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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 can not 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 purchaser's liability as indorser, and nothing more. The circumstance 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 payment.'
§ 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 following 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 mortgage 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 arranged that one half the amount should be paid over to the borrower, out of which one of the mortgages should be satisfied, and that the banker should give his certificate of deposit for the remaining half, payable to the order of the borrower at the time the other mortgage should become due; and the lender took a mortgage for two thousand dollars upon the farm. The banker failed before the certificate of deposit became payable, and upon the question whether the certificate of deposit was received as payment 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.
1 Soffe v. Gallagher, 3 E. D. Smith (N. Y.) 507, per Woodruff, J.; and see Shipman v. Cook, 16 N. J. Eq. 251. JONES PLEDGES-47
2 Monroe v. Hoff, 5 Denio (N. Y.)
3 Burrows v. Bangs, 34 Mich. 304.
§ 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 payment.1 "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 party receiving such note to show the contrary.""
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 reasonable diligence in the collection of it. The diligence required
(Tenn.) 79, 81; Roberts v. Thompson, 14 Ohio St. 1, 82 Am. Dec. 465; Bridge Co. v. Savings Bank, 46 Ohio St. 224, 20 N. E. Rep. 339; Muirhead v. Kirkpatrick, 21 Pa. St. 237; Sellers v. Jones, 22 Pa. St. 423; Lyon v. Huntingdon
3 Wilson v. Force, 6 Johns. (N. Y.) Bank, 12 S. & R. (Pa.) 61, 67; Miller
v. Gettysburg Bank, 8 Watts (Pa.) 192, 34 Am. Dec. 449; Bank of U. S. v. Peabody, 20 Pa. St. 454; Lishy v. O'Brien, 4 Watts (Pa.) 141; Girard F. & M. Ins. Co. v. Marr, 46 Pa. St. 504; Lamberton v. Windom, 12 Minn. 232, 18 Minn. 596, 90 Am. Dec. 301; Colquitt v. Stultz, 65 Ga. 305; Blouin v.
Partee v. Bedford, 51 Miss. 84; Bayard v. Shunk, 1 W. & S. (Pa.) 92, 37 Am. Dec. 441.
2 Noel v. Murray, 13 N. Y. 167, per Dean, J.; and see 1 Duer 385, per Oakley, C. J.
Burgess v. Chapin, 5 R. I. 225. Ex parte Mure, 2 Cox 63; Williams v. Price, 1 Sim. & Stu. 581; Lawrence v. McCalmont, 2 How. 426; Slevin v. Morrow, 4 Ind. 425; Kiser v. Ruddick, 8 Blackf. (Ind.) 382; Reeves v. Plough, 41 Ind. 204; Word v. Morgan, 5 Sneed
of 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 necessary, by due demand of payment 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 defense 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,
Hart, 30 La. Ann. 714; Hawley Bros.
'Buckingham v. Payne, 36 Barb. (N. Y.) 81; Hazard v. Wells, 2 Abb. N. C. (N. Y.) 444; Kephart v. Butcher, 17 Iowa 240; Lawrence v. McCalmont, 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. Foote v. Brown, 2 McLean 369; Peacock v. Pursell, 14 C. B. N. S. 728; M'Lughan v. Bovard, 4 Watts (Pa.) 308; Ormsby 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.
3 Lawrence v. McCalmont, 2 How. 426, 454; Pickens v. Yarborough, 26 Ala. 417, 62 Am. Dec. 728; May v. Sharp, 49 Ala. 140; Reeves v. Plough, 41 Ind. 204; Succession of Liles, 24 La. Ann. 550; Cardin v. Jones, 23 Ga. 175; Barrow v. Rhinelander, 3 Johns. Ch. (N. Y.) 614; Hawley Bros. Hardware Co. v. Brownstone, 123 Cal. 643, 56 Pac. Rep. 468; Aldrich v. Goodell, 75 Ill. 452; Hall v. Green, 14 Ohio 499; Charter Oak Life Ins. Co. v. Smith, 43 Wis. 329; Bonta v. Curry, 3 Bush (Ky.) 678; Noland v. Clark, 10 B. Mon. (Ky.) 239; Word v. Morgan, 5 Sneed (Tenn.) 79; Griggs v. Day, 136 N. Y. 152, 32 N. E. Rep. 612; Jennison v. Parker, 7 Mich. 355; Murphy v. Bartsch, 2 Idaho 603, 23 Pac. Rep. 82; Rumsey v. Laidley, 34 W. Va. 721, 12 S. E. Rep. 866.
Wakeman v. Gowdy, 10 Bosw. (N. Y.) 208.
and are of equal obligation.' The reason for thus requiring the preservation 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 insolvency 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 required 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 preservation 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, while the creditor refuses to preserve the collateral security by its collection; the hands of the debtor are tied; he is in no default whatever, yet he must stand by 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 defense.
1 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 arrives 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 in 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 security becomes deteriorated or valueless, it becomes equivalent to actual payment." See also, McLemore v. Hawkins, 46 Miss. 715.
"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 can not, 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 evidence of the indebtedness, but the indebtedness itself is the substantial 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 pledge; and as men in the exercise of ordinary care generally preserve 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 answerable when the pledge is lost through his negligence.' In the exercise of such ordinary care and diligence to preserve the collateral note from being lost by reason of the insolvency of the maker, it is requisite that the pledgee shall resort to active efforts 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 collateral 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 purposes of dominion over the debt assigned. He alone is empowered to receive the
'Lamberton v. Windom, 12 Minn. 232, 247,90 Am. Dec. 301, per McMillan, J.
2 Whitin v. Paul, 13 R. I. 40; Wakeman v. Gowdy, 10 Bosw. (N. Y.)
208; Slevin v. Morrow, 4 Ind. 425; Lyon v. Huntingdon Bank, 12 S. & R. (Pa.) 61; Hoard v. Garner, 10 N. Y. 261; Williams v. Price, 1 S. & St. 581; Ex parte Mure, 2 Cox 63.