Miles v. Centennial National Bank

Argued October 21, 1926. This appeal is from judgment on a case stated (which will appear in the reporter's statement). It was brought to ascertain whether defendant bank can retain the proceeds realized on the sale of collateral belonging to plaintiff but wrongfully pledged by a borrower. The court below held that the plaintiff was entitled to recover part of the proceeds. Defendant appealed.

Kendrick Company, brokers, borrowed $25,000 from defendant on February 28, 1922, on their collateral note. Among the collateral were three $1,000 Liberty bonds which belonged to plaintiff but had been in the custody of the brokers to be sold. Not only was the collateral deposited as security for the repayment of the loan of February 28th, but it was deposited as security for the repayment of prior loans then existing and any that might be made subsequently. The brokers were then indebted to defendant on four other collateral loans; on March 1, an additional loan was made. On March 3, 1922, the brokers failed and winding-up proceedings followed. On May 13, 1922, defendant received notice of plaintiff's claim to the three bonds. Prior to that date, however, defendant had sold the bonds with other collateral, pursuant to the terms of the collateral agreement. The sale of the collateral deposited as security for the loan of February realized more than was sufficient to repay the loan; the excess was accordingly credited to earlier loans. When the collateral securing those loans was all converted, the excess, including part of the proceeds of plaintiff's bonds, was credited to the last loan.

The learned court below concluded that plaintiff was entitled to the excess of the proceeds of the collateral deposited to secure the loan of February 28th, (sharing with another person whose bonds had likewise been wrongfully pledged). This result seems to have been reached on the ground, as stated, by the court, that "there is nothing in the case stated which shows loan [of February 28th] was granted upon the faith or understanding that said loan would not be granted unless all the collateral pledged therein should be held for all past or future indebtedness of Kendrick Company or that it was upon that condition alone such loan was made. The loan was the ordinary one with collateral therefor." Accordingly, the court held that "the bank is not a purchaser for real value as against the real owner, except insofar as this particular loan to which the collateral attached......" The law is otherwise. In short, the transaction was as follows: the brokers were indebted to defendant on loans and desired another. They applied for a loan of $25,000 and offered their promissory note and certain collateral (including plaintiff's bonds), agreeing that if the loan was made, the collateral then to be delivered should be held by the bank as security for the repayment of that loan and of prior loans and for any subsequent loans that might be made to the borrower. Defendant accepted that proposal. By making the loan, the bank got the security of that collateral for all the loans because that was the contract; the promise of the borrower was not that the collateral offered should go for repayment, of that $25,000 loan only, if granted, but of all the then existing and any subsequent indebtedness. The value given by the bank in making the loan purchased security for the entire indebtedness; the bank was not bound to make the loan, but, doing so, it parted with something for which it received the borrower's pledge securing all the indebtedness described. As the bank has not applied the collateral otherwise than in accordance with the contract, there is no legal ground on which it can now be deprived of the benefit of security so obtained.

Plaintiff's bonds were negotiable instruments; they passed by delivery; apparently the broker's title to the bonds was not defective; there was no mala fides on the part of the bank in taking or dealing with them; it was a holder in due course: Dengler v. Paul, 83 Pa. Super. 37, 40; Mason v. Frick,105 Pa. 162, 167; Ryman v. Gerlach, 153 Pa. 197; Cochran v. Fox Chase Bank, 209 Pa. 34; King v. Mellon Nat. Bank, 227 Pa. 22,27; Oleon v. Rosenbloom, 247 Pa. 250.

To appellee's contentions (1) that the "extent of plaintiff's loss must be measured by the extent to which the value of his bonds contributed to the liquidation of the loan made upon the faith of the delivery to the defendant of his bonds," and (2) that as the prior loans were not made for this collateral, the bank is not entitled to apply the overplus to prior loans, the answer is that the bank parted with its $25,000 in exchange for the promise that the brokers' entire indebtedness should be secured by these bonds. Appellee further contends that as the case states that the bank was authorized "to apply any collateral then or thereafter deposited by the borrower with said bank and giving the bank a lien on allproperty of the borrower theretofore and thereafter left with said bank for safekeeping, or otherwise, for the payment of any indebtedness present, past or future, to the bank by the brokers," the bank was not permitted to use the proceeds of these bonds because they were not the property of the borrower but the property of the plaintiff. This contention disregards the transaction which was that these bonds were specifically pledged by one having lawful possession for a present consideration as already described. The precedents cited require that the judgment be reversed.

Judgment reversed and here entered for defendant.