302 N.Y. 139 | NY | 1951
Lead Opinion
To settle this action (for fraudulent conspiracy) which had been brought, in 1939, by plaintiff’s testator-Schenck against defendants and was then pending untried, a written agreement was entered into in 1940, whereby defendants paid plaintiff’s testator $20,000, and promised to pay him $180,000 more in installments. As security for those deferred payments, defendants agreed to, and did, transfer to a trustee, title to, and possession of, shares of stock and other property belonging to defendants. The trustee chosen for this purpose by the parties was one of the attorneys then representing defendants. The agreement of compromise provided that, on default by defendants in making any of the deferred payments, the trustee was, upon request of the creditor (plaintiff’s testator Schenck), empowered to “ liquidate any or all of the collateral ”. Defendants in 1942, defaulted as to some of their promised payments. The creditor Schenck thereupon requested a sale of the securities, and the trustee gave notice of, and conducted, through an auctioneer, a public sale thereof. At that vendue creditor Schenck was the highest bidder, and so he purchased all the collateral and gave credit to defendants, on the indebtedness, for the amount of his bid. After such credit had been so applied, there was a balance unpaid on the settlement price, and plaintiff moved for judgment therefor, this being pursuant to the earlier
Defendants, however, pleaded by way of counterclaim in an amended answer they then filed, and testified, that Schenck’s purchase of the pledged securities, at the auction, was subject to an oral agreement made just before the sale, by the terms of which, according to defendants, Sehneck would buy in the property but would give defendants “ a right to it ”, and credit them, not with the amount of Ms bid, but with the amount for which he should later resell the property. The trial court, dismissing the counterclaim as matter of law, refused to submit to the jury the question of fact as to whether such an oral promise was actually made by Schenck. There was no statement by the court as to its precise ground for dismissal, but the motion therefor had urged that the alleged oral agreement, enforcement of which was prayed for in the counterclaim, was unenforcible because of lack of consideration, because of vagueness and incompleteness, and for other reasons. The Appellate Division (with a minor modification not here contested) concurred in that disposition.
Appellants say that there was consideration for Schenek’s alleged promise, made on the day of the auction sale. As appellants reason it out, creditor Schenck, as a pledgee, was forbidden by law to be the purchaser at the sale of the pledged property without the consent of the pledgeors. Therefore, say defendants, the permission given by them, as pledgeors, to Schenck, to bid and buy, constituted sufficient consideration for the agreement, which defendants say Schenck made, that he would hold the stock for a later and better turnover for appellants’ benefit. But that argument rests on the assumption that this was a simple pledge or pawn from defendants to the creditor Schenck. It takes no account of the presence in the picture of a trustee, chosen by the parties and given title and possession of the collateral, with obligations to hold and protect it and power and duty to sell it on default. The transaction was, of course, a pledge. Defendants were the pledgeors and Schenck the pledgee. But, by agreement and in fact, there was a tMrd party: “ the holder of the pledge in trust for the purpose ” of the pledge (Union Ins. Co. v. Central Trust Co. 157 N. Y. 633. 639).
When there is such a trustee, the law which disqualifies a pledgee from being the vendee, has no application. Since the prohibition against a pledgee buying is based on a trust relationship to the pledgeor (Toplits v. Bauer, 161 N. Y. 325, 332), the prohibition does not exist when a third party is constituted a trustee by the parties. The leading case is Easton v. German-American Bank (127 U. S. 532). That decision, in plainest terms, says that a creditor, for whose benefit a third party holds pledged property as trustee, may purchase the pawn at a sale held by the trustee under the terms of the trust. The Supreme Court, in the Easton case (supra), first set forth (see pp. 536, 537) the general rule that, where a creditor is a direct pledgee and himself sells the property pledged, he, being the vendor, cannot be the vendee also. The Supreme Court noted that in such a simple pledge relationship the pledgee-creditor “ is in the position of a trustee to sell, and is by a familiar maxim of equity forbidden to purchase for his own use at his own sale.” However, the Supreme Court went on to say (p. 538) that it was “ very plain ” that these familiar principles did not apply in the Easton case where the pledged res (just as in our case) “ was conveyed by the debtor, not directly to the creditor, but to a stranger.” Pointing out that, in the Easton case (just as in our case) “ the sale was made under the direction and control of the trustee ” the Supreme Court held that “ as the creditors who held the obligations of the debtors were not themselves trustees, there was nothing, either at law or in equity, to prevent their being bidders and becoming buyers at the trustee’s sale.” “ In reference to that sale ” the court said further, “ they occupied no position towards the debtor of trust or confidence. They were charged in respect to it with no duty whatever. They had an interest in it that the property should produce enough to satisfy the debts which it had been given to secure. Beyond that they had neither interest nor duty, and in their own interest the creditors had a right to bid so as to prevent the
It can make no difference that, in the Easton case {supra), the debt to the bank was, indirectly, secured by a deed of trust of real property, which deed ran to the third party as trustee. The Supreme Court treated the Easton transaction as a pledge and called it a pledge. In its opinion the court stated the general rule as to simple pledges: that the pledgee-creditor cannot be the vendee, and then held that this rule did not apply to a pledge where title and possession went to a third party and not to the creditor or creditors. Similarly, the Circuit Court opinion of Judge Wallace, in Easton v. German-American Bank (24 F. 523), treats the case as one controlled by the law of pledge. Judge Wallace wrote (pp. 526-527): “ The reason why a pledgee cannot ordinarily acquire a valid title as against the pledgeor by a purchase of the property pledged, although the sale is regularly and publicly made, unless the pledgeor assents, (Middlesex Bank v. Minot, 4 Metc. 325; Bryan v. Baldwin, 52 N. Y. 232) is because he cannot be at the same time a vendor and a purchaser of the property. The defendant here was not the vendor, but occupied the position of a creditor, or of a cestui que trust, seeking to realize as much as might be practicable out of a fund by which its debt was secured. The defendant and the pledgeors stood upon terms of complete equality.”
It is true that, in the Easton case (supra), the underlying (but not direct) security to the bank was real property, but the case has everywhere been treated and regarded as a controlling authority on the law of pledges, and so applied in many decisions including Morris v. Windsor Trust Co. (213 N. Y. 27) and First Bank of Nostasulga v. Jones (156 App. Div. 277, 167 App. Div. 929, affd. 222 N. Y. 579). A case which cites Easton v. German-American Bank (supra) in this connection, and states well its rule, is Monroe Bros. & Co. v. Fuchtler (121 N. C. 101, 104) where the court said: “ He [the trustee] is the agent of both the maker of the deed and the cestui que trust. * * * The cestui que trust has a right to buy at the trust sale.”
That the rationale of the rule, which disqualifies a true pledgee from buying, is not special or peculiar to either personal or real property, appears from many of the authorities. Probably the
It follows from all the above that, when the trustee conducted this auction sale, the creditor Schenck had as much right as anyone else to be a bidder, and needed no permission from anyone. Thus, the debtor’s purported permission was meaningless and could not form a consideration for any alleged promise by the creditor Schenck that, after he would buy, he would continue to hold the property for the benefit of th§ debtor.
And even if the debtor’s consent to a purchase by the creditor, under these circumstances, could somehow amount to a consideration for the creditor’s promise to hold the stock, that promise by the creditor, as testified to here by the debtor, was so vague and so lacking in essential terms, that no court could find a way to enforce it. The farthest that any testimony for defendants goes in this connection is to say that the creditor’s attorney promised: “‘we will credit Joe [defendant Joseph Meyer, Jr.] with the amount that we actually sell the securities for, after they come into our possession.’ ” Other testimony for defendants was that this lawyer said: “ ‘ We do not want to leave it in the name of the trustee because attachment may be made of your [Meyer’s] interest in the stock in the hands of the trustee. We want to get the property out of the hands of the trustee. We will bid it in, give you a right on it and credit you not with the amount of our bid but the amount for which the stock is actually sold by us.’ ” There was nothing said, in that alleged promise by Schenck’s lawyer, as to when, how, at what price, or in what state of the market Schenck would resell. Since no court can write a new contract, or fill iu the blank spaces, for
Eespondent, as against the counterclaim, made other attacks which need not be dealt with here. We are convinced that the result of the auction sale made plaintiff’s testator the absolute and unconditional owner of the collateralled stocks, without any obligation in respect thereto except to credit to defendants’ account (as plaintiff’s testator did) the price he had bid at the auction sale.
The judgment should be affirmed, with costs.
Dissenting Opinion
(dissenting). In February of 1940, the plaintiff’s testator, Schenck, entered into a written agreement of pledge with defendants, in which, for the sum of $200,000, he compromised an action commenced by him in 1939. The defendants paid Schenck $20,000 upon the execution of the settlement agreement, and agreed to pay the balance of $180,000 in specified installments. The payment of these installments was to “be secured by the due and proper transfer of title and possession of collateral * * * to a trustee ’ ’. The collateral consisted, in part, of certificates representing shares of stock in two oil corporations. Upon default, the agreement empowered the trustee to liquidate the collateral when so directed by Schenck, and to apply the proceeds thereof in reduction of the unpaid balance due under the settlement agreement and then to pay the excess, if any, to the defendants. The defendants defaulted in the payment of the installments on March 9, 1942, at which time the balance due Schenck was $119,200. For the sake of clarity, Schenck will hereafter be called the pledgee.
We are here concerned with the question of the legal relationship between the parties created by this settlement agreement, and with the further question of the legal effect of an alleged subsequent oral agreement between them. Since the courts below have directed judgment in plaintiff’s favor and dismissed defendants’ counterclaim, as matter of law, we must, upon this appeal, consider the facts in the light most favorable to defendants, and give them the benefit of every favorable inference which may reasonably be drawn. (Osipoff v. City of New York, 286 N. Y. 422, 425; Hedeman v. Fairbanks, Morse & Co., 286 N. Y. 240, 244.) The facts, thus ascertained, are these: Following defendants’ default, Schenck directed the trustee to liquidate the oil stock held as collateral. The stock was noticed for sale at public auction on July 22, 1942. Prior thereto, during the months of June and July, 1942, the parties held frequent conferences to discuss the situation. They all recognized that the then market price of the oil stock did not reflect its true value and that the market price was likely to rise in the near future. A sale of the stock at a later date on a rising market would, of course, have benefited both Schenck and defendants in that a larger amount of money could have been realized and applied in reduction of the debt. Schenck, how
On the day of the auction sale, Schenck’s attorney made an oral agreement with defendants whereby the latter consented to waive the asserted legal disability of Schenck to become a purchaser of the collateral at the auction sale, in return for a promise that Schenck would credit upon the debt due him, not the amount bid by him at the auction sale, but the amount for which the stock was actually sold by Schenck at a later date on what was believed would be a rising market. Pursuant to this oral agreement, Schenck’s attorney bid in the stock at the auction sale at the then market price of $19,500, and defendants made no objection to such purchase.
About a year later, Schenck’s attorney denied the making of the oral agreement, demanded payment of the balance due Schenck, and then sought to enter judgment against defendants under consents to judgment executed by them at the time of the 1940 settlement agreement. Schenck’s motion to direct the entry of such judgment was denied. (269 App. Div. 775.) Defendants, in October of 1943, cross-moved for an order directing Schenck and his attorneys to sell sufficient of the stock acquired at the auction sale on July 22, 1942, to satisfy the balance due under the settlement agreement and to turn over the excess to defendants. This cross motion was denied. There is evidence that by that time, the market value of the stock had risen to such an extent that a sale thereof would have produced an amount sufficient to completely liquidate the remaining indebtedness under the settlement agreement, leaving an excess of approximately $29,000 for defendants. The loss to defendants therefore within one year and three months was $158,000
Defendants then obtained leave to serve a supplemental answer (269 App. Div. 776) alleging the making of the oral agreement of July 22, 1942, and containing a counterclaim for the sum which, they contended, would have been left as excess after the payment of their debt to Schenck, if the stock had been sold in October, 1943, as demanded in the cross motion. Plaintiff, who by this time had been substituted as Schenck’s executrix, subsequently served a reply setting up defenses to the counterclaim, and the case finally went to trial in September of 1949. Defendants had the burden of proof upon their counterclaim and thus they put in their proof first. At the close of defendants’ case, the plaintiff rested. There was thus no denial of the testimony as to the agreement preceding the auction sale. The Trial Judge then directed verdict for the plaintiff and dismissed the counterclaim as matter of law; refusing to let the case go to the jury. As noted, the balance due Schenck on the date of default was $119,200. Credited to that amount, but without prejudice to defendants’ rights on appeal, was the $19,500 bid at the auction sale, thus reducing the amount due to $99,700. The sum of $34,000 received upon the sale of other collateral further reduced the amount due to $65,700, for which sum, plus interest, plaintiff entered judgment. The Appellate Division, after modifying in a presently uncontested particular, affirmed the judgment below, over the dissents of two Justices who voted to reverse and order a new trial “ on the ground that it was improper to grant a nonsuit upon the counterclaim.” (276 App. Div. 1064, 1065.)
Upon the appeal to this court, the principal question of law argued by both parties is whether or not the transaction provided for in the 1940 settlement agreement constituted a pledge, and, if so, whether Schenck, as pledgee, was legally disabled from purchasing the collateral upon its sale after default. We think that the transaction was clearly one of pledge and that Schenck, under the settlement agreement, was legally disabled from purchasing the collateral, since authorization so to do had not been granted therein.
A pledge is a bailment of personal property for the purpose of securing the payment of a debt. (Bank of Rochester v. Jones,
Shares of stock in a corporation may, of course, be pledged. “ In such case the transfer of the legal title being necessary to the change of possession, is entirely consistent with the pledge of the goods.” (Wilson v. Little, 2 N. Y. 443, 447. See, also, Restatement, Security, § 1, comment e.)
The pledged property may be held by the pledgee so long as the debt which it was intended to secure remains unpaid. If there be a default, the pledgee may, upon notice to the debtor, sell the property and reimburse himself for the amount of the debt, returning the excess, if any, to the pledgeor. If the debt be paid by the pledgeor, he is entitled to the restoration of his security.
In the case at bar, the transaction provided for in the 1940 settlement agreement had all the attributes of, and was, a pledge. The defendants, who were concededly indebted to Schenck in the amount of $200,000, were required to give security for the payment of the debt. The installment payments upon that debt, in the words of the agreement, were to “be secured by the due and proper transfer of title and possession of collateral,” such collateral being certificates representing shares of stock owned by defendants. The only purpose of the transaction was to furnish collateral security for the payment of the debt to Schenck. As the defendants paid installments on the debt and thus decreased it, portions of the collateral were required, under the agreement, to be returned to them and certain shares were so returned. The collateral was to be sold only after a default in the payment of the installments, and the proceeds of such liquidation were to be applied first, to the unpaid balance due Schenck, and the excess, if any, was to be paid to defendants. The stock certificates were constantly referred to in the agree
Plaintiff’s argument that the transaction was not one of pledge is based solely upon the fact that the parties utilized a trustee to hold title to the stock certificates and to perform certain other duties. There is nothing inconsistent between such use of a trustee and the existence of a pledge. The trustee was no more than a pledgeholder. The parties evidently did not wish to put title to the certificates in the name of Schenck. They chose instead a trustee, who was a partner in the law firm then representing the defendants, who was designated to perform all the mechanical tasks which would otherwise have devolved upon Schenck, as pledgee. Dividends on the stock, if. any, were to be paid to defendants. Portions of the stock, as noted, were to be, and were, returned to defendants from time to time. Upon a default, a sale would have to be conducted and disposition made of the proceeds thereof. All these duties, the parties agreed, should be performed by a trustee. The trustee was, in truth, the agent of Schenck and the device was chosen for the mutual convenience of the parties. Such employment of a trustee cannot change the essential nature of the transaction which was a simple pledge.
In a similar situation, this court has recognized that a pledge may exist even though the security be held by a trustee. See Union Ins. Co. v. Central Trust Co. (157 N. Y. 633, 639) where we said: “ In making the deposit, therefore, the Continental Company pledged its property for the purpose of securing payment by Dimick of any award made against him in favor of the Union and State Companies, which thereupon became the pledgees, the Continental Company the pledgor, and the trust company the holder of the pledge in trust for the purpose aforesaid.” (Emphasis supplied.) (See, also, 41 Am. Jur., Pledge and Collateral Security, §§ 19, 20; 49 C. J., Pledges, §§ 4, 42; Restatement, Security, § 1, comment a, p. 6; Jones on Collateral Securities, § 34, p. 42.) In 41 American Jurisprudence, Pledge and Collateral Security (§ 19), it is said: “ In order to perfect the contract of pledge, the delivery need not be made to the creditor himself; it will be sufficient if the thing pledged is placed in the hands of a third person who has been
In section 20 it is said: “ The general rule is that the validity of a pledge is not affected by the fact that an agent or employee of the pledgeor is made the custodian of the property if the parties agree to such arrangement and he is in fact placed in possession. This rule has been frequently applied in cases where the property is allowed to remain on the premises of the pledgeor. According to some authorities, if the pledgee of goods stored on the premises of the pledgeor has and maintains actual and ostensible possession by means of a custodian and a suitable segregation and marking of the property, the custodian may not only be a person in the employ of the pledgeor but he may act without pay from the pledgee. ’ ’
One of the outstanding characteristics of a pledge is that the pledgee may not purchase the pledged property upon its sale after default unless there be express authorization so to do in the contract or unless the sale is conducted by a court of equity. This rule is firmly established by overwhelming authority. (See, e.g., Roach v. Duckworth, 95 N. Y. 391, 401-402; 41 Am. Jur., Pledge and Collateral Security, §§ 90-91; 49 C. J., Pledges, § 265; Restatement, Security, § 51; Jones on Collateral Securities, § 635; Van Zile on Bailments and Carriers, § 305; Note, 38 Col. L. Rev. 923, 924-925; 76 A. L. R. 705, 708; 109 A. L. R. 1106,1107; Gins v. Mauser Plumbing Supply Co., 148 F. 2d 974, 979-980, and cases cited.) Compare General Phoenix Corp. v. Cabot (300 N. Y. 87, 94), and Sager v. Friedman (270 N. Y. 472, 477), where consent to the purchase by the pledgee was expressly given under the contract. The reason for this rule is simple and obvious. As we said in Toplitz v. Bauer (161 N. Y. 325, 332): “ The contract of bailment, whereby personal property is deposited or pledged as security for a debt, creates duties and relations
The case of Easton v. German-American Bank (127 U. S. 532) which is largely and almost exclusively relied upon by plaintiff, was concerned with an essentially dissimilar transaction. In that case
The Easton ease (supra) was cited by us in Morris v. Windsor Trust Co. (213 N. Y. 27, 31, Cardozo, J.), where we said: “ * * * This court has many times held that a contract of pledge creates a fiduciary relation between the pledgeor and the
While no opinions were written below, it appears that the dismissal of the counterclaim by the Trial Judge was based upon one or more of the legal objections raised by plaintiff to the validity of the oral agreement. We, however, are unable to agree that those objections, or any of them, constitute a conclusive defense to the counterclaim as matter of law.
The oral agreement certainly did not lack consideration on the part of defendants. The waiver of Schenck’s legal disability to purchase constituted ample consideration for Schenck’s promise. (Ryerson & Son, Inc., v. O’Donnell, Inc., 279 N. Y. 109, 115.) Neither was the agreement so indefinite and uncertain as to be unenforcible. There was no need under our authorities to specify any period of time within which Schenck was to sell the stock or the price at which he was to sell it. Schenck, the jury might find, was to hold the stock as pledgee, subject to the conditions generally applied to pledgees by implication of law. Plaintiff pleaded in her reply that the agreement was violative of the Statute of Frauds in that it was not to be performed within one year (Personal Property Law, § 31, subd. 1). That was plaintiff’s only defense under that statute. Apparently, in this court, plaintiff has abandoned that defense and, without amending her reply, is urging that the agreement violates subdivision 8 of section 31, viz., that the agreement was one to establish a trust. Since a jury may find, as we have indicated above, that Schenck, under the agreement, was to hold the stock as pledgee subject to the conditions generally applied to pledgees by implication of law, plaintiff’s present contention, even if pleaded, would be untenable and inapplicable. Moreover, even if we were to concede, as plaintiff now urges, without pleading it, that the purpose of the oral agreement was to make Schenck a trustee for the benefit of defendants the objection is not sufficient as matter of law, for
Thus, on the question of the validity of the oral agreement of July 22, 1942, the courts below erred in attempting to decide
If the purchase by the pledgee be deemed unauthorized for that reason, the law is clear that the pledgeor has the option either to affirm or reject the purported sale. The sale in such a case is not void but voidable only, at the election of the pledgeor. (Roach v. Duckworth, 95 N. Y., supra, p. 401.) If the pledgeor elects to treat the sale as illegal, “ the parties are remitted to their rights the same as though no sale had been attempted ” (Bryan v. Baldwin, 52 N. Y. 232, 235) and the pledgee still holds the property as pledgee, with all the duties and obligations of that status. (Duncomb v. New York H. & N. R. R. Co., 84 N. Y. 190, 204-205; Jones v. National Chautauqua County Bank, 272 App. Div. 521, 527, McCurn, J.) As stated in the Bestatement of Security, section 51, comment a, “ The pledgor has the option of affirming the sale and holding the pledgee accountable for the purchase price, or of disaffirming the sale. If he takes the latter alternative, the pledge is not terminated.”
Under either theory, Schenck, after July 22, 1942, was in the position of a pledgee with respect to the oil stock. If the oral
It appears in the record that Schenck or his estate disposed of the oil stock “ within two years ” after he acquired it at the auction sale on July 22,1942. It does not appear, however, how much money was realized upon such subsequent sale. It also appears, as already noted, that defendants in October of 1943, cross-moved for ah order compelling Schenck and his attorneys to sell sufficient of the oil stock to satisfy the balance due Schenck and to turn over the excess to defendants.
Defendants claim that that cross motion constituted a demand by them that Schenck liquidate the collateral at that time, and that by failing so to do, Schenck became liable for the then market value of the stock, which was sufficient to pay off the balance of the debt and to leave an excess for defendants of approximately $29,000.
It is generally held that, even after a default in payment on the part of the pledgeor, the pledgee is under no obligation to sell the collateral, but may sell it or not at his option. (Howell v. Dimock, 15 App. Div. 102, 104; First Trust & Deposit Co. v. Potter, 155 Misc. 106, 111; cases cited in 77 A. L. R. 379; Restatement, Security, § 52.) Where, however, after default, the collateral security is sufficient to satisfy the debt, including interest, expenses and cost of sale, and the pledgeor requests or directs the pledgee to sell the collateral, the pledgee’s duty of good
Defendants’ cross motion in October of 1943, did contain such a request or demand that the securities be sold, and the evidence in the record shows that the securities at that time would have been more than sufficient to satisfy the debt. That cross motion, however, was denied by Special Term and no appeal was taken therefrom by defendants. Since the demand was couched in the form of a motion, and since the motion was denied by the court, we are inclined to think that plaintiff was justified in relying upon the decision of the court, despite the general rule, above stated.
Defendants’ rights, in our judgment, must be determined as of the time when Schenck or his estate actually sold the pledged collateral. The proceeds of such sale should be applied first, upon the debt due Schenck, and the excess, if any, should be returned to defendants. We do not know the amount realized upon that subsequent sale by Schenck or his estate. That issue and all other factual issues in the case may be determined on a new trial.
The judgments below should be reversed and a new trial ordered, with costs to defendants in all courts to abide the event.
Loughean, Oh. J., Dye and Fuld, JJ., concur with Desmond, J.; Conway, J., dissents in opinion in which Lewis and Fboessel, JJ., concur.
Judgment affirmed. [See 302 N. Y. 703.]
The facts of the Easton ease are somewhat complicated, and, for convenience, we state them here. Bowen Bros, issued a series of 100 bonds, payment of which was secured by a deed of trust conveying to one Smith certain real estate owned by Bowen Bros, and empowering him to sell the real estate to the highest bidder, upon the application of any of the bondholders. Forty of those 100 bonds were pledged by Bowen Bros, with the German-American Bank as security for a loan. The real estate which secured the payment of the bonds was sold upon the application of one of the bondholders, not, however, the German-American Bank. One Dexter purchased the land at the sale acting as the agent for all the bondholders. Afterwards, he conveyed 40/100’s of the land to the German-American Bank, which, as noted, held that proportion of the bonds. Later the bank sold the land to one Dore, and also
