Dwight v. Singer

Opinion by

Henderson, J.,

On December 31,1897, the defendant gave to the plaintiff his promissory note for $422.67, payable in ninety days from date; and at the same time transferred to him as collateral security 362 shares of stock. The statement of claim shows that this stock was “sold at public auction and realized the sum of ten dollars.” One of the defenses set up in the affidavit of defense is, that at the time of the execution and delivery of the note, the collateral security was worth much more than the face of the note; that the stock was always of sufficient market value to produce the sum of $362, if sold at a bona fide sale ; that the plaintiff had knowledge of the value of the stock, and that it could be sold at a bona fide sale for a much larger sum than $10.00; that if the plaintiff sold the stock either at public or private sale for that sum, the sale was not bona fide but for a grossly inadequate price; and that in the opinion of deponent the sale if made as alleged, was made for the purpose of defrauding him of the real value of the stock.

The contract of hypothecation authorizes the sale of the stock either at public or private sale without advertisement or notice, with the right on the part of the pledgee to become the purchaser. It does not, however, release the pledgee from the obligation cast upon him to exercise good faith in the disposal of the collateral. He occupies a fiduciary relation, and is in a sense a trustee for the pledgor, and is bound to deal fairly with him: 2 Cook on Corp. sec. 479; Pauly v. State Loan & Trust Company, 165 U. S. 606 (17 Sup. Ct. Repr. 465).

The defense is not that the plaintiff sold without notice, or that he became the purchaser himself, or that he was negligent in omitting to sell the stock at a proper time, by reason of which it became valueless; but that the plaintiff, with the knowledge that the stock was worth its face, and could have been sold for that in the market, caused it to be sold for a grossly inadequate price. This is a direct attack upon the good faith of the pledgee, and inasmuch as he has disposed of the collateral, the defendant is entitled to set up the breach of duty alleged in the affidavit of defense against the plaintiff’s action. It is said by way of argument in behalf of plaintiff, that if the sale of the stock was fraudulent, the defendant’s title did not pass, and that he still has his right of action for its recovery. But the defendant is not bound to resort to this remedy.' The plaintiff has seen fit to exercise the power given him in the collateral pledge, and if he acted in fraud of the defendant’s rights, he is accountable for the market value of the stock. The contract of pledge did not authorize the plaintiff to sell the stock to himself or any other person at private or public sale for any price which the plaintiff saw fit to name. It was his duty to obtain the market price for the stock, or, if he sold the stock to himself, to credit the defendant with the value thereof. As the plaintiff has given no information in his statement of the time and place when and where, and the person to whom the stock was sold, we are of the opinion that the averments of the affidavit are sufficient to put the plaintiff on proof and that judgment was erroneously entered on the rule. We need not consider the question whether the averments of payment are sufficient, in view of our conclusion on the other defense. The judgment is, therefore, reversed and a procedendo awarded.