SAME-EXPENSES ABOUT THE THING PLEDGED

82. The pledgee can charge the pledgor with expenses necessarily incurred as to the pledged goods.

Expenses of the Pledge

35

The pledgee is entitled to be reimbursed for expenses incurred by him which were reasonably necessary in keeping and caring for the pledged goods. The term "expenses" is used in a broad sense, and includes the premiums paid by the pledgee on an insurance policy held in pledge, money paid in removing the lien of an incumbrance superior to the lien of the pledge, and assessments on corporate stock.88 These expenses are added to the debt for which the pledge stands as security.

86

87

Liability of Pledgee of Stock to Corporate Creditors

A few words seem appropriate here as to the liability of the pledgee to creditors of the corporation for unpaid stock subscriptions, and also as to the liability imposed on stockholders by statute. The decisions are not entirely harmonious, but it seems that, if there is an absolute transfer to the pledgee on the corporate books, then the pledgee is liable to the creditors just as if he were the absolute owner of the stock. But if the transfer on the books is to

39

85 Furness v. Union Nat. Bank, 147 Ill. 570, 35 N. E. 624; Hickson Lumber Co. v. Pollock, 139 N. C. 174, 51 S. E. 855; Bank of Staten Island v. Silvie, 89 App. Div. 465, 85 N. Y. Supp. 760; Hills v. Smith, 28 N. H. 369; Starrett v. Barber, 20 Me. 457; Hendricks v. Robinson, 2 Johns. Ch. (N. Y.) 283; Fagan v. Thompson (C. C.) 38 Fed. 467. One of two joint pledgees cannot recover from the other compensation for caring for and selling the pledged property, where there was no agreement therefor. Central Trust Co. of New York v. New York Equipment Co., 87 Hun, 421, 34 N. Y. Supp. 349.

30 These expenses, to be recoverable by the pledgee, must not be unreasonable. Iowa Nat. Bank v. Cooper (Iowa) 101 N. W. 459; Raley v. Ross, 59 Ga. 862.

87 Furness v. Union Nat. Bank, 147 Ill. 570, 35 N. E. 624. One who takes notes as collateral security for a debt is entitled, as against the owner thereof, to be allowed the cost of realizing on them, including a reasonable attorney's fee. Gregory v. Pike, 15 C. C. A. 33, 67 Fed. 837. But, for a case in which attorney's fees were not allowed the pledgee in defending an action against the real owner, see Work v. Tibbits, 87 Hun, 352, 34 N. Y. Supp. 308.

88 McCalla v. Clark, 55 Ga. 53; Mabb v. Stewart, 147 Cal. 413, 81 Pac. 1073. 393 Thomp. Comm. on Corp. § 2937; 1 Cook, Corp. § 247; Germania Nat. Bank v. Case, 99 U. S. 628, 25 L. Ed. 448; Pullman v. Upton, 96 U. S. 328, 24 L. Ed. 818; Johnson v. Underhill, 52 N. Y. 203; In re Empire City Bank, 18 N. Y. 199; Adderly v. Storm, 6 Hill (N. Y.) 624; Holyoke Bank v. Burnham, 11 Cush. (Mass.) 183; Crease v. Babcock, 10 Metc. (Mass.) 525; Hale v. Walker, 31 Iowa, 344, 7 Am. Rep. 137; Magruder v. Colston, 44 Md. 349, 22 Am. Rep. 47; Wheelock v. Kost, 77 Ill. 296; Appeal of Aultman, 98 Pa. 505.

40

him as "pledgee," or otherwise indicates that he holds the stock merely as collateral, then the pledgee is not so liable. Where the pledgee does not appear on the books of the company as a stockholder, though he holds the stock certificate, again the pledgee is not liable to the creditors of the corporation. 41 In some states, statutes have been passed exempting the pledgee from such liability on stock held by him as collateral.*2

SAME DEGREE OF CARE REQUIRED OF THE PLEDGEE

83. The pledgee must exercise ordinary care or diligence about the pledged goods.

In General

Apart from the somewhat anomalous case of commercial paper, this subject presents no unique difficulty. Since the pledge is a bailment for the mutual benefit of both parties (the pledgor bailor and pledgee bailee), the pledgee is held to the usual standard of diligence in such cases and is bound to exercise ordinary care."

40 Pauly v. State Loan & T. Co., 165 U. S. 606, 17 Sup. Ct. 465, 41 L. Ed. 844; Beal v. Essex Sav. Bank, 67 Fed. 816, 15 C. C. A. 128; May v. Genesee County Savings Bank, 120 Mich. 330, 79 N. W. 630.

41 Henkle v. Salem Mfg. Co., 39 Ohio St. 547; Prouty v. Prouty & Barr Boot & Shoe Co., 155 Pa. 112, 25 Atl. 1001.

42 Colorado, Gen. Laws 1877, p. 150, § 210; Dakota, Laws 1879, p. 14, c. 9; Indiana, 1 Rev. St. 1876, p. 371, §§ 8, 9, and Rev. St. 1881, § 3008 (Burns' Ann. St. 1894, § 3431); Maryland, Code 1878, art. 40, § 61; Massachusetts, Pub. St. 1882, c. 105, § 25; Missouri, Rev. St. 1879, §§ 934, 935; New York, 2 Rev. St. 1881 (7th Ed.) p. 1548, § 11; Ohio, Rev. St. 1880, § 3259; Washington, 1 Hill's Ann. St. & Codes 1891, § 1512; Wisconsin, Rev. St. 1878, p. 532, § 1827; Wyoming, Comp. Laws 1876, c. 34, art. 1, §§ 16, 17. And see Beal v. Essex Sav. Bank, 15 C. C. A. 128, 67 Fed. 816; Pauly v. State Loan & Trust Co., 7 C. C. A. 422, 58 Fed. 666; Borland v. Nevada Bank of San Francisco, 99 Cal. 89, 33 Pac. 737, 37 Am. St. Rep. 32.

48 Mansur-Tebbetts Implement Co. v. Carey, 1 Ind. T. 572, 45 S. W. 120; MINNEAPOLIS & N. ELEVATOR CO. v. BETCHER, 42 Minn. 210, 44 N. W. 5, Dobie Cas. Bailments and Carriers, 128; O'Kelly v. Ferguson, 49 La. Ann. 1230, 22 South. 783; Commercial Bank of New Orleans v. Martin, 1 La. Ann. 344, 45 Am. Dec. 87; Cooper v. Simpson, 41 Minn. 46, 42 N. W. 601, 4 L. R. A. 194, 16 Am. St. Rep. 667; Girard Fire & Marine Ins. Co. v. Marr, 46 Pa. 504; Erie Bank v. Smith, 3 Brewst. (Pa.) 9; Third Nat. Bank of Baltimore v. Boyd, 44 Md. 47, 22 Am. Rep. 35; St. Losky v. Davidson, 6 Cal. 643; Scott v. Crews, 2 S. C. 522; Petty v. Overall, 42 Ala. 145, 94 Am. Dec. 634; Wells v. Wells, 53 Vt. 1; Cutting v. Marlor, 78 N. Y. 454; Ouderkirk v. Central Nat. Bank of Troy, 119 N. Y. 263, 23 N. E. 875; Hollister v. Central Nat. Bank of Troy, 119 N. Y. 634, 23 N. E. 878; Damon v. Waldteufel, 99 Cal. 234, 33 Pac. 903; Cutting v. Marlor, 78 N. Y. 454. Where a life insurance policy is assigned to secure the assignee against a contingent liability, de

The duty and liability of the pledgee are closely analogous to those of the bailee in locatio custodia bailments. The general question of care in mutual benefit bailments has already been sufficiently. discussed, and what has been said on that subject is equally applicable to pledges.

44

Negotiable Paper

Though the theoretical standard, ordinary care, is the same in pledges of negotiable paper as in other classes of property, the practical application of this standard to pledges of negotiable paper presents some unique features. In the case of the ordinary pledge of corporeal goods, only passive custody is usually demanded of the pledgee, who ultimately returns the pledged article in the same form in which it is received. Negotiable paper, however, is valuable, not for itself, but because it is either a promise or order to pay money, and into money it should ultimately be converted.

45

Accordingly, at the maturity of the paper, ordinary care demands that the pledgee (even though the debt secured by the paper is not due) should proceed to take such action as is necessary to collect the note. Again, there are many parties to negotiable paper, who are only secondarily liable thereon (indorsers, for example); and to fix their liability certain steps (such as presentment, demand, and notice) must be taken. It is not ordinary care, usually, unless the pledgee proceeds to take these steps; and if he fails, without reasonable excuse, thus to proceed, and an indorser is released from liability, thereby causing loss, the pledgee is responpendent on the life of the assured, and such assignee is paid by a third person a sum sufficient to pay the premiums while such contingency exists, but he does not agree to pay them, he is not liable in damages to the assured's estate for permitting the policy to lapse by failure to apply the money received to the payment of such premiums. Killoran v. Sweet, 72 Hun, 194, 25 N. Y. Supp. 295. Where a creditor holds as security logs, which he is to manufacture into lumber, sell the lumber, and apply the net proceeds on the debt, he must use reasonable diligence to secure the best net results, account for the proceeds, and show what expenditures were necessarily or reasonably incurred. Second Nat. Bank of Grand Forks v. Sproat, 55 Minn. 14, 56 N. W. 254. If a theft of the pawn was occasioned by his negligence, he is responsible; if without any negligence, he is discharged from liability. Petty v. Overall, 42 Ala. 145, 94 Am. Dec. 634. A pledgee is responsible, also, for the negligence of his servants as well as his own negligence. But he would not be responsible for the negligence of an attorney employed to collect negotiable instruments held in pledge if he used reasonable care in selecting the attorney. Commercial Bank of New Orleans v. Martin, 1 La. Ann. 344, 45 Am. Dec. 87.

44 Ante, §§ 53, 65.

45 Richardson v. Ashby, 132 Mo. 238, 33 S. W. 806; C. H. Larkin Co. v. Dawson, 37 Tex. Civ. App. 345, 83 S. W. 882; Joliet Iron & Steel Co. v. Scioto Fire Brick Co., 82 Ill. 548, 25 Am. Rep. 341; Hamilton's Ex'r v. Hamilton,

46

48

1

sible in damages. Although no steps are necessary to fix the liability of parties primarily liable on a negotiable instrument (such as the maker of a note), yet if the pledgee negligently delays collection and the parties become insolvent, the pledgee would, of course, be liable." The pledgee will also be liable for neglecting to put the collateral in suit, when an ordinarily prudent man would sue, if any loss results from the neglect. In suing on the instrument the pledgee collects the full amount of the instrument, and holds any balance, over and above the amount secured to him, on behalf of the pledgor, unless there were equities existing against the pledgor, in which case the pledgee can collect only the amount of his own interest.50 Where there is danger of loss, the pledgee 84 S. W. 1156, 27 Ky. Law Rep. 298; Mauck v. Atlanta Trust & Banking Co., 113 Ga. 242, 38 S. E. 845; Daugherty v. Wiles (Tex. Civ. App.) 156 S. W. 1089.

49

46 Swift v. Tyson, 16 Pet. 1, 10 L. Ed. 865; 1 Am. Lead. Cas. Eq. 411, 423, note; Smith v. Miller, 43 N. Y. 171, 3 Am. Rep. 690; Wheeler v. Newbould, 16 N. Y. 392; McLughan v. Bovard, 4 Watts (Pa.) 308; Sellers v. Jones, 22 Pa. 423; Muirhead v. Kirkpatrick, 21 Pa. 237; Betterton v. Roope, 3 Lea (Tenn.) 215, 31 Am. Rep. 633; ALEXANDRIA, L. & H. R. CO. v. BURKE, 22 Grat. (Va.) 254, Dobie Cas. Bailments and Carriers, 135; Foote v. Brown, 2 McLean, 369, Fed. Cas. No. 4,909; Lee v. Baldwin, 10 Ga. 208. And see Goodall v. Richardson, 14 N. H. 567.

47 C. H. Larkin Co. v. Dawson, 37 Tex. Civ. App. 345, 83 S. W. 882; Hazard v. Wells, 2 Abb. N. C. (N. Y.) 444; Barrow v. Rhinelander, 3 Johns. Ch. (N. Y.) 614; Muirhead v. Kirkpatrick, 21 Pa. 237; Bank of U. S. v. Peabody, 20 Pa. 454; Sellers v. Jones, 22 Pa. 423; Lyon v. Huntingdon Bank, 12 Serg. & R. (Pa.) 61; Lamberton v. Windom, 12 Minn. 232 (Gil. 151), 90 Am. Dec. 301; Noland v. Clark, 10 B. Mon. (Ky.) 239; Roberts v. Thompson, 14 Ohio St. 1, 82 Am. Dec. 465; Reeves v. Plough, 41 Ind. 204.

48 Ex parte Mure, 2 Cox, Ch. 63; Williams v. Price, 1 Sim. & S. 581; Wakeman v. Gowdy, 10 Bosw. (N. Y.) 208; Hoard v. Garner, 10 N. Y. 261; Lyon v. Huntingdon Bank, 12 Serg. & R. (Pa.) 61; Lamberton v. Windom, 12 Minn. 232 (Gil. 151), 90 Am. Dec. 301; Slevin v. Morrow, 4 Ind. 425, 426; Whitin v. Paul, 13 R. I. 40. But see 1 Am. Lead. Cas. 404. The same rule applies to securities, not negotiable, held as collateral; for instance, a judgment. Hanna v. Holton, 78 Pa. 334, 21 Am. Rep. 20. If a pledgee, without the consent of the debtor, renews or extends a note pledged as collateral, or surrenders such note and takes new security, he must account to his debtor as if he had collected it in full. Haas v. Bank of Commerce, 41 Neb. 754, 60 N. W. 85. Particularly is this true when pledgee allows the note to be barred by the statute of limitations. Farm Inv. Co. v. Wyoming College and Normal School, 10 Wyo. 240, 68 Pac. 561.

49 No demand by the pledgee on the maker is necessary in such case to enable him to sue. White v. Phelps, 14 Minn. 27 (Gil. 21), 100 Am. Dec. 190. 50 Williams v. Smith, 2 Hill (N. Y.) 301; City Bank v. Taylor, 60 Iowa, 66, 14 N. W. 128; Steere v. Benson, 2 Ill. App. 560; Valette v. Mason, 1 Ind. 288; Mayo v. Moore, 28 Ill. 428; Ehrler v. Worthen, 47 Ill. App. 550; Barmby v. Wolfe, 44 Neb. 77, 62 N. W. 318; Haas v. Bank of Commerce, 41 Neb. 754, 60 N. W. 85. So, in the case of a note given for the pledgor's accommodation.

should immediately proceed to collect the collateral, though the pledge debt is not then due."1

Ordinarily the pledgee of negotiable paper (or even of nonnegotiable choses in action) has no right, without the consent of the pledgor, to compromise and take less than what is due on the instrument, and in such case the pledgee might be held responsible for the difference between the amount received under the compromise and face value of the instrument pledged." To this rule there are exceptions, however, as, for example, when the maker of a note is insolvent and the compromise was an advantageous one for the pledgor, since the amount secured was more than could have been collected by suing on the instrument."

SAME REDELIVERY OF THE PLEDGED GOODS

84. The pledgee must, on redemption by the pledgor, redeliver the identical things pledged, except in cases of certificates of corporate stock.

Redelivery of Things Pledged

When the pledge is redeemed by payment of the debt or performance of the undertaking secured, it is the duty of the pledgee to redeliver the goods pledged, together with all their increase and profits. This duty is fulfilled only by a delivery of the identical

54

Atlas Bank v. Doyle, 9 R. I. 76, 98 Am. Dec. 368, 11 Am. Rep. 219; Doud v. Reid, 53 Mo. App. 553. Where the debt for which a note was pledged is paid pending an action on the note by the pledgee, the latter may continue the action, subject to all equitable defenses, holding the proceeds as trustee for the pledgor. First Nat. Bank of Johnson City v. Mann, 94 Tenn. 17, 27 S. W. 1015, 27 L. R. A. 565. Where notes held as collateral are impounded in an equity suit, the pledgee is still entitled to control the same, so far as necessary to bring an action at law thereon, and have the proceeds paid into court. Gregory v. Pike, 15 C. C. A. 33, 67 Fed. 837.

51 Seeley v. Wickstrom, 49 Neb. 730, 68 N. W. 1017; Field v. Sibley, 74 App. Div. 81, 77 N. Y. Supp. 252.

52 Powell v. Ong, 92 Ill. App. 95; Hawks v. Hinchcliff, 17 Barb. (N. Y.) 492; Grant v. Holden, 1 E. D. Smith (N. Y.) 545; Gage v. Punchard, 6 Daly (N. Y.) 229; Garlick v. James, 12 Johns. (N. Y.) 146, 7 Am. Dec. 294; Zimpleman v. Veeder, 98 Ill. 613; Union Trust Co. v. Rigdon, 93 Ill. 458; Depuy v. Clark, 12 Ind. 427; Wood v. Matthews, 73 Mo. 477, 479; Stevens v. Hurlbut Bank, 31 Conn. 146.

3 When the compromise yields more than could have been realized from a suit, then the pledgor is benefited rather than injured by the transaction. It would seem though that the burden of showing this would rest on the pledgee making the compromise. See Powell v. Ong, 92 Ill. App. 95.

54 Whittaker v. Amwell Nat. Bank, 52 N. J. Eq. 400, 29 Atl. 203; Dean v. Lawham, 7 Or. 422; Davenport v. Tarlton, 1 A. K. Marsh. (Ky.) 244; Woodard