay that a defence to the collateral ob- ligation is threatened.* Neither is it any excuse that the maker of such collateral resides in another state. ^ But a delay for five months to collect a note payable on de- mand, taken as collateral security for a debt payable on demand, was held not to make the creditor chargeable with a loss occur- ring through the insolvency of the maker of the collateral note, where the maker was supposed to have ample property and not to be embarrassed, and the debtor had not requested his creditor to collect the note.^ 1 Cherry v. Miller, 7 Lea (Tenn.), 3 Charter Oak Life Ins. Co. v. 305. Smith, 43 Wis. 329. 2 Girard F. & M. Ins. Co. v. Marr, * Wakeman v. Gowdy, 10 Bosw. 46 Pa. St. 504; Sellers v. Jones, 22 (N. Y.) 208. lb. 423; Covely v. Fox, 11 lb. 171; ^ Burt v. Horner, 5 Barb. (N. Y.) Vose V. Yulee, 4 Hun (IST. Y.), 628; 501. See, however, Noland v. Clark, Dugan V. Sprague, 2 Ind. 600; Kiser 10 B. INIon. (Ky.) 239. V. Ruddick, 8 Blackf. (Ind.) 382. « Goodall v. llichardson, 14 N. H. 567. 621 §§ 707, 708.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. 707. Delay with debtor's consent. — A creditor holding promissory notes as collateral security is not liable for a loss occasioned by his delay to enforce the notes until the maker be- comes bankrupt, if such delay was with the debtor's consent.^ Neither is the creditor liable to account for collaterals which were never placed in his hands or under his control, but which were placed by the debtor in the hands of a third person appointed by himself, 2 or were placed by the debtor in the hands of his own lawyer for collection.^ Neither is the creditor bound, after his lien has been discharged by payment of the principal debt, to do anything further about collecting the collateral note. Such pay- ment absolves him from all further obligation about the collat- eral except to return it to the debtor.* 708. Bad faith or faulty discretion on the part of the pledgee, in the course taken by him in respect to the collection of the collateral, must be proved in order to make him liable for any loss or depreciation that ma}' have occurred from his delay. In a case where the collateral was a mortgage and mortgage note, and the pledgee refrained for nine months from proceeding to enforce it, the pledgee having exercised good faith toward the pledgor, and reasonable judgment in collecting the mortgage, he was held not to be chargeable with the collateral as a payment upon his demand.^ Among the circumstances adverted to by the court, as showing that the pledgee was not under the necessity of proceeding sooner to enforce the collateral, were these : proceed- ings on the part of the pledgee were pending to enforce the principal debt ; the maker of the mortgage note had no property subject to attachment or execution, and the mortgage could only be enforced by strict foreclosure, which would have given the pledgee land and not money ; the land moreover was incumbered by a prior mortgage, which the pledgee would have been obliged to redeem in order to hold the land, which, after he had obtained, was only a farm of inadequate and doubtful value ; and the ex- 1 Runals v. Harding, 83 111. 75; » Noland v. Clark, 10 B. Mon. Mitchell V. Levi, 28 La. Ann. 946; (Ky.) 239. Lee V. Baldwin, 10 Ga. 208; and see * Overlock v. Hills, 8 Me. 383. Brown V. Hiatt, 1 Dill. 372. 5 Wells v. Wells, 53 Vt. 1. 2 Bank of tlie United States v. Pea- body, 20 Pa. St. 454. 522 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§§ 709-711. pense of the foreclosure would have to be met by the pledgee ; and all the while if the pledgor had desired to have the mortgage foreclosed, he had the right to take proceedings for that purpose on his own behalf. 709. There is no obligation resting upon one who receives a note of a third person as conditional payment to bring suit upon it if it be not paid at maturity. Such is the case when a note is transferred for property purchased on an agree- ment that if the note be not collected, the purchaser is to make up the deficiency to the seller. If the note be not paid at matu- rity, and the purchaser wishes to have suit brought upon it, he may at any time pay the amount of the dishonored note, and take his own course for its collection. ^ 710. A pledgee of a judgment may be liable for a loss occurring through his negligence in permitting the lien to expire. — Such would be the case if it was within his power to continue or revive the lien, and the judgment was collectible, and the judgment debt afterwards becomes worthless through the in- solvency of the judgment debtor.^ One holding an assignment of a judgment as collateral security is not bound to collect it before the principal debt has become due, unless he has expressly agreed to do so. Therefore where a judgment was assigned, as security for the payment of certain notes, by a written assignment giving authority to the pledgee to sell it in case the notes should not be paid at maturity, and there was no provision in the assignment for the collection of the judgment before that time, it was held that evidence was not ad- missible to show a parol agreement, made at the time of the transaction, and as a part of it, that the pledgee should issue execution and collect the judgment whenever the money could be made thereon. A loss by failure to collect the judgment be- fore the maturity of the notes secured, wlien the judgment debtor had property subject to execution sufficient to satisfy it, conse- quently fell upon the pledgor.^ 711. A surety of the debt has the right to exact of the cred- 1 Dod^'e V. Stanton, 12 Mich. 408; » Hanna v. Holton, 78 Pa. St. 334. Hicc V. Benedict, 19 Mich. 132. « Bast v. Bank, 101 U. S. 93. 623 § 712.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. itor proper care and diligence in the collection of collateral security deposited with the creditor by the debtor ; and want of diligence in this respect on the part of the creditor operates to release the surety to the amount of the loss actually sustained. The creditor in such case is regarded in the light of a trustee for the surety of the property pledged.^ If, however, such security be confided to a trustee, who is the common agent of both the debtor and the creditor, the latter cannot be charged as the bailee of the trust property .^ But if he connives at any mismanagement of the property by the trustee, he may be held responsible for the result of such mis- management.^ If a pledgee sell the debt secured and assign the collateral note, and the assignee allows such note to become barred by the statute of limitations, he cannot afterwards recover of the payee as indorser of such note.* 712. A creditor is in equity entitled to the benefit of col- lateral security given by his debtor to a surety for the hitter's indemnity ; ^ and under some circumstances he may have the benefit of such security even after the surety's discharge. Thus, the maker of a promissory note having given a judgment bond to an indorser to indemnify him, the note was protested at maturity for non-payment, but due notice not being given to the indorser, he was discharged. The indorser, however, afterwards assigned the judgment to the holder of the note, in consideration of being released from all responsibility on his indorsement. This assign- ment was held to be a waiver of want of due notice, and tanta- mount to a promise to pay ; and it was further held that a sub- sequent mortgagee or judgment creditor had no equity to allege against such a waiver of want of notice in order to avoid the judgment so given for the indemnity of the indorser.^ 1 Hall V. Hoxsey, 84 111. 616, per 5 Curtis v. Tyler, 9 Paige (N. Y.), Craig, J.; Murrell v. Scott, 51 Tex. 432; Evertson v. Booth, 19 Johns. 520. (N. Y.) 486; Moses v. Murgatroyd, 1 2 Bank of the United States v. Johns. (N. Y.) Ch. 119, 129. See §§ Peabody, 20 Pa. St. 454. 523-533. 3 Murrell v. Scott, supra. e phiHips ,,. Thompson, 2 Johns. * Fennell v. McGowan, 58 Miss. (N. Y.) Ch. 418. 261. 524 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§ 713. 713. A creditor to whom a mortgage, or judgment, or other claim has been ass.igned as collateral security is in like man- ner chargeable for a loss ha23pening through his neglect to col- lect it.^ Thus it would seem that if a creditor holding a mort- gage as collateral security should omit for an unreasonable length of time, after its maturity, to cause proceedings for foreclosure to be commenced ; or if he should employ an incompetent solicitor to commence and prosecute them ; or if the proceedings, after being commenced, were unduly delayed by his own negligence or that of his solicitor, — he would be liable for the loss so happen- ing. Such was held to be the law in a case where a creditor, receiving a mortgage of a third person to collect and apply to his own claim and to pay the remainder to his debtor, covenanted expressly " to take proper means " for its collection. The cred- itor, however, delayed for several months after the maturity of the mortgage to commence proceedings to foreclose it, and then his solicitor delayed for some years, and much longer than was necessary, to bring the case to a hearing and to obtain a decree. In the Superior Court,^ Judge Sandford said : " The retainer of a competent sohcitor was undoubtedly a proper step to be taken, and, as far as it went, was a compliance with the contract. But the responsibility did not cease there ; and if the solicitor failed to pursue the proper means for collecting the securities, the de- fendant must answer for his default. It was contended that proper means were taken in this case ; that the long delay which occurred was the result of no oversight on the part of the solicitor employed ; in his judgment, it was inexpedient to proceed under the circumstances ; and his course was the true one. The good faith of the solicitor is not impeached. This, however, did not satisfy the covenant ; nor did the exercise of his judgment, if that judgment were wrong and caused unreasonable delay. We have considered the question with more than usual care and delibera- tion, and we cannot resist the conclusion that the course pursued by the solicitor was unwise, and, in respect to the defendant's duty to the plaintiff, was entirely unwarrantable." This judg- ment was affirmed in the Court of Appeals.^ 1 Beale v. Bank, 5 Watts (Pa.), Bank of Wellsburg v. Kiinberlands, 529; Ilanna v. Ilolton, 78 Pa, St. 3:}4; lb. S.'iS. Miller V. Gettysburg Bank, 8 AVatts ^ Hoard v. Garner, 3 Sandf. (N. Y.) (Pa.), 192; Whitteker v. Charleston 179, 1S9. Gas Co. IG W. Va. 717; First Nat. » Hoard v. Garner, 10 N. Y. 2G1. 625 § 714.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. Although this decision ^vas upon a covenant to use proper means to collect the mortgage, it is conceived that there is a cov- enant just to this effect implied in the taking of a mortgage as collateral security, and that the decision is applicable to such a case. 714. A pledgee is bound to use reasonable diligence in collecting the interest due on a mortgage assigned as collat- eral, but he is not responsible for the principal as well as for the interest, when the principal has not fallen due, although the mortgage contains a power of sale under which the holder is era- powered to sell upon any default in the payment of interest, and in case of such sale the principal is then made due and payable on the day of such sale. Under such a mortgage the principal does not fall due so soon as the interest is in arrear, bat only upon a sale for non-payment of interest. The only neglect of which the pledgee is guilty in such case, is neglect to collect the interest. If the pledgee had collected the interest without selling under the power, as cheaply and as speedily as he could have collected it by selling, the pledgor would have no ground of complaint. Moreover, if the pledgor had credited upon the principal debt the interest due upon the collateral mortgage, tak- ing upon himself tlie hazard of its subsequent collection, the pledgor would have had no ground of complaint.^ Chief Justice Durfee, delivering the opinion of the court, further said : " It is true she might, the interest being in arrear, have sold under the mortgages, and so made the principal paj'able, and, according to the testimony, it would have been greatly to the advantage of both herself and the complainant for her to have done so. But in our opinion it was not her duty to do so for any other purpose than to collect the interest, and therefore she is responsible only for the interest which was lost by her neglect. She had a right to suppose that the complainant was willing to let the principal run to its maturity, so long as the interest was paid or accounted for, the complainant having agreed to sucli a term of credit, the interest being paid. For a like reason, she had a right to sup- pose that the complainant was satisfied with the sufficiency of the security, as security for the principal, and that, until the maturity of the notes, she was only bound to collect the interest, or to be 1 Whitin V. Paul, 13 R. I. 40, 43. 526 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§§ 715, 716. responsible for it if not collected. It would be exacting too much of a pledgee with power to sell to hold that it is his duty to watch the market, and take advantage of the most favorable opportunities for selling, or make good any loss resulting from not doing it." The pledgor's request in such case that the pledgee shall col- lect the interest, though coupled with the statement that it is the duty of the pledgee, if the mterest is not paid, to "enforce the terms of the mortgage," does not make it the pledgee's duty to foreclose for any other purpose than the collection of the in- terest. If he had wished to have the mortgage foreclosed by sale, to avoid an impending loss by depreciation in the value of the property, he should have said as much. " He could not rea- sonably expect the pledgee to forecast the future for him." He is not bound to exercise extraordinary care and diligence, and collect the principal without request before it is legally due.^ 715. Return of execution unsatisfied. — The creditor having brought suit upon the collateral obligation within a reasonable time, and prosecuted this to judgment and obtained execution thereon, upon a return of nulla bona upon the execution, is not ordinarily bound to do more with the claim ; unless it be to prove it in proceedings in bankruptcy or insolvency, if such pro- ceedings be instituted.^ 716. The pledgee has no right to compromise with the maker of the collateral note, and take less than the amount due upon it, unless he has the pledgor's consent. This is certainly the case when the debt is well secured by mortgage.^ It would only be in an extreme and exceptional case that the pledgee would be justified in making such a compromise. Authority given to a pledgee to sell the collateral note at public or private sale does not authorize him to surrender such note to the maker after ma- turity, without any effort to collect the same, for a sum less than the amount due thereon, though this be enough to pay the prin- cipal debt. Such a transaction is not a sale of the note but a 1 Whitin V. Paul, 13 R. L 40. 458; Garlick v. James, 12 Johns. (N. 2 Burnett v. Thompson, 1 Ala. 469. Y.) 146 ; Depuy v. Chirk, 12 Ind. 3 Zinipleiuan v. Vofder, 98 111. 6i;3; 427. Union Trust Co. v. Kigdon, 93 111. 627 § 716.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. compromise with the maker, and renders the pledgee liable to the pledgor for the injury the latter has sustained.^ One who has taken negotiable paper as collateral security has no right to compromise with the parties liable upon it for a sum less than that called for on the face of the paper ;2 except per- haps in a very extreme case ; ^ or if he does so compromise, he makes himself accountable for the whole amount of the security. Neither has he any right to surrender the security to the maker upon receiving a sum of money equal to the debt for which the pledge was made, and another note for the remainder of the security; and the pledgor is not obliged to receive the new note, or to await the collection of it by the creditor, but may maintain a suit for the full amount of the original pledge, after deducting the sum for which the pledge was made.* If the pledgee delivers up the original note received as security, and takes any other security in place of it, he will be assumed to have received pay- ment in fuU.^ The holder of collateral paper is under no obligation to receive payment thereof in property other than money ; and he is not bound to notify the debtor of a proposition to discharge the col- lateral note in this way.^ Even if the debtor requests the creditor to accept a compro- mise of the collateral security by taking a conveyance of land, al- though the compromise proposed be a reasonable one under the circumstances, the creditor does not make himself liable for any loss sustained through his refusal to accept a compromise.'^ A comiDromise of the collateral note made with the consent of the principal debtor is, of course, binding upon him.^ In exceptional cases a compromise without such consent may be sustained ; as where the maker of the collateral note is in- 1 Union Trust Co. v. Rigdon, 93 111. and see Union Trust Co. v. Rigdon, 458. supra. 2 Garlick v. James, 12 Johns. (N. ^ Gage r. Punchard, supra. Y.) 146; Union Trust Co. v. Rigdon, ^ j^j^^eg j,, M'Losky, 5 Stew. & P. supra; S. C. 9 Cent. L. J. 486; Grant (Ala.) 330. V. Holden, 1 E. D. Smith (N. Y.), '' Rliinelander v. Barrow, 17 Johns. 545; Gage v. Punchard, 6 Daly (N. (N. Y.) 538; reversing Barrow v. Y.), 229. Rhinelander, 3 Johns, Ch. 614. 3 As intimated in Story's Bail. ^ Pence v. Gale, 20 Minn. 257. § 214. Randoli)h v. Merchants' Nat. Bank, * Depuy V. Clark, 12 Ind. 427 ; 9 Lea (Tenn.), 63. 628 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§§ 717, 718. solvent, and nothing can be collected by process of law, and the compromise effected is, on the whole, advantageous to all parties. ^ 717. A pledgee has no right to surrender a collateral note to the maker without payment. If he cannot collect it, he must return it to the pledgor. If he surrenders it without receiv- ing payment, or makes use of it in any transaction of his own, he is chargeable with its full amount.^ But a pledgee who has surrendered the collateral note to the maker of it, without exacting payment, may show in defence that the note was made for the accommodation of the pledgor, or was for some other reason invalid against the maker. The presump- tion of law is, however, that the note was given for a good and valuable consideration ; and unless the pledgee shows that there was a legal defence to the note surrendered, he is liable to the pledgor for the amount thereof, less the debt secured.^ In such action against the pledgee for having wrongfully disposed of the pledge, he cannot show that the pledgor was indebted to the maker of the collateral note both at the time of the pledge and afterwards, for it is not for the pledgee to claim a set-off in be- half of the maker of the note against the pledgor. Neither can the pledgee show that tlie maker of the collateral note was in the habit of giving his paper to the pledgor as an accommodation, for evidence to this effect does not prove that this particular note was given as accommodation paper.* 718. A creditor holding negotiable paper as collateral security has an undoubted right to exchange the security, witliout the consent of the debtor, unless restrained by the express terms of the pledge ; and it is only in case loss results to the debtor from want of proper care and diligence in the exchange, that the creditor becomes responsible to the debtor for the loss sustained.^ To make the creditor responsible for a loss arising from an exchange of collaterals, it must be shown that a loss was thereby occasioned to the pledgor. Even a warning given by ^ Exeter Bank v. Gordon, 8 N. II. * Union Trust Co. v. Rigdon, supra. 66. ^ Giranl Fire & Marine his. Co. v. 2 Wood V. Mattliews, 73 Mo. 477. Marr, 4G Pa. St. 504 ; Hunter v. Moid, ' Union Trust Co. v. Kigdon, 93 98 Pa. St. 13; llandul{)li y. Mereliants' 111. 458. Nat. Bank, 9 Lea (Tenn.), 63. 34 529 § 719.] REMEDIES UPON PLEDGES OF NEGOTIABLE PAPER. the latter, that the proposed exchange would result in loss, and that the creditor would make it at his own risk, and would take the exchanged collateral as cash, does not of itself establish a loss by reason of the exchange, although the substituted collateral turns out to be wortliless. There must be evidence that the securities given up were not also worthless. When the pledge has been made on no other terms than those defined by law, the debtor cannot afterwards add to or change the conditions of the pledge, so as to turn the collateral note into cash, by a mere notice to the creditor that if he exchanges it for another note he must take the collateral as cash. The pledgor can give such notices and warnings as may raise proof of negligence on the part of the creditor if he disregards them. But this amounts to nothing, unless injury and loss be shown to have resulted from negligence or mismanagement on his part. No doubt the pledgee takes upon himself an increased responsibility by making an ex- change of security ; but it is only the omission of proper care and diligence on his part that will make him liable to account for collateral security which has proved worthless.^ But the creditor is liable for any loss occasioned by an ex- change of the collateral obligation without the consent of the debtor, or by the conversion of the collateral into a less security, by discharging any of the parties originally liable upon the col- lateral.^ If, for instance, he takes in exchange for a note signed by two persons a new note signed by only one of them, he ren- ders himself accountable to the principal debtor for the original collateral note.^ 719. If the creditor extend the time of payment of the collateral note, he thereby makes it his own.* Such is the effect of his receiving payment of part of the collateral note at its maturity, and taking a new note payable at a future day for the part not paid.^ Even where a creditor does not make a definite agreement for extension, he may, by so dealing with the collateral obligation as to delay the collection of it, make it his 1 Girard Fire & Marine Ins. Co. v. * Freeman v. Benedict, 37 Conn. Marr, 46 Fa. St. 504, per Thompson, J. 559. 2 Girard Fire & Marine Ins. Co. v. ^ Nexsen v. Lyell, 5 Hill (X. Y.), Marr, supra; Muirhead v. Kirkpa- 466; Southwick v. Sax, 9 Wend. (N. trick, 21 lb. 237. Y.) 122; Gage v. Punchard, 6 Daly 8 Muirhead v. Kirkpatrick, supra. (N. Y.), 229. 530 DILIGENCE IN COLLECTING COLLATERAL PAPER. [§ 719. own. Thus, if a draft be received by a creditor from his debtor to collect, and to place to tbe account of the latter when paid, and the creditor presents the draft to the drawee and receives his check for it, but delays for one day to present the check, dur- ing which time the drawee fails, the principal debtor is dis- charged from all liability ; for the creditor in such case under- takes to do all that the law requires to be done to obtain payment of the draft, and having failed in that duty to the prejudice of the debtor, he must suffer the consequences.^ As regards the maker of the collateral note, an extension of the time of payment by taking a new note payable at a future day, in place of the original note, may have the effect of making a new and valuable consideration for the new note, although the original note was without consideration and subject to defence in the hands of the creditor. In such case, the new note being founded on a valuable consideration, independent of that on which the original note was founded, the failure of the considera- tion of the former is not a defence by the maker in a suit against him on the last note.^ 1 Smithv. Miller, 43 N.Y.I 71, 174. ^ Muirhead v. Kirkpatrick, 21 Pa. St. 237. : 531 CHAPTER XVIII. REMEDIES UPON PLEDGES OF STOCKS. I. Sale at common law, 720-729. II. Sale under powers of sale, 730-740. III. Illegal sales by the pledgee, 741-7-19. IV. The measure of damages for an illegal sale of stock collaterals, 750-757. I. Sale at Common Law. 720. As has already been noticed, a holder of collateral securities, upon the debtor's default, has several remedies. He may enforce payment of the principal debt ; he may sell the collateral securities under any power of sale the debtor may have given, or, in the absence of such power, he may sell them upon giving reasonable notice to the debtor ; or he may, by bill in equity, have a judicial sale.^ The latter course is rendered necessary where stock has been pledged by delivery of a certifi- cate, without any transfer, or power to make a transfer. A court of equity will look upon a transfer as made which ought to be made, and wall decree a sale and application of the pro- ceeds to the payment of the loan.^ There is also jurisdiction in equity in case an account between the parties must be stated, in order to determine the amount of the debt secured,^ or even in case there is such oUncertainty as to the time of payment that a demand of pajmient will not certainly make the debt due.^ 721. The holder of stocks or bonds of a corporation, as collateral, may sell them, because that is the usual method of turning such securities into money ; the sale being made at public auction, after demand of payment and due notice of the sale.^ Such securities are expressly designed to be circulated ^ Robinson v. Hurley, 11 Iowa, 410. 2 Johnson v. Dexter, 2 McArthur, 530. 3 §§ 640, 641. 4 Stokes V. Frazier, 72 III. 428. 5 Cortelyou v. Lansing, 2 Caines Cas. (N. Y.) 200; Brown v. Ward, 3 532 Duer (N. Y.), 660; and see Fletcher V. Dickinson, 7 Allen (Mass.), 23; Vaupell V. Woodward, 2 Sandf. (N. Y.) Ch. 143 ; Wallace r. Berdell, 24 Hun (N. Y.), 379 ; Canfield v. Minne- apolis Agricultural & Mechanical Asso. (C. C. D. Minn. 1883), 14 Fed. SALE AT COMMON LAW. [§§ 722, 723. and sold in the stock market ; and it is to be presumed that, in making a pledge of such securities, the parties contemplate a sale of them in case the debt which they secure is not paid according to agreement.^ Interest accruing upon collateral securities may, in the absence of any agreement to the contrary, be properly collected by the pledgee, and applied to the debt secured. Thus, if a bond with interest coupons be the subject of a pledge, an authority in the pledgee to collect the interest as it becomes payable is necessarily implied.^ A railroad company having pledged its own bonds as collateral security, and afterwards, by its agents, having paid the interest coupons as they matured, is precluded by such payment from claiming that cutting off and collecting the coupons oper- ated as a conversion of the bonds.^ 722, The remedies of a broker who has purchased stock for a customer on a deposit of a margin are : 1st. By suit for the purchase-money, after tendering the stock and demanding payment ; 2d. By suit for a breach of the contract, wherein the broker would charge himself with the stock purchased and the advance made upon it ; * 3d. By a public sale of the stock pur- chased, after proper demand upon the customer, and notice to him of the time and place of sale, followed by suit against the customer for any deficiency there might be. 723. A custom of brokers to sell at the stock exchange, without the notice required at common law, stocks and bonds deposited as collateral, is declared to be unreasonable and void.^ As has already been shown,^ a purchase of stock by Rep. 801. That railroad bonds can- ^ Androscoggin R. R. Co. v. Auburn not be sold, but must be collected, see Bank, 48 Me. 335. Joliet Iron & Steel Co. v. Scioto Fire ^ Androscoggin R. R. Co. v. Auburn Brick Co. 82 111. 548, a decision un- Bank, supra. supported in reason or authority, and * Merriam v. Kellogg, 58 Barb. in conflict with prior decisions of the (N. Y.) 445 ; Bement v. Smith, 15 same court, to which this decision Wend. (N. Y.) 493. makes no reference. Stokes w. Frazier, ^§503; Wheeler u. Newbould, 16 72 111. 428. N. Y. 392; Lawrence v. Maxwell, 53 1 Morris Canal & Banking Co. v. N. Y. 19. Lewis, 12 N. J. Eq. 323. A decision that such a custom is « §S 495-500. 633 § 724.] REMEDIES UPON PLEDGES OF STOCKS. a broker for a customer, upon a mftrgin, creates the relation of pledgor and pledgee between them. Therefore, in a case in New York, where an offer of testimony was made to show a custom of brokers to sell without notice, the testimony was held to be inadmissible.^ Chief Justice Hunt, in relation to this part of the case, said ; " The bi-oker has no right to sell without notice. A practice or custom to do otherwise would have no more force than a custom to protest notes on the first day of grace, or a custom of brokers not to purchase the shares at all, but to content themselves with a memorandum or entry in their books of the contract made with their customer. Such practice, in each case, would be in hostility to the terms of the contract, an attempt to cliange its obligation, and would be void. The proof, therefore, cannot be legally given." If the broker desires to possess himself of the power to sell the collateral, on failure to repay advances, without notice of time and place of sale, he must make an agreement that shall permit him to do so.^ 724. The bankruptcy of the pledgor of stock or negoti- able bonds of a corporation does not deprive the pledgee of the right to sell and transfer them, upon the pledgor's de- fault. This right is presumable from the nature of the trans- action, even in the absence of any express stipulation in the not illegal as between parties familiar botli members of the board of brokers, with, and dealing on the basis of, such familiar with and dealing on the basis custom, was rendered in the Common of it, it is a valid and lawful custom, Pleas Court of Philadelphia, in the and controls tl^ rights of these par- case of Colket V. Ellis, 10 Phila. (Pa.) ties." 375,379. Mr. Justice Mitchell, after But, aside from the matter of cus- referring to several cases upon the tom, the learned judge was of opinion general subject of usages, said: "I that, in this case, there was an assent think their effect may be summed up on the part of the customer to the to be, that where no statute or prin- sale at the time it was made, and, ciple of public policy intervenes, but moreover, a ratification of it after it a rule of law is a mere privilege which was made. may be waived, there is no reason This question was raised, but not why the waiver may not be as well by decided, in Covill v. Loud, 134 Mass. a custom known to, and acquiesced — ; ^. C 18 Cent. L. J. 4 71. As in in, by the parties as by an express the previous case, there was an assent contract. Without intimating what to the sale by the customer, would be the effect if such a usage as ^ Markham v. Jaudon, 41 N. Y. the present were set up against an 235. outside party, I am of opinion that, ^ Taylor v. Ketchum, 6 Robt. (N. as between plaintiffs and defendants, Y.) 507, 513, per Garvin, J. 534 SALE AT COMMON LAW. [§§ 725, 726. contract of pledge that the pledgee may sell on default. The Bankrupt Act takes away no right secured to the pledgee by his contract.^ If, in the proof of a promissory note in bankruptcy, the creditor agrees with the assignee in bankruptcy that bonds or stocks held as collateral shall, for the purpose of proof, be credited as of a certain value, or even if the agreement be that the collateral shall be sold at a certain price, for the purpose of fixing the amount provable against the bankrupt's estate, such agreement is not conclusive as against another party to the note that the creditor actually received the amount so credited, or that he made any actual sale of the collateral which such other party was entitled to avail himself of. Whether there was any such sale is a question of fact.^ 725. A creditor cannot apply collateral security in satis- faction of the debt in any way save by notice and public sale, or in pursuance of a contract for private sale.^ A loan was made in 1855 upon certain shares of telegraph stock. In 1863 the debtor offered to pay the debt, and demanded a return of the stock. The creditor replied that he had not expected the stock would ever be redeemed, and had sold his own stock of the same company at a low price, because he did not wish to have so much of it, retaining that which he had received in pledge. Inasmuch as he would have lost in case the stock had declined, having nothing else to look to for his claim, he thought it only just that he should have the benefit of a rise in the stock, having taken all the risk himself. But, of course, the court told him that he could not appropriate the stock to the payment of the debt at his own option, but only in the manner the law provides.^ 726. The general rules in regard to demand and notice in the case of the sale of an ordinary chattel under a pledge apply to sales of stocks held in pledge.^ If the obligation 1 Jerome v. McCarter, 94 U. S. * DjU^r ?;. Bruhaker, 52 Pa. St. 498; 734; Grinnell, in re, 9 N. Bank. II. and see Davis v. Funk, 39 Pa. St. 243 ; 137. Sitj,freaves v. Fanners' & INIechanics' 2 Globe Nat. Bank v. Ingalls, 130 Bank, 49 Pa. St. 359; Conyngliam's Mass. 8. Appeal, 57 Pa. St. 474. 8 Lewis V. Mott, 3G N. Y. 395; Mc- 6 France v. Clark, 22 Cb. D. 830. Neil V. Tentb Nat. Bank, 55 Barb. (N. Y.) 59. 635 § 727.] REMEDIES UPON PLEDGES OF STOCKS. secured be not payable at a fixed time, a demand of payment is necessary before proceeding to give notice of the time and place of sale. Such a demand is necessary to create a default. Thus, a broker carrying stocks upon a margin must demand payment either of the balance of the account, or demand that the margin be made good, in case there be a special contract in regard to the amount of the margin to be kept. A notice that unless a specified amount of the loans secured be paid, the stock collateral would be " used," does not constitute a demand sufficient to authorize a sale.^ 727. Corporate bonds and stocks held as collateral securities may be sold, like ordinary pledges, after the debt secured becomes due, without judicial process and decree of fore- closure, upon giving reasonable notice to the debtor to redeem.^ The sale must be at public auction, and the notice must specify the time and place of it.'^ Aside from a sale under judicial pro- cess, or one at auction, after proper notice, the holder of such collaterals can appropriate them to the payment of the debt secured only in pursuance of a special contract with the debtor.^ In the absence of a special agreement as to the time, place, or manner of sale, such collaterals must be sold at public auction, 1 Genet v. Howland, 45 Barb. (N. articles of like character and descrip- Y.) 560; .S. C. 30 How. Pr. 360. tion, which possess a peculiar value to 2 Morris Canal & Banking Co. v. the owner, or which cannot readily be Lewis, 12 N. J. Eq. 323; Indiana & replaced, it is riojht and necessary to 111. Cent. R'y Co. v. McKernan, 24 give notice to the bailor of both the Ind. 62 ; Loud v. Burke, 22 Gratt. time and place of sale, in order that (Va.) 254; Water Power Co. v. he may have an opportunity of re- Brown, 23 Kans. 6 76, 691. deeming his pledge, or attending the 2 Diller r. Brubaker, 52 Pa. St. 498 ; sale and protecting his interests. But Conyngham's Appeal, 57 Pa. St. 474; the same reason does not apply to Gay V. Moss. 34 Cal. 125; Eobinson cases of sales of stocks. One share V. Hurley, 11 Iowa, 410 ; Brown v. is exactly similar to, and of the same Ward, 3 Duer (N. Y.), 6G0. Contrary value, as another of the same com- to the better and general rule, it is pany, and can be purchased easily declared in Worthington v. Tormey, and readily, if desirable." Itis, how- 34 Md. 182, 195, that, in selling stocks, ever, submitted that the reason given a pledgee is not bound to give notice is not sufficient to sustain the excep- of i\ie place of sale, Grason, J., saying : tion to that rule. " In sales of some kinds of pledges, * Diller v. Brubaker, supra. such as heir-looms, plate, and other 536 SALE AT COMMON LAW. [§ 728. after reasonable notice to the debtor of tlie time and place of sale.^ When a creditor has given proper notice of the sale of the collateral security, the debtor has no alternative but to redeem the security by paying the debt for which it was pledged, or to allow it to be sold. He cannot resist the creditor's right to have the stock sold, on the ground that the sale could then be made only at a great sacrifice.^ 728. A pledgee of corporate stocks or bonds is under no obligation to sell the security after default in payment of the debt.^ Thus, one holding bank shares as collateral security wrote to his debtor requesting payment, and stating that if pay- ment were not made immediately he should sell the shares. The debt was not paid, and the pledgee did not sell the shares. The bank afterwards failed, and the shares became of no value. In an action by the creditor on the debt, it was held that his omis- sion to sell the shares constituted no defence. The pledgee in such case takes upon himself no duty to sell the shares, but simply holds them as security, with perhaps a power to sell. The remedy of the debtor is in paying the debt and redeeming the shares.* It does not alter the case that the stock has been transferi'ed on the books of the corporation and a new certificate issued to the pledgee. Though the pledgor cannot himself sell the stock in such case, he could, after the maturity of the debt, request the pledgee to sell, and in that way make him liable for a loss occurring through his failure to sell. But without such request, and in the absence of any special agreement upon this 1 Little V. Barker, Ho£f. (N. Y.) timely and reasonable notice, the par- Ch. 487; Genet V. Howland, 45 Barb, ties livinir and being in the city of (N. Y.) 560; S. C. 30 How. Pr. 360; New York, where the sale was made Lewis V. Graham, 4 Abb. (N. Y.) Pr. and all the transactions had. 106; Oi,nlen y. Lathrop, 3 J. & S. (N. 2 Rfigdi y. His Creditors, 1 La. Y.) 73; Stokes v. Frazier, 72 111. 428; Ann. 31. Sitgreaves v. Farmers' & Mechanics' ^ O'Neill v. Whio;ham, 87 Pa. St. Bank, 49 Pa. St. 359 ; Strontr v. Nat. 394; S. C. 7 Reporter, 215; Robinson Mechanics' Bank, 45 N. Y. 718. As v. Hurley, 11 Iowa, 410; Colquitt v. to reasonable notice, see Stewart v. Stiiltz, 65 Ga. 305; Rozet v. Mc- Drake, 46 N. Y. 449, holding that a Clellan, 48 111. 345. notice given on the afternoon of Thurs- ■* Granite Bank v. Richardson, 7 day, of a sale to be made at half-past Met. (Mass.) 407. twelve o'clock on Saturday, was a 537 § 729.] REMEDIES UPON PLEDGES OF STOCKS. matter, it is discretionary with the pledgee after maturity to sell or not as he may deem best. The law imposes no obligation upon him to do anything more than to safely keep the stock so as to restore it when the debtor might redeem. ^ When a creditor has agreed to dispose of collateral stock held ■ in pledge and apply the proceeds to the payment of the debt, his neglect to do so is not a bar to an action upon the debt, but is a matter of defence or set-off.^ 729. A pledgee of stock is not liable for a loss occasioned by his neglect to sell the stock, — it having depreciated in his hands till it became worthless, — when by contract between the parties the right to sell the stock had been conferred upon the pledgee or a third person, and the pledgee has never refused to transfer the stock for the purpose of a sale, and the pledgor has never requested that a sale should be made.^ The pledgor, hav- ing the general property in the pledge, may sell it, and compel its restoration upon paying the debt secured.* If he should find a purchaser who should tender the amount of the debt to the pledgee, and the latter should refuse to deliver the stock to him upon the order of the pledgor, the creditor would undoubtedly be liable for a conversion of the stock. A creditor holding corporate bonds as collateral security is not liable for a depreciation occurring after he has received other collaterals in their place, under an agreement to surrender the bonds, unless the debtor has demanded them. It is the duty of the debtor in such case, if he wants the bonds after he has be- come entitled to them, to demand their surrender ; and, if he allows them to remain in the creditor's hands, they are at his 1 Colquitt V. Stultz, 65 Ga. 305. Newsotne v. Davis, 133 Mass. 343 ; ^ Taggard v. Curtenius, 15 Wend. Richardson v. Ins. Co. 27 Gratt. (Va.) (N. Y.) 155. Tiie stock in this case 749, where the stock pledged was sup- was of a bridge company, and the posed to have become worthless in debtor claimed that the creditor ne- consequence of the Civil War, but the glected to dispose of the stock, accord- pledgor neither sought to redeem it ing to agreement, until the bridge was nor requested the jjledgee to sell it; carried away by a flood, and its value Colquiit v. Stultz, supra; S. C. 22 was thereby greatly lessened. Alb. L. J. 436. 8 Howard v. Brigham, 98 Mass. 133; < Rozet v. McClellau, 48 111. 345. O'Neill V. Whigham, 87 Pa. St. 394; 538 SALE UNDER POWER. [§ 730. risk, so far as loss may occur from delay in collection or the like cause.i When the pledgee has the right to sell the stock at his discre- tion without notice, he is not bound to sell the stock, even at the pledgor's request, immediately upon default. He may in such case exercise his own judgment as to the sale of the stock, sub- ject only to the general liability of a pledgee for negligence.^ His refusal to sell upon request may, or may not, be negligence. Such a request may tend to prove negligence and may be essential to establish it.^ Certainly the creditor is under no obligation to sell the stock immediatelji' upon default. He can hold the stock at his own risk without making sale.* Even if the debtor should request the creditor, upon default, to sell the stock, it would seem that such request would be without legal effect ; because the debtor, if he desires to sell the stock, should first redeem it, and then he can do with it as he may choose. II. Sale under Powers of Sale. 730. In general. — It is, of course, competent for the parties to agree, by express terms, that upon the pledgor's default, or upon his failure to keep the security good, the pledgee may sell at public or private sale, at his option, without giving notice of his intention, or of the time or place of sale ; ^ or upon giving a specified notice of such time and place.^ A debtor, though in fact insolvent, may authorize -his creditor to sell at private sale stocks held as collateral security. He may even, after his faikire, if before the commencement of proceed- ings in bankruptcy, authorize a sale of collaterals, or acquiesce ^ Williamson t". McClure, 37 Pa. St. California (Codes and Stats. 1876, 402. § 8092, Civil Code, § 3092) and Da- 2 Franklin Sav. Inst. v. Preetorius, kota Territory (K. Codes 1877, 6 Mo. App. 470. § 1826 of Civil Code) it is expressly 8 Goodall V. Richardson, 14 N. H. provided by statute tliat a negotiable 567, 572. instrument may contain a pledge of * O'Neill V. Whigham, 87 Pa. St. collateral security, with authority to 394. dispose thereof. 6 Milliken v, Dehon, 27 N. Y. 364; It is held that such a power does Chouteau V. Allen, 70 Mo. 290. not deprive a promissory note of its *' Bates V. Wiles, 1 Handy (Ohio), negotiable character. Fancourt v. 532; Loomis v. Stave, 72 111. 623. In Thorne, 9 Q. 13. 312. 639 § 731.] REMEDIES UPON PLEDGES OF STOCKS. in a sale made, although at a sacrifice ; and his assignee in bank- ruptcy subsequently chosen will be bound by such authority or acquiescence.-^ A power of sale without notice or demand, upon default of payment of an obligation having a definite time of payment, may be exercised immediately upon such default.^ Under a time- note, giving authority to sell the security on non-performance of the promise, no valid sale of the collateral can be made before the maturity of the principal debt. A sale before maturity is a conversion and not a sale under the power, which is restricted by the terms of the contract to the case of non-performance.^ But where- a note payable in three months was secured by a pledge of stock which the lender agreed to hold for three months, it was held that, inasmuch as there were days of grace upon the note but none upon the agreement for the return of the stock, the stock might be sold under a power before the maturity of the note.* 731. A power of sale may be implied from, the terms of the pledge. Thus, drafts drawn upon a person with whom the drawer had deposited city bonds and scrip, directing him to pay "from the proceeds of securities in his hands," or to pay, "when in funds, from the proceeds," was held to imply authority in the latter to sell the securities to meet the drafts ; and a sale under such authority is good without notice to the debtor of the time and place of sale, and without previous demand of payment.^ Authority to sell at private sale was inferred from a pledge of stock, with authority to the pledgee to sell in case it is not re- deemed by a day specified, or to give the same " to any broker to sell on that day ; " and a sale made by a broker after the day specified, at private sale, for the full market price of thesto ck, was held to be in conformity with the authority, and valid.^ This construction is based upon the consideration that the par- ties by their contract intended to enlarge the power of sale which the law gives to every pledgee, and to enable him to sell at pri- 1 Sparliawk v. Drexel, 12 N. Bank. ^ Rankin v. McCullough, 12 Barb. K. 450. (N. Y.) 103. 2 Chouteau v. Allen, 70 Mo. 290. ^ Hyatt v. Argenti, 3 Cal. 151. 8 Allen V. Dykers, 3 Hill (N. Y.), ^ Bryson v. Rayner, 25 Md. 424. 593; S. C. 7 Hill, 497. 540 SALE UNDER POWER. [§ 732. vate sale, and without notice. The fact that a sale b}' a broker was autliorized implied a private sale, and the provision that he might sell on the day he received the stock excluded the require- ment of any notice.^ Where collateral secuinties have been pledged upon special terms, and afterwards further securities are deposited by way of margin on the original loans, the latter, in the absence of any special agreement, may be regarded as pledged, according to the terms of the written contracts relating to the original securities, under the rule that the accretion follows the main body, and is subject to the same conditions. If by the terms of the original pledge some of the securities might be sold on one day's notice and some on three days' notice, the additional securities may be sold upon the longest term of notice so stipulated for.^ 732. Waiver of notice. — Under a special authority to sell collaterals upon default of payment without notice, or upon de- mand of payment without further notice, all notice of the time and place of sale, such as the law requires in the absence of a special agreement, is waived.^ The only obligation resting upon the creditor in such case is to sell publicly and fairly for the best price he can obtain. But the parties may agree that there may be a private sale without notice, and then the only obligation upon the creditor is to sell fairly for the best price he can reason ably obtain.* Where, by the terms of a contract, a loan is made payable on one day's notice, and the creditor is authorized, upon the debt- or's default, to sell the collaterals without further notice, a sale may be made at any time after the expiration of one day from the making of demand of payment.^ If stock or bonds be pledged as security, with a right of sale if the indebtedness be not paid within a reasonable time, but the power of sale makes no provision as to the time, place, or manner 1 Bryson v. Rayner, 25 Md. 424. * Genet v. Rowland, 45 Barb. (N. 2 Baltimore JMarine Ins. Co. v. Dal- Y.) 5G0; Milliken v. Delion, 27 N. Y. rymple, 25 Md. 2G9, 301. 364; Hamilton v. State Bank, 22 8 Loomis V. Stave, 72 Bl. 623; Iowa, 306; Fitzgerald v. Blocher, 32 Maryland Fire Ins. Co. u. Dalrymple, Ark. 742; Robinson r. Hurley, 11 25 Md. 242, 264; Baltimore Marine Iowa, 410. Ins. Co. V. Dalrymple, .««;.!?•«; Bryson y. 5 g^e Maryland Fire Ins. Co. v. Rayner, supra ; S. C. 29 lb. 4 73. Dalrymplc, supra. L) 41 §§ 733-735.] REMEDIES UPON PLEDGES OF STOCKS. of sale, a valid sale cannot be made without giving the debtor reasonable notice of the time and place of sale. A sale made by the creditor upon the same day that he notifies the debtor that he must pay or satisfactorily secure his indebtedness is made upon an unreasonable notice, and renders the creditor liable in damages.! 733. A minor may revoke his -waiver of notice of sale upon coming of age. Thus a minor who has bought stocks, and deposited money with his broker for a margin to carry them, may upon coming of age repudiate the transaction, may retract authority given the broker to sell the stocks without notice or demand of payment, and may recover the amount deposited with the broker to cover margins.^ 734. When the giving of the notice of sale provided for in a contract of pledge has been rendered impossible by the act of the pledgor, a valid sale may be made without giving the notice. Thus a bank having pledged negotiable bonds with power to sell them in case of default on giving the bank thirty days' notice of the intended sale, subsequently failed and closed its place of business, and had no office or acting officers. The pledgee three years afterwards sold the bonds in good faith at their market value, without giving notice to the bank ; but he was held not to have incurred thereby any liability for a con- version of the bonds.^ 735. As regards the price obtained at a sale made under a power to sell without notice, the mere fact that the price obtained is less than the market price at the time does not alone make the pledg(^-e liable for the difference. It must appear that there was an intent to injure the pledgor, or that there was such recklessness shown, in the mode or time of selling, that such in- tent might be inferred.* 1 Stevens v. Hurlbut Bank, 31 ^ Qjty Bank of Racine v. Babcock, Conn. 146. 1 Holmes, 180. 2 Heath v. Mahoney (N. Y. Su- * Durant v. Einstein, 5 Robt. (N. perior Ct. 1881), 12 N. Y. Weekly Y.) 423; S. C. 35 How. Pr. 223. Dig. 404. 542 SALE UNDER POWER. [§ 736. 736. A demand of payment of the principal debt may be necessary before a sale of the collateral, although the creditor be authorized to sell without notice upon the debtor's default. Thus, if the debt be one payable upon demand, or at an indefinite time, there can be no default until a demand has been made, or an action has been brought to enforce tbe claim, — the bringing of an action being only one way of making demand ;^ but the creditor in such cases may call upon the debtor at any time to redeem. ^ A notice to redeem collateral securities, by payment of the amount loaned, would operate as a regular demand of payment of the debt ; but under such a notice a reasonable time to redeem should be allowed. A notice without date or signature, left at the pledgor's office, stating that if a specified amount of the loan be not paid the stock securing it would be " used," does not con- stitute a demand sufficient to authorize a sale.^ Stocks carried upon a margin, under an agreement that a cer- tain margin shall be maintained, cannot be sold when the margin has become deficient, without giving notice to the owner that further margin is required, and allowing him reasonable time to make it good.^ The right to sell arises only upon failure of the owner to make the margin good. There may, however, be an agreement between a broker or banker and customer, by which a right to sell will arise whenever the stocks should fall in price and diminish the margin, without calling upon the customer to 1 Wilson V. Little, 2 N. Y. 443, per ^ Sitgreaves v. Farmers' & Me- Ruggles, J. "In every contract of chanics' Bank, SM/)?-a. pledge there is a right of redemption ^ Genet v. Howland, supra. on the part of the debtor. But in this ^ Stenton v. Jerome, 54 N. Y. 480 ; case that right was illusory and of no Baker v. Drake, 66 lb. 518 ; Hanks v. value, if the creditor could instantly, Drake, 49 Barb. (N. Y.) 186 ; Bitter ■without demand of payment and with- v. Cushman, 7 Robt. (N. Y.) 294 ; out notice, sell the thing pledged. AVe IVIilliken v. Dehon, 27 N. Y. 364; are not required to give the transac- Markham ?;. Jaudon, 41 lb. 235; Stew- tion so unreasonable a construction, art v. Drake, 46 lb. 449. The borrower agreed that the lender Otherwise in Massachusetts, might sell without notice, but not that where the contract in such case is not be might sell without demand of pay- regarded as creating the relation of ment, which is a different thing." pledgor and pledgee, but as merely Genet v. Howland, 45 Barb. (N. Y.) executory. Covell v. Loud, 134 Mass. 560, 565; Porter v. Parks, 49 N. Y. — ; S. C. 16 Cent. L. J. 471. Sec 564; Sitgreaves v. Farmers' & Me- §498. chanics' Bank, 49 Pa. St. 359; France V. Clark, 22 Ch. D. 830. 643 § 737.] REMEDIES UPON PLEDGES OF STOCKS. make the margin good ; ^ but such an agreement is out of the usual course of dealing, and in order to be supported should be definite and certain in the intent that a sale can be made with- out giving the customer notice to make good the margin. 737. Sale at brokers' board. — Whether a sale of corporate stocks, or bonds, or like securities at a brokers' board is such a public sale as the law will sanction, or whether the sale must be made at public auction, is a question upon which there has been some diversity of opinion. In favor of the validity of sales of such collaterals at the brokers' board, it is urged that there is the stock market, to which sellers and buj^ers of such property resort, and where competition among bidders is most apt to be found ; and that such sales are public, and should be supported, unless in particular cases there be some ground for impeaching their fairness.'^ If the contract of the parties contain no restriction as to the mode or place of sale, and none can be implied from any estab- lished custom, and notice of a sale at the brokers' board be duly given to the debtor, his silence in regard to the mode of sale has been held to estop him from afterwards taking objection to it.^ If a creditor be authorized to sell the collateral security at public or private sale, at his discretion, he ma}'' properly sell at the brokers' board ; but he is bound to exercise the authority under a trust for the debtor's benefit as well as his own. He has no right to force a sale for barely enough to pay his claim, when he might have obtained a surplus. But he need not, having such a power, sell stocks at auction if there is a fair market for them at the stock exchange or brokers' board.* 1 Thus, in Wicks v. Hatch, 6 J. & 'brokers acquired the right to sell for S. (N. Y.) 95, the stock market being their own protection, and were only excited, and the customer residing out bound to act in good faith and in the of town, it was expressly agreed, in exercise of their best judgment and writing, that the brokers should sell in discretion. Affirmed 62 N. Y. 535. their discretion, at public or private ^ Maryland Fire Ins. Co. v. Dalrym- sale, without any notice whatever, pie, 25 Md. 242, 265; Baltimore Ma- whenever the margin should fall below rine Ins. Co. v. Ualrymple, lb. 269. five per cent., the stocks having been Question raised, but not decided, in purchased on a larger margin. Under Child v. Hujror, 41 Cal. 519. this agreement it was held that the ^ Willoughby v. Comstock, 3 Hill customer waived all right to notice of (N. Y.), 389. deficiency of margin, and that the * Sparhawk v. Drexel, 12 N. Bank. SALE UNDER POWER. [§§ 738, 739. 738. But, on the other hand, the fact remains, that a sale at the brokers' board is really a private sale. The regulations of the board exclude all but members, and the debtor is not only- deprived of the opportunity of seeing that the sale is fairly made, but of the opportunity of arranging to get the best price ; and, therefore, the prevailing and better rule is, that, except in case the creditor has specific authority to sell at private sale without notice, a sale at the brokers' board does not answer the require- ments of the general law of pledges requiring a sale of the pledge to be at public auction.^ 739. Separate lots. — Stock or bonds pledged to a person at different times, to secure several debts, should be sold in separate lots, whether the sale be under order of court or without such order. Each separate debt, in such case, has a separate security ; and a sale of all the collaterals in gross, and an application of the proceeds to the entire indebtedness, might, in effect, extend the security to debts unsecured, or secured only in part, and might interfere with the rights of other parties.^ But if a debtor deliver several certificates of stock to secure one debt, the creditor is not bound, in selling under a power of sale, to divide either certificate, though representing a large number of shares into small lots, even if a prudent owner having regard solel}' to his own interests would have done so.^ The pledgee has no right to sell more of the securities pledged than is necessary to satisfy the debt, if they are susceptible of division ; and if he does so, he is responsible for the damage sustained by the debtor. The measure of damages in such case is the sum necessary to replace the securities in excess of what it was necessary to sell, less the price for which the excess was sold, if that has been paid over to the debtor.* R. 450; Castello v. City Bank of Al- 648, 652; Markham v. Jaudon, 41 N. bany, 1 N. Y. Leg. Obs. 25, per Hoff- Y. 235, 244. See Schej)eler v. Eisner, man, J.; Wicks v. Hatch, 38 N. Y. 3 Daly (N. Y.), 11, which, however, Superior Ct. 95. is not good law. 1 Castello y. City Bank of Albany, * Mahoney v. Caperton, 15 Cal. 313. supra; Brown v. Ward, 3 Duer (N. * Newsome u. Davis, 133 Mass. 343. Y.), 660; Rankin v. McCullou^di, 12 * Fitzgerald v. Blocher, 32 Ark. Barb. (N. Y.) 103, 107, per Edmonds, 742. J. ; Brass v. Worth, 40 Barb. (N. Y.) 35 645 §§ 740, 741.] REMEDIES UPON PLEDGES OF STOCKS. 740. A creditor cannot himself become the purchaser of collateral bonds or stocks sold by him upon his debtor's default. Such a purchase does not change the creditor's relation to his debtor as regards the collaterals ; but these are still held by the creditor under the original title, as security for the original debt. The debtor, in order to obtain another sale of the collaterals, or to redeem them, is not required to prove that the creditor made a fraudulent sale, or one advantageous to himself, but only that the creditor became the purchaser. The creditor, in selling the collaterals, is in the position of a trustee for the debtor, and the law will not allow of the temptation to fraud, or the possibility of it, through the trustee's becoming purchaser at his own sale.^ Objection to the creditor's purchasing does not exist to the same degree when the sale is made upon a decree in equity ; for the sale is not then under the control of the creditor, but is made by a disinterested officer designated by the court. Accord- ingly, authority is very generally given, by statute or by de- cree, that the creditor may become a purchaser at a judicial sale made for his benefit ; or such authority is given by judicial con- struction.2 III. Illegal Sales hy the Pledgee. 741. The consequences of an illegal sale of stock col- laterals is, that the pledgor may, within a reasonable time afterwards, demand their return, and, upon a tender of the debt, may hold the pledgee liable in damages for failure to return them. But the pledgor cannot follow the collaterals in the hands of a purchaser in good faith from the pledgee, without notice that the latter held them in pledge. Before the pledgor can redeem them from the purchaser, or recover them in any way from him, he is required to make the clearest proof of the pur- chaser's direct knowledge of the loan and pledge.^ The consequence is the same if a pledgee himself, or by his 1 §§ 635-638; Stokes v. Frazier, 72 and see Richardson v. Mann, 30 La. 111. 428 ; Bank of the Old Dominion v. Ann. 1060 ; Wright v. Ross, 36 Cal. 414. Dubuque & Pacific R. R. Co. 8 Iowa, ^ Jones on Mortgages, § 1636; New- 277; Maryland Fire Ins. Co. v, Dal- port & Cincinnati Bridge Co. t?. Doug- rymple, 25 Md. 242; Baltimore Marine lass, 12 Bush (Ky.), 673, 720. Ins. Co. V. Dalrymple, lb. 269; Bryson ^ Little v. Barker, HoflF. (N. Y.) Ch. V. Rayner, lb. 424; Star Fire Ins. Co. 487; Conyngham's Appeal, 57 Pa. St. V. Palmer, 41 N. Y. Superior Ct. 267; 474. 546 ILLEGAL SALES BY PLEDGEE. [§§ 742, 743. agent, purcliases collateral stock upon a sale for default. Nothing passes by tlie sale, and the pledgee holds the pledge by his orig- inal title as pledgee. Only a bond fide purchaser from hini can acquire absolute ownership of the stock.^ 742. A wrongful sale or pledge of a customer's stock by a broker does not prevent his recovering for the purchase- money. Such sale or pledge is a failure to perform a subsequent duty, and he will be liable for the injury done by such failure. It is not a breach of a condition precedent which will prevent his charging his customer for the purchase of the stock.^ In an action by a stock-broker to recover an alleged balance on a stock transaction where the broker has sold stock purchased by him on a margin, and held in pledge to secure the advance made by him to make the purchase, he does not, by such sale, as a matter of law, extinguish all claim against the customer for the advance. The stock-broker is liable for the damages sustained by the customer through the wrongful sale of the stock, but whether the damages are equal to, or more or less than the amount of the claim for the purchase of the stocks, depends upon the facts to be developed.^ After such illegal or irregular sale the stock still remains in pledge, and all the dividends and accretions to it belong to the pledgor.* 743. A debtor will lose his right to question a sale of his collateral by acquiescence, or by his failure for an unreasonable length of time to institute proceedings to impeach the sale. The Eliot National Bank, holding certain shares of the Hecla Mining Compan}^, as collateral security for a loan, with written autliority to sell at its discretion, notified the debtor that the stock would be sold, and, accordingly, did sell it for more than its market value, to three directors of the bank, and applied the proceeds to the jjayment of the loan. A statement of account was given to the debtor after the sale, and he was informed of all the ^ Caiifield V. Minneapolis Agricul- 8 Gruman v. Smith, 81 N. Y. 25; tural & Mechanical Asso. (C. C. D. anil sec Capron d. Thompson, A-w/>m. Minn. 1883), 14 Fed. Rep. 801. ^ Conynghani's ApiJcal, 57 Ta. St. 2 Capron v. Thompson, 86 N. Y. 474. 418; .S'. C. 13 N. Y. Weekly Diy. lOy. 547 § 744.] REMEDIES UPON PLEDGES OF STOCKS. material facts respecting the sale, including the fact that the sale was made to three directors of the bank. Three years and a half after the sale, the stock having, in the mean time, greatly increased in value, the debtor notified the bank of his desire to redeem, and filed a bill in equity to assert a right of redemption. The Supreme Court held, that if he had originally any right to ques- tion the sale, he had lost this right by delay in asserting it.^ An account rendered is regarded as allowed by the party receiving it, unless it is objected to within a reasonable time ; and what is a reasonable time depends upon the circumstances of the case, and is for the jury to determine.^ 744. A customer whose stock has been irregularly sold by his broker should make objection to the sale within a reasonable time, else he may by his silence be estopped from disputing the sale.^ " What is a reasonable time must depend upon the circumstances of each case. Property of most kinds varies in value but little from week to week ; but stocks are sensitive to every breath that blows ; not infrequently they fluc- tuate from day to day, and in times of financial panic the steps in their decline are to be counted by hours, if not by minutes." In illustration of this statement of law, and of the reason for it, the following case is instructive. On the seventeenth day of September, 1873, a firm borrowed of brokers sixteen thousand dollars, payable the next day, on the security of five hundred shares of the stock of the Lehigh Coal and Navigation Company. On the day of the loan the stock was selling at about thirty-five dollars per share. The next morning the failure of Jay Cooke & Co. was announced, and on next following day the brokers sold, at 'private sale, with the apparent assent of the borrowers, a part of the stock at twenty dollars per share, and the brokers sold, at the brokers' board, the remainder of the stock at the same price. The same day they rendered an account of sales, showing a balance of four thousand dollars due upon the loan. About a fortnight afterwards they rendered another account, showing the same bal- ance due them. In the month of December following the brokers 1 Hayward v. National Bank, 96 » Colket v. Ellis, 10 Pliila. (Pa.) U. S. 611. 375, per Mitchell, J. 2 Porter v. Patterson, 15 Pa. St. 229; Bevan v. Cullen, 7 Pa. St. 281. o4b ILLEGAL SALES BY PLEDGEE. [§ 745. commenced a suit for the recovery of this balance of account. Early in February following the borrowers tendered the full amount of their debt, and demanded the return of the collateral stock. In the mean time the stock had greatly risen in price until it had reached, at the time of the tender, the price of forty- three dollars per share. It was held that this delay, for about four months, to object to the sale was unreasonable, and that the pledgors were thereby estopped to dispute the sale. Mr. Justice Mitchell, delivering the opinion of the court, said upon this point : ^ " Had plaintiffs promptly objected to the account, and expressed an intention to hold defendants liable for the con- version, the latter might, on the 27th of September, have bought back the stock at the same price at which they had sold it, and avoided this present controversy. How much longer the stock remained at or about this price the evidence does not show, but this is sufficient to demonstrate the importance of time in the question of ratification. Probably no safer way of specu- lating at another's risk could be invented than to make default and induce a sale of collaterals on a depressed market, lie quietly by till the wave had passed and prices were up again, and then tender the amount of the debt, with legal interest. Under the circumstances of this case, the delay of four months in objecting to the sale was so unreasonable, and the condition of defendants had in that time altered so materially, that it would be contrary to common honesty to allow the plaintiffs now to hold the de- fendants accountable for a loss which was caused in the first instance by their own inability to perform their contract." 745. The debtor, by accepting the surplus proceeds of a sale, may waive any irregularity in the sale, and debar him- self of the right afterwards to call it in question. Thus United States bonds having been pledged to a bank to secui'e overdrafts without any special power of sale, the bank afterwards sold the bonds at private sale with the consent, as the bank claimed, of the debtor. A surplus of proceeds was placed to the credit of the debtor in his account with the bank, entered upon his pass book, and drawn out by him. lie afterwards demanded the re- turn of the bonds, and brought suit therefor, denying that he had consented to the sale. Upon the trial of this issue the jury were 1 Colket V. Ellis, 10 Tlilhi. (Pu.) 3 75. 519 § 746.] REMEDIES UPON PLEDGES OF STOCKS. rightly instructed in substance, that if they found that the sale was made by the consent of the debtor, or that he knowingly accepted the credit on his bank account, then he could not com- plain that the sale was not made in accordance with the law of pledges, unless he could show that the sale was not fairly made for the fair market value of the bonds. ^ But a distinction has been made between an acceptance of the surplus by the debtor under a sale which he knew was claimed to have been made with his consent, and an acceptance of surplus arising from a sale made under authority of the act of bailment ; the acceptance in the latter case being regarded as no waiver of an irregularity in the sale. The sale being by virtue of the con- tract, it is said that the acceptance or non-acceptance after the sale is no evidence of the legal effect of the contract. The ac- ceptance of the surplus in such case, it is declared, does not estop the debtor, because neither by this act nor by any other had he induced the creditor to make the sale, or had he misled him to suppose he had a right to make the sale.^ 746. A pledgor by bringing an action for money had and received against his pledgee, after a wrongful sale of the property pledged, waives the tort and ratifies the sale. If the property pledged be a bond of the United States, which the pledgee has collected in gold coin at a time when such coin was at a premium, the pledgee is not liable in such action to account for its value in paper currency ; but having applied the gold to the payment of the debt, it is to be treated as any other cur- renc}", so far as it was applied as current money to the payment of the debt ; but that the surplus was to be accounted for at its value in paper money or in gold.^ If the pledgor, having ten- dered the amount of the debt before the collection of the bond, had brought an action of trover for the conversion of the bond, the damages would have been the value of the bond after de- ducting the amount of the debt.* In like manner a debtor's approval of an account and promise to make good a deficiency arising from the sale, made with full 1 Hamilton i\ State Bank, 22 Iowa, ^ Hancock v. Franklin Ins. Co. 114 306, per Dillon, J. Mass. 155. * Fitzgerald v. Blocber, 32 Ai-k. ■* Per Morton, J., in Hancock v. 742. Franklin Ins. Co. supra. 550 ILLEGAL SALES BY PLEDGEE. [§§ 747, 748. knowledge of the facts of the case, are a sufl&cient ratification of the sale.i 747. A payment of a deficiency arising upon the debt secured, after a wrongful sale of stocks held as collateral security, might, under ordinary circumstances, be an acqui- escence in the sale ; but it does not have this effect if it be made for the sole purpose of releasing other securities held in pledge by the creditor, and he refuses to surrender this without such payment. Such a payment is not a voluntary one. Being procured by a duress of goods, it is no more voluntary in the eye of the law than it would be if procured by duress of the person.^ 748. An action of trover cannot be maintained by the pledgor to recover the value of stock wrongfully sold by the pledgee without a tender of the debt secured. The wrongful sale of the pledge does not revest the immediate right of posses- sion of the pledge in the pledgee, and therefore the latter cannot maintain the action either for the whole value of the shares or for nominal damages.^ " It is true the pledgor has such a property in the article pledged as he can convey to a third person, but he has no right to goods without paying off the debt, and until the debt is paid off the pledgee has the whole present interest. If he deals with it in a manner other than is allowed by law for the payment of his debt, then, in so far as by disposing of the re- versionary interest of the pledgor he causes to the pledgor any difficulty in obtaining possession of the pledge on payment of the sum due, and thereby does him any real damage, he com- mits a legal wrong against the pledgor. But it is a contradiction in fact, and would be to call a thing that which it is not, to say that the pledgee consents by his act to revest in the pledgor the immediate interest or right in the pledge, which, by the bargain, is out of the pledgor and in the pledgee. Therefore, for any such wrong an action of trover or of detinue, each of which as- sumes an immediate right to possession in the plaintiff", is not maintainable, for that right clearly is not in the plaintiff." '* 1 Child V. HufTfT, 41 Cal. 519. 299; § 420. And see Donald v. Suck- 2 Stenton v. Jerome, 54 N. Y. 480. Vmg, L. R. 1 Q. B. 585. 3 Ilalliday v. Holgate, L. R. 3 Ex. * Halliday v. Hulgate, sujjra, per WiUes, J. 551 §§ 749, 750.] REMEDIES UPON PLEDGES OF STOCKS. But in case the pledgee has put the securities beyond his reach by an illegal sale of them, it is said that the pledgor need not make a formal tender of the amount due, nor a demand for the se- curities, before bringing an action against the pledgee to redeem, or an action for the conversion of the securities.^ If the pledgee by a sale has put it out of his power to return the securities, a formal tender of the debt and a demand for the return of the se- curities would be a useless ceremony, which the law never requires.^ If, however, he has only pledged the securities in good faith, and therefore had not wholly put it out of his power to restore them, a demand would be necessary before bringing a suit for damages.^ 749. That a debtor must pay or tender the amount of the debt before he is entitled to a re-transfer of stock held by the creditor as collateral security, is a proposition that is too clear to need authority for its support. But a transaction may be so uncertain in its character as to require a decision of court to determine whether the debtor is to first pay his debt or the cred- itor is first to tender the stock. Thus the purchaser of shares of a railroad company gave his note for the purchase money, and the seller gave him an agreement wherein he agreed to deliver certain certificates of stock, and recited that the stock had been transferred to the purchaser, but that the seller was to hold it for the payment of said note. In an action upon the note, it was held that the transaction was a sale of the stock and a pledge of it for the purchase money, and not an executory agreement to sell it ; and that therefore the plaintiff wa'fe not bound to tender the stock, or to make a formal transfer of it upon the books of the company, until the defendant should have paid the note, or, at least, have tendered payment thereof to the plaintiff.^ IV. The Pleasure of Damages for an Illegal Sale of Stock Collaterals. 750. The general rule of damages in actions at law for 1 Cortelyou v. Lansing, 2 Caines ^ Fletcher v. Dickinson, supra ; Cas. (N, Y.) 200, 203 ; Wilson v. Read v. Lambert, supra. Little, 2 N. Y. 443, 449 ; Read v. ^ Read v. Lambert, supra. Lambert, 10 Abb. (N. Y.) Pr. N. S. * James i'. Hamilton, 2 Hun (N.Y.), 428; Lewis v. Graham, 4 Abb. (N. Y.) 630; S. C. 5 T. & C. 183; affirmed, 63 Pr. 106; and see Fletcher v. Dickin- N. Y. 616. son, 7 Allen (Mass.), 23. 652 DAMAGES FOR ILLEGAL SALE OF STOCK COLLATERALS. [§ 751. wrongful conversion of stock by a pledgee is the value of the stock at the time of its conversion, with interest.^ This rule fol- lows the general rule, that in an action on a contract to deliver goods, stocks, and other personal property, the measure of dam- ages is the value of the property at the time and place of de- livery.2 " In trover, the general rule, both in England and the United States, undoubtedly is, that the current or market value of property at the time of conversion, with interest from that time until the trial, is the true measure of damages." ^ lu many of the cases above cited the doctrine noticed in a succeeding sec- tion as an exception to this general rule of damages, when the subject matter of the action is a conversion of stock or goods pledged, or a failure to deliver them after the price has been paid, is expressly examined and repudiated. 751. In many cases the time of conversion will be fixed by the demand for the return of the stock, and therefore in such cases the value of the stock will be taken at the time of the demand in fixing the measure of damages.* If the time of con- version was not known to the plaintiff at the time it occurred, it is said that he may at his election take the time of its becoming known to him, instead of the time of the actual conversion, as the time for fixing the market value of the stock.^ 1 As in New Hampshire: Pinker- man v. American Powder Co. 8 Cush. ton V. :Manchester & Lawrence R. R. 168. Co. 42 X. H. 424, 457; Rand v. White Mississippi : Bickell v. Colton, 41 Mountains R. R. Co. 40 N. H. 79 ; Miss. 368. Frothingham v. Morse, 45 N. H. 545. Nevada: Boylan v. Huguet, 8 Nev. Illinois: Loomis v. Stave, 72 111. 345; and see Carlyon v. Lannan, 4 623; Sturges v. Keith, 57 111. 451; Nev. 156; O'Meara v. N. A. Mining -S'. C. Sedgwick's Lead. Cas. on Dam- Co. 2 Nev. 113. ages, 606. Vermont: Hilly. Smith, 32 Yt. 433. Iowa : Robinson v. Hurley, 1 1 Iowa, Virginia : Orange & Alexandria R. 410; and see Safely v. Gilmore, 21 R. Co. v. Fulvey, 17 Gratt. 366. Iowa, ;j88. 2 Sedgwick on Damages, p. 474 et Maryland: Baltimore Marine Ins. seq. ; Field on Damages, § 245. Co. V. Dalrymple, 25 Md. 242, 307, s Suydam v. Jenkins, 3 Sandf. (N. per Bartol, J.; Baltimore City Pas- Y.) 614, 626, per Duer, J. senger Ry. Co. i). Sewell, 35 Md. 238. * Baltimore City Passenger Ry. Co. Massachusetts : Fowle v. Ward, v. Sewell, 35 Md. 238, 257; Piiikerton 113 Mass. 518, per Ames, J. ; Gray v. v. IMancbester & Lawrence R. R. Co. Portland Bank, 3 Mass. 364 ; Ken- supra. nedyi;. Whitwell, 4 Pick. 466; Green- ^ O'Meara v. N. A. Mining Co. field Bank v. Leavitt, 17 Pick. 1 ; ^Vy- supra. 653 §§ 752, 753.] REMEDIES UPON PLEDGES OF STOCKS. 752. But in a suit in equity to redeem shares pledged as collateral security and wrongfully sold by the pledgee, the latter may be charged with the value of the shares at the time of filing the bill. " If the sale was unlawful and void as against the plaintiff," say the Supreme Court of Massachusetts,^ " he is entitled to all the advantages that he could have had from the shares if they had not been sold at all. Among those advantages •is the right of judging for himself whether to keep or to sell them, and as to the best time to sell, if he should see fit to sell them. To place him substantially in the same position as if the wrongful act of the defendant had not occurred, would require that he should recover for damages a sum of money which would enable him to purchase new shares to replace those which have been taken from him, with such additional sum as would indem- nify him for the dividends which he has lost since the sale, and also an equitable allowance for interest. It is in vain for the de- fendant to insist that when he made the sale he obtained the full market price of that time. The plaintiff was not a party to that sale, and was not bound by it. The defendant had no right to make the sale. All that he could lawfully do was to hold the shares, and have them forthcoming for the true owner on demand. But instead of so doing, he by his own fault has caused the plain- tiff to lose them, and the only equitable remedy is to replace them, or to enable the plaintiff to do so for himself. In the common law action of trover, the rule of damages is undoubtedly the value of the chattel in controversy at the time of the conversion. So also in an action for the non-fulfilment of a contract to deliver stock, the measure of damages would ordinarily be the value at the time when it should have been delivered, or if no time of de- livery had been named in the contract, the time when it was demanded. But in the case before us the plaintiff seeks, and is entitled to have, the specific equitable remedy of being replaced in his original position. His claim is not damages for breach of a contract or for a wrongful conversion of property, but to com- pel the reconveyance of shares which ought to be in the defend- ant's hands at this moment." 753. In England, and in some of the American States, an exception to this general rule of damages is made in cases of 1 Fowler. Ward, 113 Mass. 548. 554 DAMAGES FOR ILLEGAL SALE OF STOCK COLLATERALS. [§ 753. loans of goods oi* stocks ; in cases of contracts to deliver them where the price has been paid ; and in cases of failure to return such property when it has been pledged, and the debt secured has been paid.^ The distinction rests upon the ground that the defendant having got the plaintiff's money, and thereby having deprived him of the means of going into the market and pur- chasing the same property at the market prices then prevailing, the plaintiff should be allowed to elect the value at the time the property should have been delivered, or the value at the time of trial, or, perhaps, the value at any intermediate period. Thus, in Shepherd v. Johnson, ^ in an action for breach of an engage- ment to replace borrowed stock on a given day, the highest value as it stood at the time of trial was taken as the measure of damages, Grose, J., saying: "The true measure of damages is that which will completely indemnify the plaintiff for the breach of the engagement. If the defendant neglect to replace the stock at the day appointed, and the stock afterwards rise in 1 West V. Pritchard, 19 Conn. 212. The court, after stating the general rule that the damages for a breach of contract to deliver any article is the value of it at the place and time of delivery, say: "But to this general rule an exception has been made in many of the modern cases. And that is, where the price of the goods is paid in advance, and the vendor sub- sequently refuses to deliver them, the purchaser is not confined to their value at the time when they should have been delivered, but if the goods have risen in value, he may recover their value at the time of trial. But this exception does not apply where a con- tract is made for the purchase of goods which are to be paid for when de- livered. There, as nothing is paid by the purchaser upon the contract, lie has the money in his possession, and may, immediately after the contract is broken by the defendant, purchase other goods; and if he sustains any loss by neglecting to do so, the fault is his own. He cannot avail himself of any subsequent rise of the articles in his action for their non-delivery. . . . Although the exception to the rule seems not to have been univer- sally adopted, yet, in our opinion, it appears to be founded upon principles of natural justice. The effect is to give indemnity to the injured party, who has been induced to part with his property, relying upon the engagements of another." See, also, in recognition of this exception to the rule, Shepherd V. Hampton, 3 Wheat. 200, 204, per Marshall, C. J.; Clark v. Piuney, 7 Cow. (N. Y.) 681; Arnold v. Suffolk Bank, 27 Barb. (N. Y.) 42-4. Kent V. Ginter, 23 Ind. 1 ; Randon v. Bar- ton, 4 Tex. 289; Stephenson v. Price, 30 lb. 715. 2 2 East, 211 ; followed in M' Ar- thur V. Seaforth, 2 Taunt. 257; Green- ing V. Wilkinson, 1 C. & P. G25 ; Gains- ford V. Carroll, 2 B. & C. 624; Downes V. Back, 1 Starkie, 318; Harrison v. Harrison, 1 C. & P. 412; Archer v. Williams, 2 Car. & Kir. 26 ; Owen v. Routh, 14 C. B. 327; West v. Wcnt- worth, 3 Cow. (N. Y.) 82; Clark v. Pinney, 7 lb. 681. 555 § 754.] REMEDIES UPON PLEDGES OF STOCKS. value, the plaintiff can only be indemnified by giving him the price of it at the time of the trial. And it is no answer to say that the defendant may be prejudiced by the plaintiff's delaying to bring his action ; for it is his own fault that he does not per- form his engagement at the time ; or he may replace it at any time afterwards, so as to avail himself of a rising market." 754. This exception had its origin in England in actions for stock loaned, or purchased and paid for. Stocks are sub- ject to wide fluctuations in price, and in case the market price had advanced between the time of the breach of the contract and the trial, it was assumed that the plaintiff could be com- pletely indemnified only by allowing him the value of the stock at the time of trial, or the highest value, up to that time, as damages. But this rule presupposes that the stock was intended for a permanent investment, and that the plaintiff would have kept it until the time of trial. These presumptions may be, and often are, against the fact. The plaintiff, moreover, by being allowed to elect the time at which the stock shall be valued, is able to make the measure of damages depend upon his own strategy rather than upon any fixed or definite rule. " Stocks that cost the owner little or nothing now and then advance to par, and above. Suppose the owner of such stocks should pledge them when not worth ten cents on the dollar, and the pledgee convert them. They cost the owner little or nothing. Circum- stances arise, however, which enhance their value. By delaying his suit, or the trial of it, until these circumstances have had their full effect, the plaintiff, by invoking the aid of the pre- sumptions, 1st, that he had parted with his money for the stock ; 2d, that he obtained the stock as a permanent investment ; and, 3d, that it is to be presumed that he would have kept it until the time of the trial, can elect to take the market value at the time of trial, when each of these presumptions is as baseless as the fabric of a dream. Such a rule, instead of being general, fixed, and certain, is merely speculative, conjectural, and dependent upon accidental circumstances." ^ The condition of one who has pledged stock for less than its 1 Sturges V. Keith, 57 111.451, 462 ; this exceptional rule of damages, and S. C. Sedgwick's Lead. Cas. on Dam- criticisms upon it, see 2 Sedgwick, on ages, 606. For an able discussion of Damages, p. 481, marginal note. 556 DAMAGES FOR ILLEGAL SALE OF STOCK COLLATERALS. [§ 755. value, in an action for its conversion by the pledgee, is analogous to the case of a purchaser of stock who has advanced his pur- chase-money, and has brought suit for failure of tlie vendor to deliver it ; and therefore the same rule of damages is adopted by courts that have adopted the foregoing exception to the general rule. 755. The highest market value of the converted stock up to the time of trial has been taken in some courts as the measure of damages for the conversion, provided the suit is brought without unreasonable delay.^ The object sought to be attained by this rule seems to be to place the plaintiff in the same situation he would have been in e:5tcept for the wrongful conversion of his stock. This rule proceeds upon the assumption that the plaintiff would have retained his stock till the day of trial, or till it had reached its highest price prior to that day, and then would have sold it, and hence that its price at that time would be the proper indemnity for him. The courts of New- York, in adopting this rule in regard to stocks, follow the rule of damages adopted in that state in relation to other property. But, on the other hand, the courts of Pennsylvania, while reject- ing this rule in regard to other property, adopt it in reference to stocks.2 "The case of stock," say the Supreme Court of Penn- sylvania, " is an exception to the general rule applicable to chat- tels.^ It is made an exception in obedience to the paramount 1 As in New York : Markbara v. either case the party entitled to the Jaudon, 41 N. Y. 235; Romaine v. delivery parts with his property on the Van Allen, 26 N. Y. 309 ; Kortright faith of the contract, and in either V. Commercial Bank of Buffalo, 20 case is prevented from, using it, up to "Wend. 91, per Verplanck, Senator; the time of trial. The question is, Wilson V. Little, 1 Sandf. 351 ; Allen whether, in either case, the law should V. Dykers, 3 Hill, 593; aflirmed, 7 lb. act on the assumption that the plain- 497; and see Lobdell v. Stowell, 51 N. tiff would have retained the property Y. 70, affirming the principle of these if the contract had been complied cases. Ohio : Bates v. Wiles, 1 with, till the period of highest value, Handy, 532. and have realized that price, and thus 2 In regard to this distinction, Mr. give damages which are purely con- Sedgwick, in his work on Damages, jcctural." p. 273, says: "There appears no solid » Bank of Montgomery v. Reese, 26 reason for making any difference be- Pa. St. 143 ; and see Conyingham's tween stock and any other vendible Appeal, 5 7 I*a. St. 4 74 ; Musgrave v. commodity. Where stock is loaned, Beckendorff, 53 Pa. St. 310. But the or the price of the article paid for, in principle of these cases ajiiilies only 557 § 756.] REMEDIES UPON PLEDGES OF STOCKS. obligation to indemnify the party for his loss. The rule of con- venience gives place to the rule of justice. The moment we proceed, on this ground, to take it out of the general rule, we are obliged to substitute one that will do complete justice to the party injured. 'The question is, what did the plaintiff lose?'^ He is entitled to all the advantages he could have derived from the stock, if it had been delivered at the specified time.^ Those advantages are the highest market value between the breach and the trial, together with the bonus and dividends which have been received in the mean time."^ In a later case,^ Judge Sharswood of the same court, after stating the general rule as to the measure of damages to be that the goods are to be valued at the time of the conversion, that this rule has been modified as to stocks, bonds, and securities of a like nature, says : " The rule, however, is not changed, but onl}^ modified to this extent, that wherever there is a duty or obligation devolved upon a defendant to de- liver such stocks or securities at a particular time, and that duty or obligation has not been fulfilled, then the plaintiff is entitled to recover the highest price in the market between that time and the time of the trial. The grounds of this .exception are, that such securities are limited in quantity, are not alwa^^s to be ob- tained at any price, and are of a very fluctuating value." 756. But the better opinion is that this rule of danaages is applicable only in special exceptional cases ; ^ and it seems clear that it cannot be properly applied to a conversion of stocks not held as an investment but carried upon a margin, with a view where the plaintiff suffers loss in the stocks; Matthews v. Coe, 49 N. Y. 57, advance price of the stock through 62. In the latter case Chief Justice the defendant's refusal to perform his Chui'ch said: "An unqualified rule, contract. Phillip's Appeal, 68 Pa. St. giving a plaintiff in all cases of con- 130 version the benefit of the highest price ^ Kinirael v. Stoner, 18 Pa. St. 155, to the time of trial, 1 am persuaded 157. cannot be upheld upon any sound 2 Harrison r. Harrison, 1 C. & P. 412. principle of reason or justice. Nor 2 Vaughan y. Wood, 1 Mylne & K. does the qualification suggested in some 403. of the opinions, that the action must * Neiler v, Kelley, 69 Pa. St. 403. be commenced within a reasonable ^ Suydam v. Jenkins, 3 Sandf. (N. time and prosecuted with reasonable y.) 614, per Duer, J., who ably re- diligence, relieve it of its objectionable views the whole subject, though the character." See, also, Bryan v. Bald- case did not relate to a conversion of win, 52 N. Y. 232, 236. 558 DAMAGES FOR ILLEGAL SALE OF STOCK COLLATERALS. [§ 756. to making a profit by tbeir sale. In a case of tlie latter kind, the proper rule of damages is the price the plaintiff would have been obliged to pay in the market to replace the stocks on a day within a reasonable time after the wrongful sale. In Baker v. Drake,^ this rule was established by the New York Court of Ap- peals. " If the broker has violated his contract, or disposed of the stock without authority, the customer is entitled to recover such damages as would naturally be sustained in restoring himself to the position of which he has been deprived. He certainly has no right to be placed in a better position than he would be in if the wrong had not been done. But the rule adopted in Mark- ham V. Jaudon,2 passing far beyond the scope of a reasonable in- demnity to the customer whose stocks have been improperly sold, places him in a position incomparably superior to that of which he was deprived. It leaves him, with his venture out, for an in- definite period, limited only by what may be deemed a reason- able time to bring a suit and conduct it to its end. The more crowded the calendar, and the more new trials granted in the action, the better for him. He is freed from the trouble of keep- ing his margins good, and relieved of all apprehension of being sold out for want of margin. If the stock fall or become worth- less he can incur no loss ; but if at any period, during the months or years occupied in the litigation, the market price of the stock happens to shoot up, though it be but for a moment, he can at the trial take a retrospect, and seize upon that happy instant as the opportunity for profit of which he was deprived by his trans- gressing broker, and compel him to replace with solid funds this imaginary loss." A similar qualification of the rule allowing the highest inter- mediate value has been made in California. " The time of the commencement of the action or trial," say the court,^ " would not seem to have any natural or logical connection or relation to the question of damages ; and the question as to whether a suit 1 53 N. Y. 211, 217; S. C 13 Am. The rule laid down in Baker v. Rep. 507 ; affirmed in same case again Drake, mpra, has since been affirmed before the court, 66 N. Y. 518; and in Gruman v. Smith, 81 N. Y. 25; see Scott v. Rogers, 31 N. Y. 676; Colt w. Owens, 90 N. Y. 3G8. Matthews v. Coe, 49 N. Y. 57, per ^ See § 755. Church, C. J.; Whelan v. Lynch, 60 ^ Pacre r. Fowler, 39 Cal. 412; S. C. N. Y. 469; Brass v. ^^'orth, 40 Barb. Sedgwick's Lead. Cas. on Damages, (N. Y.) 648. 597. 559 § 757.] REMEDIES UPON PLEDGES OF STOCKS. was or was not commenced within a reasonable time would rarely, if ever, depend upon any fact which would affect the in- demnity to which the plaintiff is entitled. The reasonable time mentioned in the cases cannot mean a reasonable time within which to commence the action independently of the question of damages. It must mean a time within which it would be reason- able to allow the plaintiff to take the highest market price as the measure of his damages. In other words, the rule reducible from the authorities is, that in cases affecting property of a fluctuating value, where exemplary damages are not allowed, the correct measure of damages is the highest market value within a reason- able time after the property was taken, with interest computed from the time such value was estimated." 757. The true measure of damages for a broker's unauthor- ized sale of his customer's stock is the difference between the price for which the stock was sold and its market price within such reasonable time after notice of the wrongful sale as would enable the customer to replace the stock, in case such market price should exceed the price for which the sale was made. The customer is entitled to the damages sustained, but he can claim no greater benefit than would have accrued to him if the wrongful sale had not been made. If, for instance, the price of the stock does not advance again after the sale, but declines still more, it is clear that the customer, instead of being injured by the sale, is really benefited by it.^ Accordingly, where it appeared that the customer could have purchased the stock at any time within thirty days after an un- authorized sale by his broker, for a less price than that at which it was sold, it was held that the customer was entitled to recover v only nominal damages for such unauthorized sale.^ 1 Gruman v. Smith, 81 N. Y. 25; affirmed by Ct. of Appeals (Nov. 21, Colt V. Owens (N. Y. Superior Ct. 1882), 15 lb. 439; S. C. 90 N. Y. 368. 1881), 13 N. Y. Weekly Dig. 40; ^ Coll v. Owens, suj)ra. 560 INDEX. Reference is to Sections. ACCEPTANCE. §ee Bill of Exchange. ACCESSIONS to the pledged property are covered by the lien, 32, 33. ACCOMMODATION PAPER, holder of, ia pledge for preexisting debt, 122. it does not matter that holder has notice of fact, 123. may be effectually pledged for preexisting debt, 124. note held as collateral, discharged by tender of principal debt, 547. pledgee may enforce before collecting principal debt, 673. in suit upon, pledgee can recover only to extent of debt secured, 676. ACTION. See Remedies. ADMINISTRATOR. See Executor. AGENT, pledgor may act for pledgee in selling pledged goods, 43. holding negotiable paper can effectually pledge it, 96. of debtor, misapplication of negotiable securities by, 97. no power to pledge goods of principal, 327. when not a factor vpithin the factors' acts, 344. to be a factor his business must end in a sale, 345. whose authority to sell has been revoked, 347. misapplication of negotiable collaterals by pledgee's agent, 565. AGREEMP^NT to pledge distinguished from actual pledge, 28. to pledge amounts to nothing as security, 29. ALABAMA, statute regulating transfer of stock, 181. pledgor's interest subject to garnishment, 375. APPLICATION of payments. See Payment. APPROPRIATION of payment.^. See Payment. ARKANSAS, statute regulating transfer of stock, 182. ASSIGNMENT by pledgor of his interest, 364-371. is subject to lien of the pledge, 364. 3G 561 INDEX. Reference is to Sections. ASSIGNMENT — continued. gives only pledgor's interest, 365. notice to assignee of the pledge, 367. notice by assignee of the assignment, 368. action for prior conversion of the pledge, 369. assignee entitled to redeem, 370. Of pledge by pledgee, 418-428. pledgee's assignee stands in his place, 418. of pledge without the debt, 419. original contract not destroyed by, 420. no implication of law that pledgee will keep possession, 421. pledgor cannot maintain trover in consequence of, 422. can pass no greater interest than pledgee has, 423. except in case of negotiable paper, 424. ATTACHMENT, whether shares transferred merely by delivery of certificate subject to, 177. of shares with knowledge of prior equitable transfer, 179. Liahility of pledgor s interest to, 372-392. not liable at common law, 372. not subject to trustee or garnishee process, 373. statutes of several states in regard to attaching pledgor's interest, 374-392. Cf pledged property by pledgee, 599-601. pledgee generally waives by attaching same property, 599. but may attach other property of pledgor, 599. cannot attach pledged goods in hands of his agent, 599. may attach same goods on other demand, 601. BANKRUPTCY AND INSOLVENCY. Upon bankruptcy of the pledgor, pledgee still holds the pledge, 584. assignee holds subject to same equities as the debtor, 585. assignee who collects securities must apply the proceeds to pledgee's benefit, 586. pledgee may prove his whole claim, 587. rule that the value of security must be deducted before proof, 588. of debtor does not deprive pledgee of right to sell, 724. BILL IN EQUITY. See Equity ; to redeem pledge, see Redemp- tion. BILL OF EXCHANGE, whether bill of lading secures acceptance or payment of, 255. 562 INDEX. Reference is to Sections* BILL OF -EXCHANGE — conthiued. bill of lading secures acceptance of when on time, 256. when bank may surrender on acceptance, 257. by agreement bill of lading may secure payment, 258. such agreement may be proved by parol, 259. title of pledgee divested by acceptance or payment, 260. BILL OF LADING, pledge of, 227-279. Is a symbol of property, 227-232. transfer of makes effectual pledge of the goods, 228. delivery of is a symbolical delivery of the goods, 229. represents the property, 230. indorsement of in pledge passes special property in the goods, 231. preexisting debt sufficient consideration for pledge of, 232. Soto far negotiable, 233-244. is quasi negotiable, 233. statutory provisions in several states, 234^240. qualities of negotiable notes cannot be given by statute, 241. rights of pledgee of bill of lading are those of a pledgee of the property, 242. indorsement by shipper assigns his title, 243. pledge by one not the owner gives no title, 244. How far binding upon carrier, 245-254. represents goods to be in hands of carrier, 245. not binding upon carrier when signed by agent, if goods not de- livered, 246. statutory enactments on this subject, 247. master of vessel cannot bind owner, if goods not received, 248. carrier on land has same rights in this respect, 249. custom cannot make negotiable, 250. carrier not estopped to deny that he has received the goods, 251. exceptional doctrine in New York, 252. may be operative as a pledge, though not binding upon carrier, 253. spurious bill does not avail against genuine, 254. Whether security for accejytance or payment, 255-260. is security for acceptance of time draft, 256. bank may surrender on acceptance, 257. secures payment when so agreed, 258. agreement to this effect may be proved by parol, 259. title of pledgee divested by acceptance or payment, 260. 503 INDEX. Reference is to Sections. BILL OF LADING — continued. Bow pledged, 2Ql-2e5. drawn to order should be indorsed, 261. but may be delivered without indorsement, 262. not to order may be pledged by delivery, 263. third person paying draft secured is vested with title, 264. pledgee by delivery may maintain replevin for the goods, 265. Pledgee's rights as against consignor, 266, 267. vendor's right of stoppage in transitu defeated, 266. so far as concerns the pledgee, 267. Pledgee's rights as against the consignee, 268-272. consignee obtains title only upon paying or accepting draft, 268. obtaining goods without accepting drafts, 269. pledgee may deliver possession of goods to consignee, 270. inaknig goods deliverable to consignor's order, 271. pledgee not affected by secret agreement between consignor and consignee, 272. Pledgee's rights against carrier, 273-277. for delivering goods to any other person, 273. last carrier bound to deliver goods to holder of, 274. when goods made deliverable to consignee, 275. what is a complete delivery of the goods, 276. lien of pledgee covers freight, 277. Pledgees of different parts of same bill of lading, 278, 279. property passes by part first delivered, 278. carrier may deliver to consignee on his producing one of the set, 279. BILL OF PARCELS, as security, constitutes a pledge, 15. receipted, constitutes a pledge, 16. BILL OF SALE, as security, constitutes a pledge, 15. with agreement for repurchase, a pledge, 19, 20. BROKER, carrying stocks upon margin, 495-501. stands in relation of pledgee to customer, 495. acts in a threefold relation, 496. distinction between carrying stocks and carrying executory con- tract for grain, 497. different view of the contract in Massachusetts, 498, 499. cannot recover for fictitious purchase, 500. Authority to use and hypothecate pledged stock, 501-512. may be inferred from circumstances, 502. usage to pledge customer's stock, 503. 664 INDEX. Reference is to Sections. BROKER — continued. agreement that he may hypothecate customer's stock, 506. but bound to return identical stock, 508, 509. but must always have enough on hand to deliver, 510, 511. rehypothecating securities belonging to several persons, 512. Remedies of upon purchases of stock upon margin, 722. custom to sell at stock exchange without notice, 723. illegal sale does not prevent his recovery of purchase money, 742. customer should object to sale within reasonable time, 744. BROKERS' BOARD, sale at, is not a public sale, 737, 738. CALIFORNIA, statute regulating transfer of stock, 183. statute relating to negotiability of bills of lading, 234. statute relating to negotiability of warehouse receipts, 284. pledgor's interest subject to garnishment, 376. CARE of thing pledged. See Diligence. CARRIER, cannot pledge goods intrusted to him, 64. How far hill of lading binding upon, 245-254. bill of lading represents goods to be in hands of, 245. not bound by bill of lading signed by agent not receiving the goods, 246. statutory enactments on this subject, 247. master of vessel not bound by bill of lading when goods not re- ceived, 248. railroad company not bound under like circumstances, 249. custom cannot make bills of lading negotiable, 250. not estopped to deny that he has received the goods, 251. exceptional doctrine in New York, 252. may not be bound by bill of lading, though good between pledgor and pledgee, 253. possession obtained by spurious bill of lading, 254. Pledgee's rights as against, 273-277. liable for delivering goods to any one but holder of bill of lading, 273. last carrier bound to deliver to holder of bill of lading; 274. when justified in delivering to consignee, 275. what a complete delivery under a bill of lading, 276. freight on pledged goods covered by lien of pledgee, 277. may deliver to consignee holding one of set of bills of lading, 279. 565 INDEX. Reference is to Sections. CERTIFICATE. See Stock and Transfer. of stock not a negotiable instrument, 461. usage of brokers to treat it as negotiable, 462. some authorities assimilate it to a negotiable instrument, 463. title to, not changed by involuntary transfer, 464. whether negligence to assign in blank, 465. taken in good faith from apparent owner, 466, 467. CHOSES IN ACTION, pledge of non-negotiable, 134-150. subject in hands of pledgee to existing equities, 134. bond fide purchaser for value, 135. assignment is valid without notice to debtor, 136. Mortgages may be assigned in pledge, 137-144. absolute assignment as security is a pledge, 140. may be shown by parol to be a pledge, 141. may be pledged without formal assignment, 142. note may be pledged without mortgage, 143. Insurance policies may be pledged, 145-147. without written assignment, 145, 147. life policy payable to married woman may be pledged by her, 146. Savings bank books may be pledged, 148. without written assignment, 148. Judgment may be pledged, 149. Pledge of land certificates, 150. other than stocks and bonds should be collected and not sold, 661. CIVIL LAW, doctrine regarding delivery of pledge, 23. exception as to redelivery to pledgor for special purpose, 46. COLLATERAL SECURITY, defined, 1. when assignment of security to a creditor presumed to be, 17. COLORADO, statute regulating transfer of stock, 184. pledgor's interest made subject to execution, 377. pledgee of stock not personally liable as stockholder, 446. , COMMON CARRIER. See Carrier. COMPROMISE. Pledgee cannot make upon collateral paper, 716. CONDITIONAL PAYMENT, negotiable paper taken as, 115, 116, 132. CONDITIONAL SALE, distinguished from pledge, 20, 154. sale of stock with agreement to repurchase, 154, 156. CONNECTICUT, statute regulating transfer of stock, 185. statute giving corporation lien upon its stock, 222. statute relating to negotiability of warehouse receipts, 285. 566 INDEX. Reference is to Sections. CONSIDERATION, illegality of, does not affect pledgee of negotiable paper, 99. future advances sufficient to support pledge, 106. Preexisting debt, whether sufficient to support a pledge, 107—133. early decisions in this country, 107. held sufficient by the United States Courts, 108, 109. is a valuable consideration, 110, 469. held sufficient in certain states. 111. ground of the doctrine, 112. forbearance on the part of creditor, 113. taking security for preexisting debt is in usual course of business, 114. distinction between taking note in payment and in security, 115. this distinction is shadowy, 116. doctrine that preexisting debt is not good consideration, 117. this doctrine rests upon two objections, 118. the old debt a sufficient consideration, 119. policy and prospects of this doctrine, 120. uniformity of rule important, 121. exception as to accommodation paper, 122. does not matter that pledgee has notice that paper is accommoda- tion, 123. accommodation paper pledged for preexisting debt, 124. equities arising subsequently to indorsement, 125. equities arising from independent transactions, 126. creditor parting with value at time of pledge, 127. effect of a change in legal rights of the parties, 128. agreement for further time, 129, 130. usurious agreement for extension, 131. paper taken as conditional payment, 132. transaction governed by law of place of contract, 133. sufficient for pledge of bill of lading, 232. Debt secured must he founded on, 354. CONSIGNEE. See Bill of Lading. CONSIGNOR. See Bill of Lading. CONSTRUCTION of pledge when in writing, for the court, 21. CONVERSION by pledgor of property returned to him for special pur- pose, 45. of pledge, pledgee's action for, 429. pledgee may recover of pledgor for, 430. measure of damages in action by pledgee against pledgor, 432. 567 INDEX. Reference is to Sections. CONVERSION — continued. measure of damages in action against third person, 433. of pledged stock by pledgee's hypothecating, 507. trover for conversion is usual remedy for redeeming pledges, 561. trover for bank bills pledged, 562. wrongful sale of pledge by pledgee amounts to, 563. principal liable for conversion by agent, 565. occurs ujion creditor's refusal of a proper tender, 566. but not when third party claims the pledge, 567. pledgee may show in defence that property belonged to a third person, 568. the burden of proof is then upon him, 569. tender generally necessary before suit, 570. unauthorized sale of pledge not itself a conversion, 571. no formal tender necessary if there be a substantial offer to re- deem, 572. may be waived by debtor, 573. measure of damages for, 574. in case of negotiable paper, 575. mitigation of damages may be shown, 576. pledgee may offset the debt secured, 577. counter-claim for other debt cannot be set up, 578. in case of rehypothecation, 579. if pledgee has converted pledge into money he may be sued for money had and received, 580. Of stocks hj illegal sale, damages for, 750-757. value at time of sale is general rule, 750. time of, may be fixed by demand for the stock, 751. highest market value up to time of trial, 755. this rule applies only in exceptional cases, 756. the true rule of damages, 757. CORPORATION, may pledge any personal property, 70. when may pledge unissued stock, 71. to its own directors, 72. may pledge its mortgage bonds, 73. railroad may pledge its bonds, 74. may take a pledge of any property, 75. prohibited from taking stock of another corporation, 76. national bank may take a pledge of chattels, 77. cannot lend its credit, 77. 568 INDEX. Reference is to Sections. CORPORATION — continued. may take a jjledge of stock of corporations whose property is real estate, 78. canuot take its own stock in pledge, 79. See Stocks. COUPONS, for interest, pledgee should collect as they fall due, 668. CRIMINAL OFFENCE, assigning collateral before maturity of debt* 98. CUSTOM. See Usage. DAKOTA TERRITORY, statute regulating transfer of stock, 186. pledgee of stock not personally liable as stockholder, 447. DAMAGES, for refusal of corporation to transfer stock, 226. measure of, for pledgee's loss of collaterals, 417. in action by pledgee against pledgor for conversion, 432. in action by pledgee against third person for conversion, 433. for pledgee's conversion of pledge is its value at that time, 574. of negotiable paper is its face value, 575. mitigation of, when proceeds of pledge have been applied to debt, 576. pledgee may offset amount of debt secured, 577. • cannot set up other debt as a counter-claim, 578. in case of rehypothecatiou, 579. Pleasure of for illegal sale of stocks, 750-757. general rule is value at time of rule, 750. exception to the rule, 753, 754. highest market value up to time of trial, 755. this rule applicable only in special cases, 756. the true rule, 757. DEBT secured must be founded on good consideration, 354. is determined by contract of the parties, 355. mere existence of another debt from pledgor to pledgee, 356. general lieu for balance of account, 357. security for specific loan may be made to cover other loans, 358. a pledge may be a continuing security, 359. banker may have a lien for a general balance, 360. to arise in the future may be secured, 361. whole transaction to be looked at to determine, 362. interest as well as principal secured, 363. Sttit upon (he debt, 589-598. demand of payment may be necessary to create default, 608. 569 INDEX. Reference is to Sections. DEBT — continued. payable at future day cei-tain, does not dispense with notice of sale, 609. Enforcing collateral 'pa'per^ 651—663. Enforcing 'principal debt, 681-686. DEFICIENCY, suit for after applying proceeds of pledges, 597. payment of, is an acquiescence in sale of pledge, 747. DELIVERY. See Possession. Essential to a pledge, 23-39. what constitutes, 23. distinguishes a pledge from a mortgage, 24. in case the goods are already in hands of pledgee, 25. in case of a pledge of a part of a quantity of goods, 26. agreement of parties not equivalent to, 27, 28. cannot be dispensed with by agreement, 29. symbolical, sufficient, 36. of document of title, 37. to carrier effectual, 37. subsequent, prevails between the parties, 38. back to pledgor terminates the pledge, 40. unless for a temporary purpose, 40. Of negotiable paper in pledge, 80-88. is essential to a valid pledge, 80. statutory provisions concerning, 81. parol evidence that transfer is in pledge, 82. need not always be actual, 83. subsequent to the pledge, 84. actual possession by pledgee essential, 85. redelivery to pledgor for collection, 86. destroys pledgee's title as against third persons, 87. for temporary purpose, 88. of paper not requiring indorsement makes pledge eflfectual, 90, 91. without indorsement makes an equitable pledge, 92, 93. By delivery of bill of lading, 227-232, 261-265. a symbolical delivery of the property represented, 229, 230. By delivery of warehouse receipt, 280, 298. not indorsed and not to bearer, effectual, 299. otherwise in Massachusetts, 300. to bearer may be transferred without indorsement, 301. by order upon warehouseman accepted, 307. 570 INDEX. Reference is to Sections. DILIGENCE in care of thing pledged, 403-417. what is required, 403. pledgee's obligation may be modified by agreement, 406-408. in case of loss by theft, 409. ordinary care only required, 410. what is ordinary care depends upon circumstances, 411. ordinary, a relative term, 412. on part of pledgee, presumed, 413. national bank liable for want of, 414, 415. measure of damages for want of, 417. In collecting collateral paper, 692-719. pledgee bound to use, 692. in fixing liability of indorsers, 693. delay of three days in presenting, 694. pledgor not entitled to strict notice of dishonor, 695. collateral should be in hand in making demand, 696. insolvency of maker does not dispense with demand, 699. what constitutes negligence in collecting, 700. whether creditor's negligence makes him conclusively liable, 701. actual loss to pledgor the criterion of liability, 702. when collection could be made only by extraordinary diligence, 703. pledgor desiring prompt collection should demand it, 704. burden upon debtor to show negligence, 705. delay for three months to bring suit, 706. delay with debtor's consent, 707. bad faith or faulty discretion on part of pledgee, 708. negligence in 25ermitting judgment lien to expire, 710. surety has right to demand diligence, 711. negligence in collecting mortgage or other claim, 713. diligence in collecting interest on mortgage, 714. DISTRICT OF COLUMBIA, statute regulating transfer of stock, 187. DIVIDENDS upon pledged stock, pledgee may collect, 398. EQUITIES arising between parties to negotiable paper after it is pledged, 125. from independent transactions, 126. in favor of maker of collateral paper, effect of upon pledgee, 673- 676. 571 INDEX. Reference is to Sections. ; :;:i 'EQ]]1TY , proceedings to foreclose pledge, 640-648. the earliest remedy upon a pledge, 640. jurisdiction in, when an account must be stated, 641. to foreclose pledge of shares of land association, 642. to foreclose pledge of title deed, 643. factor may enforce his lien in, 644. jurisdiction in, not excluded by a power of sale, 645. there can be no decree of strict foreclosure, 647. court may authorize pledgee to bid, 648. sale of collateral paper under decree in, 655. ESTOPPEL of owner of goods as against pledgee, 308. two things must concur to create, 309. arises against warehouseman by his false representation, 310. of warehouseman to deny he has the goods mentioned, 311. not estopped to deny matters not within his knowledge, 312. not estopped to dispute receipt issued by mistake, 313. of factor from taking advantage of his wrongful pledge, 330. EXECUTION. See Attachment. sale of stock upon, against registered owner, 178. pledgor's interest not subject to, at common law, 372. statutory provisions of several states as to levy upon pledgor's in- terest, 375-392. EXECUTOR OR ADMINISTRATOR, may pledge personal prop- erty of the estate, 61. distinction between pledges by executors and pledges by trustees, 481. title is absolute for purposes of administration, 482. foreign can make valid transfer of stock, 482. one of several may pledge, 483. misapplying securities with knowledge of pledgee, 485, 486, 488. pledging stock issued to him as executor, 487. pledgee not bound to see application of proceeds of his loan, 489. in Georgia, sales by must be public, 492. pledgee need not present his claim to, 596. EXPENSE of keeping and caring for thing pledged, 395, 400. of collecting collateral paper, 680. EXTENSION of time of payment, a consideration for collateral, 129. not effected merely by taking collateral, 130. usurious agreement for, 131. of payment suspends right of pledgee to sell, 615. pledgee extending collateral paper makes it his own, 719. 572 INDEX. Reference is to Sections. FACTOR, pledges hy, at common law, 327-332. no power at common law to pledge, 327. power to sell gives no power to pledge, 328. though not known as such, 329, 342. estopped from taking advantage of his wrongful pledge, 330. may pledge property to extent of his lien, 331. pledge by, not distinguished from pledge by pledgee, 332. Factors' acts, their application and effect, 333-353. purpose of, 333. statutes of several states, 334-340. common law prevails except as changed, 341. may pledge instruments negotiable by statute, 343. factors' acts apply only where agent has power to sell, 344. apply only to agents whose business ends in a sale, 345. his general employment does not authorize him to pledge, 346. after authority to sell has been revoked, 347. acts apply only where relation of principal and factor exists, 348. relation not created by mere possession of bill of lading, 349. pledgee having knowledge that he is acting contrary to instruc- tions, 350. bound to follow principal's instructions, 351. may make successive pledges of same property, 352. provision of acts that consignor shall be deemed true owner, 353. may enforce his lien in equity, 644. FLORIDA, statute regulating transfer of stock, 188. FORECLOSURE. See Equity. form of transaction important, 8. FUTURE ADVANCES, pledge to secure, 106, 361. FUTURE PROPERTY, cannot be pledged, 30. when subsequently acquired, pledgor estopped, 31. increase of property covered by pledge of that, 32. GARNISHMENT, pledgor's interest not generally subject to, 373. but may be so reached in Alabama, 375. California, 376. and Colorado, 377. GEORGIA, pledgor's interest subject to execution, 378. GRAIN, in bulk, warehouse receipt for part of whole, 318, 319. GUARANTOR of title, warehouseman does not become by issuing re- ceipt, 320. 573 INDEX. Reference is to Sections. IDAHO TERRITORY, statute regulating transfer of stock, 189. ILLINOIS, doctrine as to transfer of shares of stock, 190. statute relating to negotiability of warehouse receipt, 286. INCREASE of property covered by pledge, 32. INDIANA, statute relating to negotiability of warehouse receipts, 287. pledgor's interest made subject to execution, 379. pledgor may vote upon pledged stock, 441. pledgee of stock not personally liable as stockholder, 448. INFANT. See Minor. INSURANCE policy, mortgage of, 9. for benefit of married woman, may be pledged by her, 68, 146. may be pledged by delivery without assignment, 145, 147. INTEREST on interest-bearing debt, secured by pledge, 363. pledgee must account for when collected, 397. pledgee may collect interest coupons, 399, 721. what rate may be charged by pawnbrokers, 616. default in, authorizes foreclosure, 646. pledgee must use diligence in collecting, on collateral, 714. IOWA, statute regulating transfer of stock, 191. statute relating to negotiability of warehouse receipts, 288. JOINT OWNER can pledge only his interest, Q5. JUDGMENT may be assigned in pledge, 149. recovery upon the debt does not affect pledgee's right to the pledge, 591. upon collateral does not satisfy principal debt, 684. KANSAS, statute regulating transfer of stock, 192. statute relating to negotiability of warehouse receipts, 289. KENTUCKY, statute relating to negotiability of warehouse receipts, 290. warehouseman authorized to give receipts for his own goods, 323. LAND CERTIFICATE cannot be pledged, 150. LAW OF PLACE of contract governs, 133. LEASE, assigned as security, 19. LEGAL TITLE, passes by mortgage, not by pledge, 3, 4. not inconsistent with existence of pledge, 153. LIEN distinguished from a pledge, 1. Upon stock in favor of the corporation, 221. corporation may have upon shares of stockholder, 221. must be expressly created, cannot be implied, 221. 574 INDEX. Reference is to Sections. LIEN — continued. not waived by taking collateral security, 221. given by statute in Connecticut, 222. cannot be claimed after notice that stock has been pledged, 223. national banks cannot claim, 224. corporation may waive, 225. general, for balance of account, not secured by pledge, 357. a banker may have, 860. LIMITATIONS, STATUTE OF, bar of debt does not make pledge the property of the pledgee, 581. when right to redeem is barred, 581. bar of debt does not enable the pledgor to recover the pledge, 582. when statute commences to run, 583. LOSS of thing pledged without fault of pledgee, 405. pledgee may make himself liable by agreement, 408. by theft, rule same as in other cases, 409. LOUISIANA, pledge must be by written act, 5. statute regulating transfer of stock, 193. factors' acts, 334. pledgor's interest made subject to attachment and execution, 380. MAINE, statute regulating transfer of stock, 194. statute relating to transfer of warehouse receipts, 291. pledgor's interest made subject to attachment, 381. pledgor may vote upon pledged stock, 441. MARGIN. See Broker and Stocks. Rights of broher carrying stocks tcpon, 495-500. relation of pledgor and pledgee is created, 495. broker acts in threefold relation, 496. distinction between carrying stocks and carrying executory con- tract for grain, 497. exceptional view of the contract in Massachusetts, 498, 499. broker cannot recover for fictitious purchase, 500. MARRIED WOMEN may pledge their personal property, OG. entitled to have pledge of property for her husband redeemed out of his estate, 67. may pledge a policy of insurance upon life of husband, 68. MARYLAND, statute regulating transfer of stock, 195. statute relating to negotiability of bills of lading, 235. statute making bill of lading conclusive upon carrier, 247. 575 INDEX. Reference is to Sections* MARYLAND — continued. statute relating to negotiability of warehouse receipts, 293. factors' acts, 335. pledgor may vote upon pledged stock, 441. pledgee of stock not personally liable as stockholder, 449. MASSACHUSETTS, statute and decisions relating to transfer of stock, 196. statute relating to transfer of warehouse receipts, 292. factors' act, 336. pledgor's interest made subject to attachment, 382. pledgee of stock not personally liable as stockholder, 450. MICHIGAN, statute regulating transfer of stock, 197. pledgor's interest made subject to execution, 383. MINNESOTA, statute regulating transfer of stock, 198. statute relating to negotiability of bills of lading, 236. pledgor's interest made subject to execution, 384. MINOR may revoke waiver of notice of sale, 733. MISSISSIPPI, statute regulating transfer of stock, 199. MISSOURI, statute regulating transfer of stock, 200. statute relating to negotiability of bills of lading, 237. pledgor may vote upon pledged stock, 441. pledgee of stock not personally liable as stockholder, 457. MONTANA TERRITORY, statute regulating transfer of stock, 201. MORTGAGE, distinguished from a pledge, 2, 3, 4, 5. is a conveyance of the legal title, 3, 4, 9. distinguished by the form of the transaction, 8. mere fact that title is conveyed, not enough, 9. of a policy of insurance, 9, 136. effect of the use of the term, 12. effect of taking possession of property under a void, 12. may be made of property not in existence, 12. transaction construed according to circumstances, 13. transaction when in doubt construed a pledge, 14. constituted by bill of sale as security, 15. constituted by bill of sale conditional in form, 18. may be made of a chose in action, 138. Pledge of, 137-144. must be legally transferred or delivered, 139. absolute assignment as security, a pledge, 140. fact of pledge need not appear on face of assignment, 141. without written assignment, 142. 676 INDEX. Reference is to Sections. MORTGAGE — continued. note without the mortgage may be pledged, 143 debtor may pledge his own note and mortgage, 14* held as collateral cannot be sold but must be collected, Go* mortgagee of mortgage may sell it, 658. may be foreclosed by pledgee upon default, 659. pledgee's interest by foreclosure becomes a mortgagee's intere 660. diligence in collecting required, 713. also in collecting interest on, 714. NATIONAL BANK, may take a pledge of chattels, 77. cannot loan its credit, 77. may take in pledge stock of corporations whose property is real estate, 78. cannot loan on pledge of its own stock, 79. cannot claim lien upon shares of stockholder, 224. liable as ordinary pledgee for care of collaterals, 414. liable for conversion by its own officers, 415. NEBRASKA, certain warehousemen authorized to give receipts for their own goods, 322. NEGLIGENCE. See Diligence. gross on part of pledgee in taking negotiable paper in pledge does not defeat his title, 104. of owner of stock in executing transfer in blank, 465. NEGOTIABLE INSTRUMENTS, how far bills of lading are, 233. statutory provisions respecting bills of lading, 234-240. statute does not give all qualities of bills and notes, 241, 242. indorsement passes only shipper's title, 243, 244. custom cannot make bills of lading negotiable, 250. Warehouse receipts are not, 280, 281. except when made so by statute, 282, 283. statutory provisions in several states, 284-295. stand in lieu of the property, 296. whether evidence of ownership or of a pledge, 297. factor may pledge instruments made negotiable by statute, 343. Certificate of stock is not, 461-468. usage of brokers so to treat them not admissible, 462. some authorities assimilate to negotial)le instruments, 463. title not changed l)y involuntary transfer, 464. confers indicia of property, 466. 37 577 INDEX. ' Reference is to Sections. NEGOTIABLE PAPER, delivery and possession essential to a valid pledge of, 80. statutory provisions regarding pledges of, 81. parol evidence that transfer of is in pledge, 82. delivery of, need not always be actual, 83. subsequent delivery of, 84. actual possession requisite to establish title of holder, 85. redelivery of to pledgor for collection, 86. destroys pledgee's title as against third person, 87. when pledgor estopped to say that pledgee has lost his title, 88. Bona fide holder for value, 89-106. pledgee in good faith is practically the owner, 89. pledge of etfectual, though title of pledgor defective, 90. possession sufficient to enable holder to pledge it, 91. note payable to order may be pledged by delivery merely, 92. but then the payee retains the legal ownership, 93. pledgee can give good title, 94. transfer of collateral alone is pro ta7ito payment, 95. agent can effectually pledge for his own debt, 96. misapplication of, by debtor's agent, 97. effect of statute making assignment of collateral a criminal of- fence, 98. illegal consideration, effect of upon pledgee, 99. notice of equities by pledgee of, 100. effect of failure to indorse instalments of interest, 101. note which states that it is given as collateral, 102. recital that note is secured by collateral, 103. gross negligence on part of pledgee does not defeat his title, 104. knowledge of pledgee of pledgor's want of authority, 105. pledged for future advances, 106. Collateral for preexisting debt, 107-133. conflict of authority on the subject, 107. rule of the United States Courts, 108, 109, 110. the rule having the better reasons and authority, 111. grounds of the rule, 112. forbearance by creditor also a good consideration, 113. taking for preexisting debt is in usual course of business, 114. distinction between taking in payment and as security for preex- isting debt, 115. this distinction is shadowy, 116. 678 INDEX. Reference is to Sections. NEGOTIABLE PAPER — continued. doctrine that pledgee for preexisting debt is not holder for value, 117. this rests upon two objections, 118. want of any new consideration, 118. not taken in usual course of business, 118, 119. does not prevail in England, 120. uniformity of rule upon this subject important, 121. exception as to accommodation paper, 122. does not matter that pledgee knows paper is accommodation, 123. accommodation paper may be pledged for antecedent debt, 124. equities arising between parties subsequently to indorsement, 125. equities arising from independent transactions, 126. creditor parting with value at time collateral is taken, 127. change in the legal rights of the parties, 128. agreement for further time, 129. right of action upon the debt not suspended, 130. usurious agreement for extension, 131. taken as conditional payment of preexisting debt, 132. place of contract governs the law, 133. Remedies upon pledges of, 651-719. collateral cannot be enforced by sale, 651. except by special power, 651, 652, 653. some authorities hold that such paper may be sold, 654. in California may be sold under decree in equity, 655. in Texas, after death of pledgor, aid of Probate Court not re- quired, 6dQ. ordinary note and mortgage cannot be sold, 657. but mortgagee may sell note and mortgage on default, 658. creditor may pursue his remedies simultaneously or successively, 663. Suit upon collateral paper, 664-680. no demand upon pledgor necessary before, 664. pledgee may enforce upon maturity, 665. understanding that collateral is not first to be resorted to, fi^Q. pledgee not bound to collect upon maturity, 667. pledgee may demand payment of coupons as they mature, 668. pledgee may collect collateral note in his own name, when, 669. pledgee when not invested with legal title may sue in name of pledgor, 670. 679 INDEX. Reference is to Sections. NE GOTIABLE PAPER — continued. pledgee may recover upon collateral though pledgor has been paid, 671. pledgee may enforce payment of accommodation paper, 673. pledgee may recover full amount though this exceeds the debt secured, 674. unless there are equities in favor of the maker, 675. pledgee of accommodation paper can recover only to extent of debt secured, 676. pledgee has no better title to proceeds than he had to the paper, 677. pledgee should credit upon debt whatever he collects upon the collateral, 678. pledgee entitled to counsel fees paid in suit upon collaterals, 680. JSnforcing principal debt, 681-686. pledgee may enforce principal debt without surrendering col- laterals, 681. pledgee after selling collaterals can recover only balance of prin- cipal, 682. no defence that creditor has irregularly foreclosed a collateral mortgage, 683. judgment upon collateral does not satisfy principal debt, 684. creditor not first bound to apply collateral, 685. even at request of surety, 686. Taken in payment., 687-691. proof of agreement to accept collaterals in payment must be positive, 687. distinction between note for antecedent debt, and one for property sold, 688. parties may by agreement take collateral in payment, 689. inclination of courts in this matter, 690. transfer of note at time of purchase of property, 691. Diligence in collecting collateral paper, 692-719. reasonable diligence in collecting must be used, 692. and in charging indorsers, 693. delay of three days in presenting for payment, 694. pledgor not entitled to strict notice of dishonor, 695. collateral should be in hand in making demand, 696. neglect or omission of officer of government, 697. whether deposited as collateral a question for jury, 698. 680 INDEX. Reference is to Sections. NEGOTIABLE PAPER — continued. insolvency of maker does not dispense with demand of payment, 699. what constitutes negligence in collecting collateral, 700. whether creditor's negligence conclusively makes him liable, 701. actual loss to pledgor criterion of pledgee's liability, 702. when collateral could be collected only by extraordinary diligence, 703. pledgor desiring prompt collection of collateral should demand it, 704. burden of proof on debtor to show creditor's negligence, 705. delay to bring suit upon collateral for three months, 706. delay with debtor's consent, 707. bad faith or faulty discretion on part of pledgee, 708. when note taken as conditional payment, 709. pledgee of judgment liable for negligence, 710. surety of debt has right to exact diligence, 711. creditor entitled to benefit of surety's collateral, 712. neglect in collecting mortgage or other claim, 713. diligence in collecting interest on mortgage, 714. return of execution unsatisfied, 715. pledgee has no right to compromise collateral, 716. no right to surrender collateral without payment, 717. pledgee may exchange the security, 718. pledgee extending time of payment of collateral, 719. NEVADA, statute regulating transfer of stock, 203. pledgor may vote upon pledged stock, 441. NEW HAMPSHIRE, statute regulating transfer of stock, 202. pledgor's interest made subject to execution, 385. pledgor may vote upon pledged stock, 441. NEW JERSEY, statute regulating transfer of stock, 204. pledgor's interest made subject to execution, 386. NEW MEXICO TERRITORY, statute regulating transfer of stock, 205. pledgor may vote upon pledged stock, 441. NEW YORK, decisions respecting transfer of stock, 206. statute relating to negotiability of bills of lading, 238. statute relating to negotiability of warehouse receipts, 294. factors' act, 337. pledgor's interest made subject to execution, 387. pledgee of stock not personally liable as stockholder, 452. 581 INDEX. Reference is to Sections. NORTH CAROLINA, statute regulating transfer of stock, 207. NOTICE, of equities affecting negotiable paper, 100, 101. of want of authority of pledgor to pledge negotiable paper, 105. need not be given to debtor of pledge of chose in action, 136. of transfer of warehouse receipt acknowledged by warehouseman, 302. of rights of true owner of stock, effect upon pledgee, 472. from fact that certificate is in name of prior pledgee, 473. In case of pledges of stock by persons holding fiduciary relations, 474-494. stock in name of "trustee" cannot be pledged, 474. stock issued to " the estate of " a deceased person, 475. pledgee knowing that pledgor is pledging trust stock for his own use, 478. when trust not indicated by the certificate, 479. exceptional decisions as to pledging stock in name of " trustee," 480. knowledge that executor is misappropriating securities, 485. is perverting stock to his own use, 486. is pledging trust certificate to secure his own debt, 487. same facts that are notice to individual are also to corporation, 488. pledgee not bound to see to application of proceeds of loan, 489. broker knowing that he is dealing with an agent, 494. Of sale of pledge, 602-615. two kinds of notice that may be required, 607. of time and place of sale not dispensed with because debt is pay- able at a day certain, 609. sale can only be made after reasonable notice of time and place, 610. waiver of may be made by agreement, 611. must be given to general owner or his agent, 612. need not be formal if pledgor has actual, 613. defective if time and place be not specified, 614. Of sale of collateral stocks, 720-729. the general rules in regard to demand and notice apply, 726. sold like pledges of ordinary chattels, 727. Waiver of by agreeing upon power of sale, 730-740. agreement for private sale or sale without notice, 730, 732. minor may revoke waiver of notice, 733. when notice provided for has become impossible, 734. 582 INDEX. Reference is to Sections. OHIO, statute regulating transfer of stock, 208. factors' act, 337. pledgor of stock liable as stockholder, 453. PAROL EVIDENCE, admissible to show that transfer was in pledge, 82. to show what debts are secured, 102. to show absolute assignment to be a pledge, 141. to show an absolute transfer of stock to be in pledge, 155. not admissible to contradict written contract, 157. PARTNER may pledge partnership property for debt of firm, 69. PAWNBROKER, statutes regarding sales of pawn by, 616-630. interest that may be charged by, 616. PAYMENT not presumed from assignment of security to a creditor, 17. whether bill of lading secures payment or acceptance of draft, 255. Effect of, 540-547. discharges the pledge, 540. but whole debt must be paid, 540. renewal of note secured does not extinguish debt, 541. creditor has no power over collateral after payment, 544. Application of, 548-551. when pledge covers several distinct debts, 548. creditor may apply a general payment, 549. proceeds of pledge must be applied to the debt secured, 550. creditor has no right to apply security to any other purpose, 551. not required of debt in order to redeem pledge obtained by false representation, 564. return of the pledge not a condition of, 593. demand of sometimes necessary to create default, 608. that collaterals are accepted in, must be proved, 687. distinction between note of third person taken for antecedent debt, and taken for property sold, 688. note of third person taken in payment by agreement, 689. note of third person when presumed to be in payment, 691. PENNSYLVANIA, statute and decisions respecting transfer of stock, 209. statute relating to negotiability of warehouse receipts and bills of lading, 239. factors' act, 338. pledgor's interest made subject to execution, 388. 583 INDEX. Reference is to Sections. PLEDGE, defined, 1. more than a lien, less than a mortgage, 2, 3. a contract implied in law, 5. though evidenced by writing, need not be recorded, 6. a lien, not a legal title, 7. form of the transaction important, 8. constituted by delivery of property as security, 8. in maoy cases legal title necessarily conveyed, 9. assignment of a contract as security, 9. by deposit of property with a third person, 10. by agreement to deliver warehouse receipts, 10. by instrument which in terms pledges property, 11. transaction construed according to circumstances, 13. favored by the law when transaction in doubt, 14. constituted by bill of sale absolute in terms, 15. bill of parcels, 14. by bill of sale and agreement to repurchase, 19, 20. by assignment of lease, 19. indicated by inadequacy of price, 20. construction of, when in writing, for the court, 21. there may be a statutory, 22. Delivery essential to create, 23-39. distinguished from a mortgage by this requirement, 24. in case the property is already in hands of pledgee, 25. of part of a quantity of goods, must be set apart, 26. agreement of parties not equivalent to delivery, 27. cannot be made of future property, 30. of lost property, 30. of unfinished goods, 33. delivery to third person for pledgee, 34, 37. subsequent delivery makes good between the parties, 39. Possession essential to continue, 40-48. not affected by wrongful possession of pledgor, 41. possession of pledgor not conclusive of fraud, 42. pledgee may employ pledgor to sell, 43. not invalidated by delivery to pledgor for special purpose, 44-46. conversion of by pledgor, trover for, 45. Subject matter of, 49-51. may be of personal property of every kind, 49. of property exempt from attachment, 50. statutory prohibition of, 51. 584 INDEX. Reference is to Sections. PLEDGE — continued. Title of the pledgor, 52-65. pledgor impliedly warrants title, 52. need not belong to pledgor, 53. possession is not title, 54. Married women may pledge their property, 66-68. By partner of pai-tnership jjroperty, 69. By corporations, 70-74. To corporations, 15-Td. Of negotiable paper, 80-133. Of non-negotiable choses in action, 134-150. subject in hands of pledgee to equities, 134. hond fide purchaser for value, 135. Of mortgages, 137-144. must be legally transferred or delivered, 139. fact of pledge need not appear on the assignment, 141. of note without the mortgage, 143. Of policies of insurance, 145-147. by delivery without formal assignment, 145, 146, 147. Of savings hanh hooks, 148. Of judgments, 149. Of land certificates, 150. Of corporate stocks, 151-154. Of bills of lading, 227-279. Of warehouse receipts, 280—326. PLEDGEE, of negotiable paper can give good title to it, 94. of bill of lading, rights against consiguor, 266, 267. rights against consignee, 268-272. rights against carrier, 273-277. of one part of bill of lading, 278, 279. of warehouse receipts, in good faith, rights of, 303-313. Right to use and profits of thing pledged, 393-402. no right to injure it by use, 394. when the thing is an expense to the pledgee, 395. must account for profits arising from use of pledge, 396. liable for interest on money loaned, 397. liable for dividends on pledged stock, 398. may collect interest coupons of bonds pledged, 399. entitled to all reasonable expenses for care of pledge, 400. when may finish unfinished goods, 401. DO right to manufacture raw material, 402. 585 INDEX. Reference is to Sections. PLEDGEE — continued. Duty to care for thing pledged, 403-417. bound to use ordinary diligence in care of pledge, 403. same care of pledge that he takes of his own property, 404. not liable if property destroyed without his fault, 405. obligation may be modified by express contract, 406, 407. may by contract make himself liable for accidental loss, 408. rule in case of loss by theft same as in other cases, 409. must take ordinary care of colltiteral, 410. what the ordinary care required is, 411. ordinary diligence is a relative term, 412. negligence on part of pledgee not presumed, 413. national bank liable as pledgee for collaterals, 414. bank liable for fraudulent conversion by its officers, 415. pledgee continues liable after debt is paid, 416. measure of damages for negligence, 417. His right to assign the pledge, 418-428. assignee stands in his place, 418. cannot assign pledge distinct from debt, 419. original pledge not put an end to by repledglng, 420. not required to keep pledge in his exclusive possession, 421. pledgor cannot maintain trover for a conversion because of an assignment, 422. can assign no greater right than he has, 423. of negotiable paper can give good title, 424. may transfer with principal debt, 425. may release a portion of goods pledged, 426. upon death his right passes to personal representative, 427. criminal offence to sell or repledge collaterals, 428. His right of action for a conversion of pledge, 429-436. may replevin pledged chattel wrongfully taken from him, 429. may recover pledge, or its value, of pledgor who has wrongfully taken, 430. cannot maintain bill in equity against one intrusted with pledge, 431. measure of damages in trover against pledgor, 432. against third person, 433. action for injury to pledge by stranger, 434. damages in action for conversion of gold coin, 435. damages against pledgor taking pledge by replevin, 436. Of stock, rights and liabilities of, 437-512. 586 INDEX. Reference is to Sections. PLEDGEE — continued. liability as stockholder, 437. cannot escape liability by transfer to irresponsible person, 438. when the stock is transferred to third person in first instance, 439. may sell it in pursuance of a power of sale, 440. the registered stockholder may vote, 441. though he holds in pledge, 442. will not be restrained by injunction from voting, 443. by voting upon stock does not convert it to his own use, 444. statutes exempting pledgees from liability as stockholders, 445- 456. of corporation's own stock entitled to benefit of such statute, 457-459. holding stock after payment of debt liable as stockholder, 460. His rights acquired in good faith from apparent owner, 461-473. certificate of stock not negotiable, 461. usage of brokers to treat it as negotiable, 462. closely assimilated to negotiable instruments, 463. title not changed by involuntary transfer, 464. whether negligence in owner to execute transfer in blank, 465. taking certificate in good faith from apparent owner, 466. owner having conferred upon another the indicia of property is estopped, 467. immaterial whether certificate passes legal or equitable title, 468. a precedent debt a sufficient consideration, 469. of collaterals taken in exchange, 470. under usurious contract whether a bondjide holder, 471. having actual notice of rights of owner, 472. of stock certificate standing in name of prior pledgee, 473. His rights when deeding with one holding a fiduciary relation, 474-494. trustee has no right to pledge stock, 474. certificate " to estate of " a deceased person, 475. one of two trustees cannot pledge, 476. when corporation liable for jiermitting transfer by trustee, 477. with knowledge that pledgor held in trust, 478. of certificate which does not indicate any trust, 479. exceptional rule in Maryland and California, 480. distinction between pledges by executors and trustees, 481. title of executor absolute, 482. one of several executors may pledge, 483. 587 INDEX. Reference is to Sections. PLEDGEE — continued. trustee of insolvent debtor may pledge, 484. knowledge that executor is misappropriating, 485. is perverting assets to his own use, 486, 487. the same facts that are notice to an individual are notice to a corporation, 488. not bound to see to proper application of proceeds of loan, 489. the rule as to trustees applies to persons holding other fiduciary relations, 490. rule applied to pledge of bonds by president of railroad company, 491. in Georgia, sales by administrator must be public, 492. of stock taken from one professedly acting as agent, 493. broker buying from one known to be acting as agent, 494. notice of trust from memorandum on note, 494. His rights as broker carrying stocks upon margin, 495-500. relation of pledgor and pledgee created, 495. broker acts in a threefold relation, 496. stocks on margin distinguished from executory contract for grain, 497. in Massachusetts, contract of broker with customer regarded as executory, 498. this decision introduces a new doctrine, 499. broker cannot recover for fictitious purchase, 500. His right to use and hypothecate pledged stock, 501-512. no right except by virtue of a special agreement, 501. authority to pledge may be inferred from circumstances, 502. custom that broker may pledge customer's stock, 503. whether stock pledged to bank is subject to banker's lien, 504. his use' must be consistent with pledgor's general ownership, 505. understanding that broker may hypothecate stocks, 506. using to secure his own debt may be treated as a conversion, 507. need not return identical stock, 508, 509. must always have on hand enough to satisfy all contracts, 510, 511. when securities belonging to several persons have been rehy- pothecated, 512. His remedies after defaidt. See Remedies. His remedies upon negotiable paper. See Negotiable Paper. His remedies upon pledges of stocks. See Stocks. 688 INDEX. Reference is to Sections. PLEDGOR, impliedly warrants title, 52. cannot set up against pledgee an after-acquired title, 52. may pledge property of another with consent, 53. possession alone does not enable him to make a valid pledge, 54. in possession of stolen property cannot pledge it, 55. may effectually pledge property obtained by fraud, 56. without title can confer no title, 56. may confer good title to negotiable instruments, 57. need not be sole and absolute owner, 58. having life interest may pledge that, 59. having a limited interest can only pledge that, 60, administrator may pledge personal property of the estate, 61. vendor in possession may pledge, 62. vendee in possession may pledge, 63. carrier cannot pledge goods intrusted to him, 64. one joint owner in possession may pledge his interest, 65. nights and liabilities of before default, 364-392. may assign his interest subject to the pledge, 364. his assignee takes only his rights, 365. right reserved to sell the pledge, 366. notice to purchaser of existing pledge, 367. notice by assignee of pledge of the assignment, 368. action for conversion of the pledge before assignment, 369. assignee of pledge entitled to redeem it, 370. genuineness of collateral not affirmed by pledgee's delivery of it to assignee, 371. Liability of his interest to attachment and execution, 372-392. not liable to attachment or execution at common law, 372. not generally liable to trustee or garnishee process, 373. statutes of the several states on this,&ubject, 374-392. action for injury to pledge by stranger, 434. cannot require return of pledge before payment, 593. cannot set up non-return of pledge in defence to suit on debt, 594. but otherwise under codes of several states, 595, o^dQ. POSSESSION. See Delivery. may be held by third person for pledgee, 34. may be held by workman or clerk of pledgor, oo. must be continued to preserve the pledge, 40. redelivery of terminates the pledge, 40. obtained wrongfully by pledgor, 41. by pledgor, not conclusive evidence of fraud, 42. 580 INDEX. Reference is to Sections. POSSESSION — continued. pledgor may be employed by pledgee to sell, 43. of pledgor for a special or limited purpose, 44, 45. under the civil law, 46. by pledgor enables him to give good title, 47. not after property has been restored to pledgee, 48. is not title though indicative of it, 54, 55. of negotiable paper is presumptive of title, 57. Of negotiable paper, 80-88. must be actual to establish title of pledgee, 85. POWER OF ATTORNEY, to transfer stock executed in blank, 164. though under seal may be in blank, 1 65. POWER OF SALE, is an authority coupled with an interest, 631. is terminated by satisfaction of debt, 632. where the subject matter is divisible, 633. where pledgor has mixed pledged goods with his own, 634, 636. pledgee cannot directly or indirectly purchase, 635, 740. pledgee purchasing not chargeable with conversion, 637. pledgor may treat purchase by pledgee as valid, 638. pledgee may show that sale was for purpose of valuing the prop- erty, 639. does not exclude jurisdiction in equity to foreclose, 646. negotiable paper may be sold by virtue of, 651-653. Sale of collateral stocks under, 730-740. competent for parties to agree upon manner of sale, 730. power of sale may sometimes be implied, 731. waiver of notice of sale, 732. PREEXISTING DEBT. See Consideration. PROBATE proceedings not necessary in Texas to enforce pledge, 656. • PROFITS, pledgee entitled to such as accrue on the pledge, 396. pledgee may collect dividends, 398. and interest coupons, 399. PURCHASER. See Assignment. in good faith from pledgee in possession acquires a good title, 47. REDELIVERY, to the pledgor terminates the pledge, 40. unless for a temporary purpose, 40. obtained by wrongful act of pledgor, 41. possession of pledgor not conclusive of fraud, 42. pledgor may be employed by pledgee to sell, 43. for a special and limited purpose, 44, 45. 590 INDEX. Reference is to Sections. REDELIVERY — continued. of negotiable paper to debtor for collection, 86. when destroys creditor's special property, 87. for temporary purpose estops debtor, 88. REDEMPTION, of pledge in equity, 552-560. the right attaches to every pledge, 553. agreement that upon default property shall be pledgee's, 554. if made subsequently to pledge may be enforced, 555. remedy at law is sufficient, 556. bill in equity will lie under special circumstances, 557. where an account is wanted, 557. to obtain a retransfer of stock pledged, 558. to compel return of note and mortgage to pledgor, 559. upon death of pledgor his representatives have his right, 560. action to redeem not the usual remedy, 561. but trover for conversion, 562-580. when right of is barred, 581. REGISTRY, not required of a pledge, 6, 39. REMEDIES, of pledgee after default, 589-650. Suit upon the debt, 589-598. pledgee may pursue all his remedies, 589, 663, 720. holding of collateral does not suspend his right of action on the debt, 590. recovery of judgment does not affect his right to enforce the pledge, 591. debt may be enforced though pledge is discharged, 592. return of pledge not a condition to be performed concurrently with payment, 593. pledgor cannot offset value of pledge in suit on debt, 594. under some codes may offset conversion of pledge, 595. and pledgee must produce or restore collateral, 596. pledgee may maintain suit for deficiency, 597. pledgee not obliged to present claim to administrator, 598. Attachment of pledged property, 599-601. pledgee waives lieu by attaching same property, 599. even when it is in hands of agent, 600. but may attach on another demand, 601. Sale of pledge at common law, 602-615. this is the usual method of enforcing a lien, 602. pledgee upon default may sell pledge at public auction, 603. pledgee can only sell the interest transferred in pledge, 604. 5U1 INDEX. Reference is to Sections. REMEDIES — continued. assignee of pledgee has same right to sell, 605. pledgee not obliged to sell even when requested, 606, 728, 729. two kinds of notice which pledgee must give, 607. when demand of payment is necessary, 608. notice of sale must be given though debt payable at a fixed day, 609. sale can only be made after reasonable notice, 610. waiver of requirement of notice, 611. notice must be given to owner or his agent, 612. formal notice not necessary if owner has actual notice, 613. time and place of sale must be given, 614. extension of time of payment suspends right to sell, 615. Statutory provisions regulating sales of pledged property, 616-630. some exclusive, others permissive, 616. statutes of several states, 617-630. Sales under powers of sale, 631-639. power of sale is coupled with an interest, 631. is terminated by satisfaction of debt, 632. where the subject matter is divisible, 633. where pledgor has mixed the pledged chattels with his own, 634. pledgee cannot directly or indirectly purchase, 635, 740. general partner in firm which is pledgee cannot purchase, 636. but pledgee purchasing is not chargeable with conversion, 637. pledgor may elect to treat such sale as valid, 638. pledgee may show that sale was for valuation, 639. Sales under proceedings in equity, 640-648. the earliest form of foreclosing a pledge, 640. jurisdiction in equity when an account must be stated, 641. to foreclose pledge of shares of a land association, 642. in case of a pledge of a title deed, 643. factor may enforce his lien by equitable suit, 644. foreclosure upon default in interest, 646. no decree of strict foreclosure of a pledge, 647. court may authorize pledgee to bid, 648. Surplus proceeds of sale, 649, 650. pledgor's right to surplus absolute, when, 649. pledgor may collect surplus by suit at law, 650. Upon pledges of negotiable paper, 651-719. See Negotiable Paper. suit upon collateral paper, 664-680. 692 INDEX. Reference is to Sections. EEMEDIES — continued. Upon pledges of stocks. See Stocks. EENEWAL, of note secured by pledge does not discharge the pledge, 541. REPLEDGING. See Pledgee and Assignment. REPLEVIN, by pledgee against pledgor for wrongfully taking pledge, 429. RHODE ISLAND, statute and decisions respecting transfers of stock, 210. factors' act, 339. SALE, of pledge at common law, 602-615. pledgee may sell at public auction, 603. pledgee can sell only interest pledged, 604. his assignee has the same right to sell, 605. not obliged to sell even when requested, 606. two kinds of notice to be given, 607. notice of time and place not dispensed with but by agreement, 609. can only be made after reasonable notice, 610. waiver of notice by agreement, 611, 631-640. notice of, must be given to general owner or his agent, 612. formal notice of not necessary if there be actual notice, 613. notice of time and place necessary, 614. extension of time of payment, suspends right of, 615. Statutory provisions regulating sale of pledge, 616-630. some permissive, others exclusive, 616. Under powers of sale, 631-639. See Power op Sale. Under proceedings in equity, 640-648. Collateral paper cannot he enforced by, 651. except by agreement of parties, 651, 652. under power of sale, 653. yet some authorities hold that collateral paper may be sold, 654. sale of collateral paper under decree in equity, 655. mortgage and note cannot be sold, 657. mortgagee of note and mortgage may sell, 658. Of corporate stocks at common law, 720-729. Of stocks under powers of sale, 730—740. Illegal sale of stocks, 741-749. Measure of damages for illegal sales of stocks, 750-757. SAVINGS BANK BOOK, delivered to a third person for a creditor, 37 may be pledged by delivery without writing, 148. cannot be sold, but should be collected, 662. 38 693 INDEX. Reference is to Sections. SOUTH CAROLINA, statute regulating transfer of stock, 211 STATUTE OF LIMITATIONS. See Limitations. STATUTES, regarding delivery of pledge, 23. regarding title of pledgor, 53. regarding pledges of negotiable paper, 81. regarding assignment of collateral, 98. regulating transfer of stock, 182-220. concerning negotiability of bills of lading, 234-240. making bills of lading conclusive against carrier, 247. regarding attachment of pledgor's interest, 375-392. in regard to voting upon pledged stock, 441. regulating sales of property under pledge, 616-630. STATUTORY PLEDGE, 22. STOCK EXCHANGE. See Brokers' Board. STOCKHOLDER, pledgee's Uahilities as, 437-460. pledgee has same liability as any stockholder, 437. pledgee cannot escape liability by transfer to irresponsible person 438. where stock is in first place transferred to a third person, 439. pledgee may transfer it under a power of sale, 440. person in whose name stock is registered may vote, 441, 442. statutes of several states as to voting upon pledged stock, 441. pledgee will not always be enjoined from voting, 443. pledgee does not convert stock by voting upon it, 444. statutes exempting pledgee from personal liability as, 445-456. pledgee of corporations on stock entitled to statutory exemption 457-459. pledgee holding stock after payment of debt liable as, 460. STOCKS, a proper subject of pledge, 151-154. a written transfer necessary, 151, 152. transfer of legal title not inconsistent with a pledge, 153. pledge of, distinguished from conditional sale, 154, 156. Parol evidence to show transfer to be in pledge, 155-157. not admissible to contradict written contract, 157. What constitutes a transfer at common-law, 158-162. transfers governed by general principles of common-law, 159. statutes of doubtful meaning do not control, 160. convenience of unrestricted transfers, 161. b^^-laws not authorized by statute do not afiect pledgees, 162. Transfers in blank, 163-167. sanctioned by general commercial usage, 163. decisions of English courts to the contrary, 164. 694 INDEX. Reference is to Sections. STOCKS — continued. power of attorney in blank, IGo. authority to fill blank not revoked by death of pledgor, 166. warranty of genuineness of certificate implied, 167. Transfers by delivery of certificate as between the parties, 168-171. title passes as between the parties, 1G8, 169. by-law requiring transfer upon books does not restrict this rio-ht 168. some courts hold that entire title legal and equitable passes, 170. other courts hold that only equitable title jiasses, 171. Transfers as between parties and corporation, 172-176. corporation only bound by recorded transfer, 172, 173. provision for recording transfer is for security of eorporatiou, 174. recorded transfer necessary to confer a legal right, 175. surrender of outstanding certificate essential, 176. Transfers a^ between parties and their creditors, 177-220. question whether unrecorded transfer passes legal title, 177. sale on execution against registered owner, 178. attachment after knowledge of prior transfer, 179. statutory regulations in the several states, 180-220. policy that should govern transfers of, 220. Liens in favor of the corporation, 221-226. must be expressly created, not implied, 221. taking of collateral security no waiver of lien, 221. statutory provision in Connecticut, 222. no lien for debt contracted after knowledge of prior transfer, 22. national banks cannot claim such lien, 224. corporation may waive lien, 225. damages for refusing to make transfer, 226, Remedies upon pledges of l'2Q-lbl. pledgee has several remedies, 720. may be sold upon default, 721. of broker who is carrying stock upon margin, 722. custom of brokers to sell at stock exchange, 723. bankruptcy of pledgor does not prevent pledgee's selling, 724. pledgee must give notice and make public sale, 725. general rules in regard to demand and notice apply, 726. bonds and stocks sold like ordinary chattels, 727. no obligation to sell on default, 728. pledgee not liable for loss by neglect to sell, 729. Sale under powers of sale, 730-740. competent for parties to agree upon manner of sale, 730. 5'J5 INDEX. Reference is to Sections. STOCKS — continued. power of sale may sometimes be implied, 731. waiver of notice of sale, 732. minor may revoke waiver of notice, 733. when notice provided for has become impossible, 734. the price obtained at the sale, 735. a demand of payment may be necessary, 736. sale at brokers' board, 737. is a private sale, 738. sale in separate lots, 739. creditor cannot himself purchase, 740. Illegal sales by pledgee, 741-749. consequence of an illegal sale is that pledgor may redeem, 741, wrongful sale does not prevent creditor's recovering upon the debt, 742. failure to impeach sale within reasonable time, 743. customer should object to broker's sale within reasonable time, 744. accepting surplus is waiver of illegality in sale, 745. action for proceeds of sale is ratification of it, 746. payment of deficiency after sale is an acquiescence in it, 747. trover after wrongful sale cannot be maintained without a tender 748. debtor must pay or tender debt before he is entitled to a retrans- fer of stock, 749. Pleasure of damages for illegal sale of stock collaterals, 750-757. is value at time of conversion, 750. time of conversion must often be fixed by demand, 751. in suit in equity to redeem shares, 752. exception to rule in some cases, 753. origin of this exception, 754. highest market value up to time of trial, 755. this rule applicable only in special cases, 756. the true measure of damages, 757. STOLEN PROPERTY, cannot be effectually pledged, 55 SUBJECT MATTER, of pledges, 49-51. every kind of personal property may be pledged, 49. property exempt from attachment, 50, pledge of a pension certificate prohibited, 51. Negotiable paper, 80-133. Non-negotiable chases in action, 134-150. mortgages, 137-144, policies of insurance, 145-147. 596 INDEX. Reference is to Sections. SUBJECT MATTER — continued. savings bauk books, 148. judgments, 149. land certificates, 150. Corporate stocks, 151-154. Bills of lading, 227-279. Warehouse receipts, 280-326. SUBROGATION. See Surety. SUIT upon debt. See Remedies. SURETY, right of subrogation to creditor's securities, 513-522. on paying the debt is subrogated to collateral, 513. also to a lien on debtor's property, 513. foundation of this equity is that the security is a trust, 514. discharged by creditor's surrender of security, 515. discharged by creditor's loss of security, 516. when may recover of creditor value of released security, 517. relation of debtor and surety may be shown by parol, 518, not discharged by creditor's taking security without extending payment, 519. released by false statement made by creditor as to the collateral, 520. when collateral also secures other debts, 521. right of subrogation does not arise till payment, 522. Creditor's equitable right to surety's securities, 523-533. security in surety's hands is a trust in favor of creditor, 523. not material that creditor did not know of the security, 524. in some states creditor's equity is merely a right to be subrogated, S25. distinction between security given for payment and security given for indemnity, 526. weight of authority in flivor of creditor's equitable lien, 527. creditor entitled to enjoin misappropriation of security, 528. but not where his right is that of subrogation merely, 529. discharge of surety does not bar creditor's right, 530. surety may transfer security to creditor, 531. one may hold a pledge both as creditor and surety, 532. how dividend in bankruptcy should be applied, 533. Mutual equities of co-sureties to each other's securities, 534-539. creditor not entitled to benefit of security furnished by another surety, 535. debtor not released from his implied contract to rei)ay surety, 636. 597 INDEX. Reference is to Sections. SURETY — continued. surety's right of subrogation does not arise till he has paid the debt, 537. is subrogated only to amount he has paid, 538. misappropriation of security by one surety, 539. cannot require pledgee to first proceed upon collateral, 686. may exact diligence of pledgee in collecting collateral, 711. SURPLUS, proceeds of sale, pledgor entitled to, 649. may collect by suit at law, 650. acceptance of is waiver of illegality in sale, 745. SYMBOLICAL DELIVERY sufficient, 36. by delivery of document of title, 37. by delivery of bill of lading, 228, 229. SYMBOL OF PROPERTY", a bill of lading is a, 227-232. delivery of bill of lading transfers the property, 228. TENDER, of amount of debt discharges the lien of the pledge, 542. creditor refusing converts pledge to his own use. 543. has no power over collateral afterwards, 544. to discharge the pledge, must be absolute, 545. need not include interest if none contracted for, 546. discharges maker of accommodation note, 547. upon pledgee's refusal of, a conversion occurs, 566. necessary to enable pledgor to recover securities, 570. need not be formal if pledgor substantially offers to redeem, 572. debt may be enforced though pledge discharged by tender, 592. necessary in order to recover value of stocks illegally, sold, 748, 749. TENNESSEE, decisions respecting transfer of stock, 212. pledgor's interest made subject to attachment and execution, 389. TEXAS, statute regulating transfer of stock, 213. pledgor's interest made subject to execution, 390. TITLE, of the pledgor, 52-65. impliedly warranted by pledgor, 52. possession not conclusive of, 54. pledgor cannot give better than he has, 55, 59, 60. possesion of negotiable paper presumptive of, 57. TITLE DEED, pledge of, must be foreclosed in equity, 643. TRANSFER, of shares of stock must be in writing, 152. of stock absolute in form may be shown to be in pledge, 154. what constitutes at common law, 158. 598 INDEX. Reference is to Sections. TRANSFER— continued. governed by general principles of common law, 159, 160. statutes of doubtful meaning relating to will not control, 160. unrestricted, convenience of, 161. unauthorized by-law restricting, 162. in blank warrants genuineness of certificate, 167. By delivery of certificate as between the parties, 168-171. title passes as between the parties, 169, 170. some courts hold that only equitable title passes, 171. JBy delivery as hetiveen the parties and the corporation, 172-176. not entered upon the books does not bind corporation, 172, 173. provision for recording is designed for safety of corporation, 174. record necessary to confer legal title as against corporation, 175. not effectual without surrender of old certificate, 176. By delivery as hetiveen parties and their creditors, 177-220. whether legal as well as equitable title passes, 177. sale on execution against registered owner, 178. regulated by statute in many states, 180-220. policy that should govern, 220. Of hills of lading, how made in pledge, 261-265. Of warehouse receipts, how made in pledge, 298-302. Of shares of stoch, when involuntary, does not change title, 464. whether negligence in owner to execute in blank, 465, 473. by owner, confers indicia of ownership, 466, 467. whether it passes legal or equitable title, 468. TROVER. See Conversion. TRUSTEE, holding stock cannot pledge for his own debt, 474. stock issued to " the estate of" a deceased person, 475. one of two trustees cannot pledge trust property, 476. when corporation liable for permitting transfer by, 477. using stock to secure his own debt with knowledge of pledgee, 478. pledging stock certificates which do not indicate any trust, 479. exceptional rule in Maryland and California, 480. distinction between pledge by executor and pledge by trustee, 481. of insolvent debtor, has like power of disposal as executor, 484. other persons holding fiduciary relations i)]edging stock, 490. case of pledge of bonds by president of a raih-oad, 491. TRUSTEE PROCESS, pledgor's interest not generally subject to, 373. statute in Maine, 381. 599 INDEX. Reference is to Sections. USAGE, cannot make bills of lading negotiable, 250. of brokers to treat certificate of stock as negotiable, 462. of brokers to pledge customer's stock, 503, 723. of bankers to sell negotiable notes taken as collateral, void, 651. cannot authorize broker to sell stock without notice, 723. USE, of the thing pledged. See Pledgee. UTAH TERRITORY, statute regulating transfer of stock, 214. VENDEE, in possession under conditional sale cannot pledge, 63. VENDOR, in possession may pledge, 62. lien of, upon goods pledged by delivery of warehouse receipt, 306. VERMONT, statute regulating transfer of stock, 215. pledgor's interest made subject to attachment and execution, 391. VIRGINIA, statute regulating transfer of stock, 216. VOTING, upon pledged stock. See Stockholder. WAREHOUSE RECEIPTS, pledge of by contract to deliver, 10. How far negotiable, 280-297. represent the property mentioned, 280. not technically negotiable, 281. quasi negotiability of, distinguished from complete negotiability, 282. in some states declared negotiable by statute, 283-295. though negotiable by statute, stand in lieu of property, 296. whether evidence of ownership or pledge, 297. How may he transferred, 293-302. need not be in a particular form, 298. though not to order or bearer may be pledged by delivery, 299. exceptional rule in Massachusetts, 263, 300. to bearer may be transferred without indorsement, 301. acknowledgment of notice of transfer of, 302. Rights of bond fide pledgee of 303-313. transfer to, passes title as effectually as actual delivery of the goods, 303. when possession of goods obtained by pledgor in fraud, 304. possession obtained by pledgee in good faith, 305. pledgee takes title superior to lien of vendor, 306. title by estoppel of pledgor, 308, 309, 310. warehouseman estopped to deny he has the goods, 311. not estopped as to matters not within his knowledge, 312. nor when he issues a receipt by mistake, 313. 600 INDEX. Reference is to Sections. WAEEHOUSE EECEIPTS — continued. Warehoicseman must have goods in store, 314-320. statutory provision that receipt shall not be issued till goods are received, 314. for goods not received does not pass title, 315. issued by agent without authority not binding, 316. for part of goods stored in bulk, 317. rule applies to such property as grain, 318. when issued for more than is in store, 319. warehouseman not guarantor of title, 320. Owner ccmnot give receipt for his own goods, 321-326. statutory provisions in Nebraska and Kentucky, 322, 323. receipt signed by agent no more effect than his own, 324. distinction between sales and pledges as regards delivery, 326. WARRANTY, of title by pledgor implied, 52, 330. of genuineness of stock certificate implied by transfer, 167. WASHINGTON TERRITORY, statute regulating transfer of stock, 217. pledgor may vote upon pledged stock, 441. pledgee of stock not personally liable as stockholder, 454. WEST VIRGINIA, statute regulating transfer of stock, 216. WISCONSIN, statute regulating transfer of stock, 218. statute relating to negotiability of warehouse receipts and bills of lading, 240. statute relating to negotiability of warehouse receipts, 295. factors' act, 340. statute making pledgor's interest subject to execution, 392. pledgee of stock not personally liable as stockholder, 455. WYOMING TERRITORY, statute regulating transfer of stock, 210. pledgor may vote upon pledged stock, 441. pledgee of stock not personally liable as stockholder, 456. 601 THIRD EDITION, REVISED AND ENLARGED. A TREATISE OK THE Law of Mortgages of Eeal Property. By Leonard A. Jones, of the Boston Bar. In two volumes, 8vo, 860 pages each. Price in law sheep, $13.00. The present revision of this work includes the decisions upon the topics treated which have been reported since the preparation of the second edition down to the be- ginning of 18S2. The number of new cases now added is about fifteen hundred, and the additional citations about twenty-five hundred. New matter has been incorporated into the text of every chapter. The chapter treating of the Assumption of Mortgages has received the largest proportion of such additions, — about a fourth part of it being new matter, in which the results of many important decisions are stated. Much labor has been given to the preparation of each new edition of this work, with the view of making it in every way more complete and useful. The Table of Cases cited in the first edition covered seventy-seven pages, and con- tained about eight thousand different eases. In the second edition the Table of Cases had increased to eighty-seven pages, and the number of cases to about nine thousand. In the third edition the Table of Cases covers more than a hundred pages, and the cases cited number about ten thousand five hundred. The extraordinar}' demand for the previous editions of this work is the best possible evidence of the high esteem in which the work is held by the Profession. Eminent judges and lawyers have expressed highly favorable opinions of its value, and it has been noticed in the principal legal journals with marked commendation. EXTRACTS FROM A FEW NOTICES OF PREVIOUS EDITIONS. When the first edition of this work appeared we gave it a very thorough examina- tion, and were impressed with the fact that it was very greatly superior to any work before published upon the the subject of Mortgages ; that it was e(iual to the very best productions of our modern legal text-books. The year and a half which has tran- spired since the appearance of the first edition has brought confirmation from both Bench and Bur of the correctness of our opinion and the justness of our commenda- tion. — Western Jurist. A sound, practical, and valuable work. The special features of merit in the book are, in our judgment, first, the clear and unlabored statement of principles worked out to a substantially harmonious development. ... In the second phice, no incon- sideralile part of the subject is new. In this portion of the work Mr. Jones has shown a sound and careful judgment in stating the propositions, and discriminating l)ctweeu the adjudged cases; and has presented a clear and readable text. — American Law lie- view. It gives me pleasure to say that the more I have had occasion to refer to it the bet- ter I like it, and I am certain it will be found to be a valuable addition to the law libraries of the day. — M. K. Waite, Chief Justice of the United States. Very high authority. — Court of Appeals of Virginia, 75 Va. 413. Valuable work. — Supreme Court of Alabama, 58 Ala. 22. A work which seems to have been prepared with great diligence and ability. — Appellate Courts of Illinois, 5 Bradw. 5 (///.) 128. This is the English Fisher, which is giving as high praise as any work can deserve — Lavj Times (London), Aug. 5, 1882. I think the profession are to be congratulated that we have at last an American work on niortjiages prepared with coni|)ctent ability and inlelligcncc, luid arranged with so much thoughtful method. — T. M. Cooley, Chief Justice of Michigan. *#* For sale by Booksellers. Sent by mail, post-paid, on receipt of price by the Publishers, HOUGHTON, MIFFLIN AND COMPANY, Boston, Mass. SECOND EDITION NOW READY. JONES ON CHATTEL MORTGAGES. A Treatise on the Law of Mortgages of Personal Property, by Leonard A. Jones, Author of works on Mortgages of Real Property and Rail- road Securities. In one volume, 8vo, uniform with the Author's other works. Price, in law sheep, $6.50. This work has been revised in the present edition by incorporating into the text and notes the new decisions that have been published since the work was first written, as well as some earlier decisions that had been omitted. The book has thus been enlarged by the addition of some sixty pages of new matter. Most of this has been wrought into the sections as they were originally formed, which retain the same numbers ; and only a few wholly new sections have been written for the treatment of new subjects. The number of cases cited has been increased by about three hundred. — From the Preface to the Second Edition. This book naturally follows the author's works upon Mortgages of Eeal Property and Railroad Securities, and the thorough manner in which these works were done led the profession to wish that the author would complete the consideration of the subject of mortgages by a treatise on this, which is perhaps the most complicated and most in need of explanation. — New Jersey Law Journal, 1881. This book, like its predecessor in the series on property securities which the author has in hand, is a model in all that makes a useful, practical book of reference for a busy profession. — American Law Review. Mr. Jones's treatise on the Law of Mortgages of Personal Property is characterized by the same full and complete treatment which he has given his previous works. — Transcript (Boston). This treatise upon the Law of Chattel Mortgages is by the author of the work on Mortgages of Real Property, which we have heretofore so highly commended, and which has received both from the Bench and Bar very universal approval. . . . Our examination of this work has impressed us with the conviction of its genuine merit and rightful claim to rank in excellence with its predecessor, and fit associate of the same author's treatise on Mortgages of Real Property. — Western Jurist. JONES ON RAILROAD SECURITIES. A Treatise on the Law of Railroad and Other Corporate Securities, includ- ing Municipal Aid Bonds, by Leonard A. Jones, author of " A Trea- tise on Mortgages." In one volume, 8vo, 750 pages. Price, in law sheep, $6.50. A very complete, accurate, and useful work. It exhausts the special subjects to which it is devoted. I have necessarily had to become somewhat familiar with these subjects, and I have not been able to discover a single reported case relating to them that has escaped the industry and research of the learned author. — Judge Dillon. I feel assured that it will prove of great benefit to the profession and a great assist- ance to the Bench, showing as it does the same industry, research, and ability as the author's earlier work on Mortgages. — Hon. William B. W ooos, Judge of the Su- preme Court of the United States. The author has discovered a unique field of legal authorship, and has admirably cul- tivated it. . . . He has made an excellent and useful work, and one of the most inter- esting that has lately come to our notice. — Albany Law Journal. The author has evidently performed his work with great care, and his treatise is well worthy to appear as the pioneer text-book in this branch of the law. — Boston Daily Advertiser. *^* For sale by all Booksellers. Sent by mail, post-paid, on receipt of price by the Publishers, HOUGHTON, MIFFLIN AND COMPANY, Boston, Mass. UC SOUTHERN REGIONAL LIBRARY FACILITY AA 000 799 318 ^■- — -^ife P13BLIC UBR/^ RyI /