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will, when sued upon the collateral, plead the statute in defense.1
§ 702. On the other hand, it is held that actual loss or prejudice to the pledgor is the criterion of the pledgee's liability for failure to charge the indorser, or for negligence in prosecuting the collection of the collateral. Mere neglect on 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. 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 pre-existing debt is not debarred from resorting to the original consideration, although he has not presented the instrument nor given notice of its dishonor, provided he can clearly and
'Hawley Brothers Hardware Co. v. Brownstone, 123 Cal. 643, 56 Pac. Rep. 468; First Nat. Bank v. O'Connell, 84 Iowa 377, 51 N. W. Rep. 162.
2 Story on Notes, § 405; Chitty on Bills, 441, 498; 2 Parsons on Bills and Notes, 184; Cumber v. Wane, 1 Smith's Lead. Cas., 8th Eng. ed., 357; Chamberlyn v. Delarive, 2 Wilson 353; Ward v. Evans, 2 Ld. Raym. 928; Van Wart v. Woolley, 3 Barn. & C. 439; Peacock v. Pursell, 14 C. B. (N. S.) 728; Clark v. Young, 1 Cranch 181; Kennedy v. Rosier, 71 Iowa 671, 33 N.W. Rep. 226; Kephart v. Butcher, 17 Iowa 240; Powell v. Henry, 27 Ala. 612. See dissenting opinion of Campbell, J., in Jennison v. Parker, 7 Mich. 361; Grove v. Roberts, 6 La. Ann. 210; Hunter v. Moul, 98 Pa. St. 13, 42 Am. Rep. 610; Hanna v. Holton, 78 Pa. St. 334, 21 Am. Rep. 20;
Westphal v. Ludlow, 6 Fed. Rep. 348;
3 Gilbert v. Marsh, 12 Hun (N. Y.) 519; Aldrich v. Goodell, 75 Ill. 452; Steger v. Bush, S. & M. Ch. (Miss.) 172, 189. Something more than mere delay is necessary in such cases; because mere delay, if no loss followed as a consequence thereof, could not be made the foundation of any complaint on the one hand or of responsibility on the other." Per Buckner, Chancellor.
17 Iowa 240.
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 principal 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 requires 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: "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 subsequent 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
1 Lamberton v. Windom, 18 Minn. 506, 514, 12 Minn. 232, 90 Am. Dec.
301; Westphal v. Ludlow, 6 Fed. Rep. 348.
24 Hill (N. Y.) 650, 653.
the liability of the creditor depend upon his ability to collect 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 can not 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 by the exercise of extraordinary diligence, or if a suit brought upon it as soon as it matured, and prosecuted with reasonable diligence to judgment 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."
§ 704. If the pledgor desires a prompt collection of the collateral, 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 creditor has, by his negligence in collecting the collateral security, occasioned a loss. When a prima facie case of negligence in
1 Lamberton v. Windom, 18 Minn. 506, 515, 90 Am. Dec. 301, per Berry, J. 2 Kephart v. Butcher, 17 Iowa 240. Marschuetz v. Wright, 50 Wis. 175, 6 N. W. Rep. 511; Westphal v. Ludlow, 6 Fed. Rep. 348.
4 Cherry v. Miller, 7 Lea (Tenn.) 305; Baker v. Burkett, 75 Miss. 89, 92, 21 So. Rep. 970; Rice v. Benedict, 19 Mich. 132; Robinson v. Hurley, 11 Iowa 410; Smouse v. Bail, 1 Grant's
Cas. (Pa.) 397; Culver v. Wilkinson, 145 U. S. 205, 213, 12 S. C. Rep. 832.
5 Girard F. & M. Ins. Co. v. Marr, 46 Pa. St. 504; Sellers v. Jones, 22 Pa. St. 423; Covely v. Fox, 11 Pa. St. 171; Vose v. Yulee, 4 Hun (N. Y.) 628; Dugan v. Sprague, 2 Ind. 600; Kiser v. Ruddick, 8 Blackf. (Ind.) 382; Murphy v. Bartsch, 2 Idaho 603, 23 Pac. Rep. 82.
the creditor is shown, the burden is then cast upon him to show some excuse for his failure to collect the security. Such a prima facie 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 will ing to pay, but afterwards became insolvent, and most of the insurance money was lost.'
On the issue of a pledgee's negligence in enforcing a note and mortgage held as collateral security the fact that the pledgee placed them in the hands of reputable attorneys for collection would not warrant the court in directing a verdict in his favor in a suit against the pledgor where the evidence tended to show that the security was lost by the negligence of the attorneys."
§ 706. Delay by a creditor to bring suit upon the collateral for three months may make him liable for a loss occurring meanwhile, through the insolvency of the parties liable upon it; and it is no excuse for such delay that a defense to the collateral obligation 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 demand, taken as collateral security for a debt payable on demand, was held not to make the creditor chargeable with a loss occurring 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."
In an action against a pledgee to recover the value of a note pledged as security, upon the ground that the makers of such collateral note have become insolvent, but were solvent at
1 Charter Oak Life Ins. Co. v. Smith, 43 Wis. 329.
2 Plymouth County Bank v. Gilman, 6 Dak. 304, 50 N. W. Rep. 194.
3 Wakeman v. Gowdy, 10 Bosw. (N. Y.) 208.
Burt v. Horner, 5 Barb. (N. Y.) 501. See, however, Noland v. Clark, 10 B. Mon. (Ky.) 239.
5 Goodall v. Richardson, 14 N. H. 567.
specified times when it might have been collected, judgment should be ordered for the pledgee, where the insolvency of the makers of such note at such times is proved.'
§ 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 becomes 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, 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 payment absolves him from all further obligation about the collateral 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 may 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: proceedings on the part of
1 Spencer v. Plano Manuf. Co. (Minn.), 81 N. W. Rep. 538.
2 Runals v. Harding, 83 Ill. 75; Mitchell v. Levi, 28 La. Ann. 946; Lee v. Baldwin, 10 Ga. 208; and see Brown v. Hiatt, 1 Dill. 372.
Bank of the United States v. Peabody, 20 Pa. St. 454.
'Noland v. Clark, 10 B. Mon. (Ky.) 239.
5 Overlock v. Hills, 8 Me. 383.