But as against the maker of the collateral note, when he has an equitable set-off or other defense to it in the hands of the pledgor, the pledgee can not be allowed his attorney's fees in prosecuting the action, but is limited in his recovery to the amount of the debt secured.1

A corporation, claiming money under a contract after instituting suit thereon, pledged the contract with a third person as collateral, but continued to prosecute the suit in its own name, with a view of realizing for itself a surplus above the amount of the debt secured by the pledge. After it obtained decree, one who had purchased the contract from the pledgee under his power of sale intervened, and claimed the proceeds of the decree. It was held that the pledgor was not entitled to be repaid out of the fund the expenses incurred in prosecuting the suit.2

III. Enforcing Principal Debt.

§ 681. A creditor holding collateral securities may enforce the principal debt by suit without surrendering the securities. He is entitled to hold them until he obtains payment. The taking of a collateral note of a third person, payable at a future day, does not extend the time of payment of the principal debt, unless there be an agreement to this effect. There may be circumstances under which the taking of collateral security, during the pendency of a suit upon the principal

ness v. Union Nat. Bank, 147 Ill. 570, 35 N. W. Rep. 624; Hanover Nat. Bank v. Brown (Tenn. Ch. App.), 53 S. W. Rep. 206.

denhall v. Lenwell, 5 Blackf. 125, 33 Am. Dec. 458; Mills v. Gould, 14 Ind. 278; Kittera's Estate, 17 Pa. St. 416; Trotter v. Crockett, 2 Port. (Ala.) 401;

1 Second Nat. Bank v. Hemingray, Chapman v. Clough, 6 Vt. 123; Snow 34 Ohio St. 381. v. Thomaston Bank, 19 Me. 269; Comstock v. Smith, 23 Me. 202; Abercrombie v. Mosely, 9 Port. (Ala.) 145.

2 McDougall v. Hazelton TripodBoiler Co., 31 C. C. A. Rep. 487, 88 Fed. Rep. 217.

3 § 130; Scott v. Parker, 1 Q. B. 809; Clark v. Young, 1 Cranch 181; Bank of Rutland v. Woodruff, 34 Vt. 89; Dugan v. Sprague, 2 Ind. 600; Men

Cary v. White, 52 N. Y. 138; Van Etten v. Troudden, 67 Barb. (N. Y.) 342; Darst v. Bates, 95 Ill. 493; Wilhelm v. Schmidt, 84 Ill. 183, 187.

debt, will be regarded as suspending the action.' But ordinarily the taking of such security does not impair or suspend the creditor's right of action upon the principal debt. Thus, if the purchaser of land assume the payment of an existing mortgage upon the property already matured, his giving a bond payable at a future time as collateral security to the mortgage does not, in the absence of any accessory agreement, suspend the right of the holder of the mortgage to enforce payment of it forthwith. Even a promise or covenant of the

2 Hawks v. Hinchcliff, 17 Barb. (N. Y.) 492; West v. Carolina Life Ins. Co., 31 Ark. 476; Wilhelm v. Schmidt, 84 Ill. 183; Allen v. Clark, 65 Barb. (N. Y.) 563, 576; Willoughby v. Spear, 4 Bibb (Ky.) 397; Carson v. Buckstaff, 57 Neb. 262, 77 N. W. Rep. 670.

1 Harshaw v. McKesson, 65 N. C. line of observation overlooks the fact 688. that although the obligor in the collateral bond would obtain, from the nature of the transaction, no binding obligation against the immediate enforcement of the mortgage, he nevertheless put things in such a position as to render it extremely unlikely that such a step would be taken, and it is upon such probabilities that human conduct is very commonly founded.

Firemen's Ins. Co. v. Wilkinson, 35 N. J. Eq. 160, 178. Chief Justice Beasley, delivering the opinion of the court said: "The transaction between them was this: the one party gave, and the other party received, a bond conditioned for the payment of these moneys in one year after date, with the understanding that such bond should be collateral to the original bond and mortgage. Now, in terms, it is declared that this obligation is not to be substitutionary, that is, it is not to take the place of the primary obligation, but it is to be collateral to it. From what circumstance, then, is it to be deduced that such primary obligation is not to be enforced until the collateral obligation falls due? It is, indeed, argued that we can not suppose that the respondent, unless this effect were to ensue, would have taken upon himself this personal covenant; that he received nothing by it, if the appellant could at once proceed to foreclose the mortgage. But such a

The sole question is,

How have the parties agreed; and all we know upon that subject is, that it was the understanding that a collateral bond would be given. That is the entire agreement. If they saw fit, they might have agreed that all proceedings in the original bond and mortgage should be suspended during the running of the new bond. But they did not make any special stipulation to this effect, and I have already said that such a stipulation is not to be inferred from the giving of such an instrument. The decisions forbidding such an inference are numerous." See, also, Neimcewicz v. Ghan, 3 Paige (N. Y.) 613, 11 Wend. 312; Jones on Mortgages, § 1190.

Calvo v. Davies, 73 N. Y. 211, 29 Am. Rep. 130, is a case where there was an express agreement to extend the original debt.

creditor, upon receiving collateral security not to sue the debtor until the securities shall be given up, is not a bar to a suit at law by the creditor, brought before giving up the securities; for it is a well-settled principle of the common law that a covenant not to sue within a limited time can not be so pleaded, the only remedy being a suit upon such covenant or promise for a breach of it; and the damages for such breach might be more or less than the amount of the debt secured.'

It is well settled that the mere taking of collateral security on time, without any agreement between the parties for a definite extension of the time of payment of the principal debt, does not, per se, operate to suspend the right of action upon the principal debt until the collateral security shall become due.2

But if a creditor accept his debtor's own note or check payable at a future day, it will operate to extend the right of action upon the debt until the maturity of the note; and such extension will discharge a surety of the original debt, if it be without his consent.*

1 Foster v. Purdy, 5 Met. (Mass.) ination of the authorities, which,

442.

2 United States v. Hodge, 6 How. 279; Cary v. White, 52 N. Y. 138. A remark to the contrary in Pratt v. Coman, 37 N. Y. 440, is criticised as not necessary to the decision, and not supported by authority.

3 Place v. McIlvain, 38 N. Y. 96, 97 Am. Dec. 777.

4 Myers v. Welles, 5 Hill (N. Y.) 463; Fellows v. Prentiss, 3 Denio (N. Y.) 512, 45 Am. Dec. 484; Bangs v. Mosher, 23 Barb. (N.Y.) 478; Brooks v. Wright, 13 Allen (Mass.) 72; Andrews v. Marrett, 58 Me. 539; Appleton v. Parker, 15 Gray (Mass.) 173; Sayre v. King, 17 W. Va. 562, 573. In Sayre v. King the law upon this subject is quite fully and clearly stated by Green, C. J., delivering the opinion of the court. From an exam

however, can not be fully reconciled, he deduces these propositions: "The taking of a bill or negotiable note for an existing debt is prima facie conditional payment thereof; but it may be shown by direct or circumstantial evidence that the bill or negotiable note was taken as an absolute payment, or as collateral security merely.

"If instead of commercial paper another chose in action, such as an unnegotiable note, a bond, a deed of trust or mortgage, or an obligation to deliver goods, be given by the debtor to his creditor, such chose in action is prima facie collateral security for the original debt; but it may be shown, by direct or circumstantial evidence, that such chose in action was received as an absolute or conditional payment. If any chose in action was received as

§ 682. A creditor who has sold or transferred the collateral paper can not recover upon the principal debt without accounting either for its face value or its actual value. By such sale or transfer he has made the collateral his own, and extinguished the principal debt, at least to the extent either of the nominal amount of the collateral or of its value.' The indorsement of a note passes the property in it to another, and is evidence that it was sold for a valuable consideration. If, after such indorsement, an action could be maintained on the original contract, the plaintiff would receive double satisfaction. The fact that the collateral note has proved worthless, and the creditor has made himself liable to his assignee for the payment of it, does not avail the creditor unless he has regained possession of it so that he can return it to his debtor upon receiving satisfaction for the principal debt. The presumption is that a creditor, in transferring collateral paper, has received the full amount appearing to be due upon its face. But even if it appear that he has received less than the face of the paper, he would be regarded as having elected to accept satisfaction out of the collaterals, and would be bound by such. election, and would not be permitted afterwards to resort to the principal debt to recover any deficiency occurring in this way. Having, without the authority of the principal debtor, transferred the securities to a third person, he will be held to

absolute payment of a preceding debt, it discharges the sureties in the original debt; and if received as conditional payment, and such chose in action is payable at a future time, it amounts to a suspension of the right of the creditor to sue on his original debt; and if taken without the consent of the sureties in the original debt, it discharges them from all liability. If such chose in action was received as collateral security, though it be payable at a future time, unless there was an agreement to postpone the right of suit on the original debt, proven by other evidence, direct or

circumstantial, the taking of such collateral security does not suspend the right of action on the original debt, and therefore does not discharge the sureties from their liability therefor." But see Elwood v. Deifendorf, 5 Barb. (N. Y.) 398.

1Cocke v. Chaney, 14 Ala. 65; Spalding v. Bank of Susquehanna County, 9 Pa. St. 28; Harris v. Johnston, 3 Cranch 311, 318, per Marshall, C. J.; Hawks v. Hinchcliff, 17 Barb. (N. Y.) 502; Haber.v. Brown, 101 Cal. 445, 35 Pac. Rep. 1035.

2 Cocke v. Chaney, 14 Ala. 65.

have elected to take them at their face, in satisfaction to that extent of the principal debt.' Furthermore, as the creditor holds the collateral securities in trust for the benefit of his debtor, after the discharge of the principal debt, if the securities upon their face represent a larger amount than the principal debt, the debtor may recover of the creditor, after he has disposed of the collateral paper, the excess of this over the amount of the principal debt.

§ 683. It is no defense to a creditor's action upon the principal debt that he has irregularly foreclosed mortgages held as collateral, and himself become the purchaser. Thus, a debtor having assigned to his creditor absolutely several mortgages of real estate to secure a note, the creditor foreclosed the mortgages and purchased the property. In a subsequent suit upon the principal debt the creditor offered to credit the sum obtained upon the foreclosure sales; but the debtor filed an affidavit of defense, wherein he averred that the creditor had acted as owner of the mortgages, and had sued them and purchased the property without notice to the debtor, and that he had sold the property for an inadequate sum of money, when by prudent management he might have obtained a much larger sum. It was held, however, that the affidavit of defense was insufficient, and that the plaintiff was entitled to judgment either for the balance of the claim or for the whole original amount of it, since, according to the defense, the collaterals have not been effectually sold, but have only been changed from mortgages of land to a title to the land itself, which is still held for the debtor's use; and therefore the creditor has constituted himself a trustee for the debtor, and so now holds. the land only as he held the mortgages, as collateral security for the payment of the principal debt; and in that case the debtor may compel a reconveyance to himself on tender of the whole amount of the debt.2

1 Hawks v. Hinchcliff, 17 Barb. (N. Y.) 492.

2 Smith v. Bunting, 86 Pa. St. 116.