Franklin Trust Co. v. Goerke , 116 N.J.L. 529 ( 1936 )

The appellant brought this action to recover the balance due upon a demand note secured by collateral. Respondent admitted the execution of the note, but denied liability thereon and recovered by way of counter-claim the losses which he had sustained by reason of the alleged negligent failure of the bank to sell his collateral at a time when it would have brought sufficient to have more than liquidated the amount of his indebtedness. The theory upon which recovery was had was that the bank was negligent in not having sold the collateral when requested so to do. The note in suit did not obligate the bank to make any sale. The proofs indicated that the respondent was nervous because there had been a severe break in the stock market. The officers of the bank were hopeful. Besides, they had many customers, the value of whose collateral would be disastrously affected by placing upon the market large blocks of like securities. The respondent repeatedly urged the sale, but took no affirmative steps to accomplish his wishes. There is some evidence also that one of the officers in charge of the loan said he would cause sales to be made in small lots as he was able.

We are now concerned only with the legal error in submitting the case to the jury upon the theory that the respondent was entitled to recover, if the proofs indicated that the pledgee was guilty of negligence in failing to sell the securities pledged after having been requested so to do, and at a time when the money realized would have been more than sufficient to liquidate any indebtedness to secure which the stocks were pledged.

It was but recently stated by Mr. Justice Heher, for this court, in Bardsley v. First National Bank, c., Montclair,111 N.J.L. 512: "As stated by Mr. Justice Williams in Glidden v. Mechanics' National Bank, 53 Ohio St. 588; 42 N.E. Rep. 995, 998; 43 L.R.A. 737: ``Under a contract of pledge, theright of the pledgee to retain possession of the propertycontinues until the debt or engagement for the security of whichit was pledged has been discharged by payment or performance, ora tender and demand for its return. * * * On the other hand, in the absence of any stipulation to the contrary, it is the dutyof the debtor to seek the creditor at the proper place, and paythe debt, or tender its payment before he is entitled to receiveback the pledge.'"

It is perfectly clear to us that the case of Peoples NationalBank v. Ginsburg, 108 N.J.L. 415, is not to the contrary. It was there definitely stated that the assertion of the proposition that the refusal by a pledgee to sell stocks, after request, constituted proof of negligence was without legal justification. What was subsequently stated by the opinion writer as to the necessity of a tender of the difference between what was due and what the securities would bring was unnecessary to the decision of the case and could not have been intended as a departure from the general statement made, because no authorities whatever were cited or discussed. The statement was obviously for no purpose other than to answer the argument of counsel.

Jones on Collateral Securities, § 606, is as follows: "A pledgee is not obliged to sell the pledge even when requested so to do by the pledgor, for his only right is to redeem. Therefore in a case where the pledgor demanded a sale of the greater portion of the property pledged upon an offer procured by him, and the pledgee refused to make the sale, and it also appeared that if the sale had been made and the money collected 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 remaining unpaid, but all the property was afterward 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."

The rule is also stated in 49 Corp. Jur. 948, § 98, as follows: "In the absence of an agreement to such effect, the pledgee has no right to sell the pledged property before maturity of the debt. * * * (Section 99). In the absence of a special agreement, a pledgee is not required, nor can he be compelled, to sell the pledged property and apply the proceeds on the debt before its maturity, even though he has authority to sell and has been requested to do so by the pledgor." And on page 997, section 247, it is said: "Although the pledgee, for the pledgor's default, is entitled to sell the collateral, in the absence of a special agreement, he may sell or not at his option, and is under no legal obligation to make a sale, and is not liable for a depreciation in value of the property after the failure to sell; but is liable only for damages resulting from bad faith or negligence." The negligence referred to would seem, by the weight of authority, to be negligence in the manner of selling or in the care of the property offered for sale.

"In the absence of contract the duty of the pledgee is to exercise ordinary care, and he is liable only for neglect of such care." Cooper v. Simpson (Minn.), 4 L.R.A. 194.

The Supreme Court of Pennsylvania has but recently held inGordon, Secretary, v. Mitchell, 182 Atl. Rep. 386, a "creditor-pledgee is under no duty to sell collateral upon request or order of debtor-pledgor."

The note in question did not require the pledgee to make sale of the securities pledged although it had power so to do. Proof of frequent requests to sell the collateral was not competent to vary the terms of the written contract. Culver v.Wilkinson, 145 U.S. 205. There was no proof, nor was there any contention at the trial that there was a new contract by which the pledgee was obliged to sell. If a new agreement existed it should have been pleaded and proved. The pledgor's note had not been called and it was not due until demand. The bank, in the absence of a new contract, was obviously under no obligation to sell before demand for payment and refusal thereof. The pledgor by his repeated requests could impose no new duty upon the bank, unless in compliance therewith it had sold in a careless manner or some loss had been incurred for which it might have been held liable. He, on the other hand, if sincere in his desire to sell the pledged property, was at perfect liberty to make a new contract or order any broker to sell the same, and upon tender of the amount due upon his obligation the pledgor would have been obliged to surrender the pledged property for transfer. Until that was accomplished, the pledgee had a right to retain possession as the pledgor had agreed. Bardsley v. FirstNational Bank, c., Montclair, supra.

The headnote, supported by the text, in Field v. Leavitt (N.Y.), 5 J. S. 215, is as follows: "In a case where personal property has been pledged to secure the payment of a note, and it appears that the pledgor and the parties to the note united in demanding a sale of the greater portion of the property pledged upon an offer procured by them, and the pledgee and owner of the note refused to make the sale, and it also appeared that if such sale had been made, and the money paid thereon, the proceeds of the sale would have paid the note except $200, and the remainder of the property pledged would have sold for a greater sum than the balance of the note, whereas, afterwards, all the property sold for a much less sum than the note, and left a deficiency to be paid by the parties. Held, by the court, that even assuming that the proposed purchaser was solvent and ready to make the purchase, there being no proof in the case that the refusal to sell by the pledgees was not the exercise of an honest judgment on the part of the pledgees; having regard to their own rights and interests as well as those of the parties to the note and the owners of the property, the most that is shown and could be claimed from these facts, is the conclusion that the pledgees made a mistake, but no liability could ensue therefrom under the circumstances."

In the instant case, the pledgor cannot say he relied upon the representation that the pledgee would sell his securities to his damage. He knew all along that the stock was not sold, because he never received credit for the proceeds thereof, and further he continued, until the bank was closed, to pay monthly interest in recognition of his debt which he well knew would have been wiped out if his request had been complied with. Besides, if only part had been sold there would have been a reduction in interest. If he may recover by reason of a default in the pledgee's unassumed obligation, he is in a position where he may enjoy the profits from his securities if the market goes up and look to the pledgee for the difference if the market goes down — a very desirable position to attain certainly a few years ago by a little talk and the failure to take a definite step, such as ordering a broker to sell stock and liquidate the indebtedness. To subject a banking corporation to such a contingent liability, which would not appear upon its books, when examined by its directors or the state banking authorities, seems without reason and likely to cause a great loss to depositors and stockholders alike. Even though a bank in these days may easily employ a reputable broker to make sale of stock exchange collateral, there seems to be no reason to depart from the established rule that the pledgee is entitled to hold the pledged property until the debtor seeks him out and pays the debt and is not liable for damages because acts were not performed which appear not to have been legally assumed.

The judgment is reversed.