Guild v. Meredith Village Sav. Bank

• Decision Date: 22 December 1980
• Docket Number: No. 80-1470,80-1470
• Citation: 639 F.2d 25
• Parties: 30 UCC Rep.Serv. 1021, 31 UCC Rep.Serv. 150 Henry R. GUILD, Jr. et al., Plaintiffs-Appellees, v. MEREDITH VILLAGE SAVINGS BANK, Defendant-Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 25

639 F.2d 25

30 UCC Rep.Serv. 1021, 31 UCC Rep.Serv. 150

Henry R. GUILD, Jr. et al., Plaintiffs-Appellees, v. MEREDITH VILLAGE SAVINGS BANK, Defendant-Appellant.

No. 80-1470.

United States Court of Appeals, First Circuit.

Argued Nov. 4, 1980.

Decided Dec. 22, 1980.

Daniel J. Callaghan, Manchester, N. H., with whom Joseph A. Millimet, and Devine, Millimet, Stahl & Branch Professional Association, Manchester, N. H., were on brief, for defendant-appellant.

William S. Strong, Boston, Mass., with whom Herrick & Smith, Boston, Mass., was on brief, for plaintiffs-appellees.

Before COFFIN, Chief Judge, BOWNES, Circuit Judge, HOFFMAN, ^* District Judge.

BOWNES, Circuit Judge.

In this diversity case, defendant-appellant, Meredith Village Savings Bank, appeals a judgment of the district court ordering it to return to plaintiffs certain debentures pledged to the bank by plaintiffs' decedent as security for a demand note to the bank executed by Donald Shoup. ¹ The court ruled that the statute of limitations had run on the note and, because it was not collectible, the bank no longer had any right to the collateral and ordered the collateral returned to plaintiffs.

There are two issues:

1. Does the expiration of the statute of limitations on a demand note nullify the bank's rights to collateral pledged by a third party?

2. Does the periodic payment of interest on a demand note sufficient to keep the interest current toll the statute of limitations?

On August 1, 1972, Donald S. Shoup executed an interest-bearing demand note to the bank for the principal sum of $61,250 and deposited collateral to secure the loan. Subsequently, the plaintiffs' decedent, Barron P. Lambert, Jr., pursuant to an hypothecation agreement with the bank, deposited $125,000 in bonds in substitution for the original collateral. The hypothecation agreement ² authorized the bank to deal with the pledged securities "in the same way and with the same force and effect" as if Shoup were the "absolute owner." It also provided that the securities, or what remained of them after the note was satisfied, should be returned to Shoup and his receipt alone would be sufficient to relieve the bank of further responsibility for them. The bank is presently holding all the bonds as well as $1,245 in currently due coupons. The bank does not have any collateral or assets belonging to Shoup. No principal payments have ever been made on the note, but interest payments were current at the time this action was brought.

Prior to this suit, the bank demanded that Shoup pay the principal; he did not and told plaintiffs that he was unable to do so. The plaintiffs demanded that the bank return the collateral; the bank refused and informed plaintiffs that it would foreclose on the collateral to satisfy the note.

This action was then brought asking that the collateral be returned to plaintiffs on the grounds that the note was no longer enforceable because the applicable six-year statute of limitations had run. See N.H.Rev.Stat.Ann. § 508:4 (Supp.1979).

We do not agree with the district court that Merrimack River Sav. Bank v. Higgins, 89 N.H. 154, 195 A. 369 (1937), is controlling here. In Higgins the bank was suing an accommodation endorser of a demand note after the statute of limitations had run on the note. The issue was whether payments of principal and interest by the maker of the note could suspend the running of the statute as to the endorser when the endorser had not made any statements or taken any actions on his own behalf that would have suspended the running of the statute. The court held that the principal and interest payments by the maker did not toll the statute of limitations as to the endorser.

In applying Higgins to this case the district court reasoned that, because payments of principal and interest on a demand note by the maker did not toll the statute as to an endorser, it followed that such payments would not toll it as to a pledgor of collateral. Although such a result seems on the surface to be a logical application of Higgins, it overlooks certain basic differences between Higgins and the case at bar.

In Higgins the bank had already foreclosed on the collateral and was pursuing the endorser for the difference between what it had realized on the foreclosure and the amount of the note. Thus, Higgins does not support the proposition that once the note is unenforceable the bank must return the collateral. Moreover, in Higgins, the bank was the plaintiff and the defendant-endorser pleaded the statute of limitations as a defense. In the present case, the bank is the defendant and the plaintiff-pledgor is pleading the statute of limitations as a means of obtaining affirmative relief. It is axiomatic that the statute of limitations is a shield, not a sword. At both the federal and state levels it has long been established that the statute is available only as a defense and not as a cause of action. In Fowler v. Taylor, 97 N.H. 294, 86 A.2d 325 (1952), the court stated:

Moreover, because of the principle that the statute of limitations may not be used as a means for affirmative relief and the further principle that a plaintiff seeking equitable relief must do equity, a mortgagor or his successor in interest is not entitled to have the foreclosure of a mortgage enjoined without paying the debt.

97 N.H. at 297, 86 A.2d at 326. The New Hampshire Court cited to an A.L.R. Annotation, Annot., 164 A.L.R. 1387, which states that the statute of limitations may not be used affirmatively in a suit to compel surrender of pledged property. One of the cases upon which the annotation relies is Weems v. Carter, 30 F.2d 202 (4th Cir. 1929), which we find to be directly apposite to the present case. In Weems the plaintiffs were suing for the return of bonds and stocks which they had pledged as collateral on certain negotiable notes executed by a company that had become insolvent. Actions on all the notes were barred by the statute of limitations. The holding of the court is as applicable today as it was then.

The plaintiffs are third persons who have pledged their property to secure the debt of another, a debt for which they are in no way personally liable. They are asking the relief of a court of equity because the Statute of Limitations has run against the debt. In order to enforce his remedy against the collateral in his hands, the creditor does not ask or need the aid of a court. The question to be considered is whether the running of the Statute of Limitations in favor of a principal extinguishes the right of the creditor to proceed, as agreed, against the collateral. On this question there is some conflict of authority, but we agree with the learned judge below when he says that both "the weight of authority and the better reason lead to the conclusion that the running of the Statute of Limitation in favor of the principal, does not extinguish the obligation of surety on a promissory note in whose favor limitation has not run."

Though a debt has been declared barred in an action on it, yet the security is unaffected.

The distinction drawn...