Turner v. Metropolitan Trust Co. of City of New York
| Decision Date | 04 August 1913 |
| Docket Number | 2,257. |
| Citation | 207 F. 495 |
| Parties | TURNER et al. v. METROPOLITAN TRUST CO. OF CITY OF NEW YORK. In re WESTERN STEEL CORPORATION. |
| Court | U.S. Court of Appeals — Ninth Circuit |
[Copyrighted Material Omitted] [Copyrighted Material Omitted]
Munn & Brackett, of Seattle, Wash., for appellants.
Frederick Bausman, Daniel Kelleher, Robert P. Oldham, and Robert C. Goodale, all of Seattle, Wash., for appellee.
Before GILBERT, ROSS, and HUNT, Circuit Judges.
HUNT Circuit Judge (after stating the facts as above).
The contract between the corporation and the trust company, like many contracts of pledge, was entered into in consideration of a cash loan by the pledgee to the pledgor. The loan was made in reliance upon the collateral and on the pledgor's contract that the collateral might be sold and the pledge relationship ended at the time and in the mode expressly set forth in the contract of pledge; that upon nonpayment of the note for $600,000 the trust company was authorized to sell, assign, and deliver the whole of the securities or any part thereof 'at any broker's board or at public or private sale, at the option of the said company, without either advertisement or notice which are hereby expressly waived. ' We need not dwell at length upon the validity of the general features of such a contract, because the appellants say in their brief that a provision in a contract of pledge that the pledgee may sell the collateral without notice to the pledgor is valid and binding; they admit that where a pledge agreement provides that the collateral may be sold at private rather than public sale the stipulation is valid; and they concede that a provision that a pledgee may become the purchaser at a public sale if the sale is conducted in strict good faith and in accordance with the terms of the contract is valid. Nevertheless they say that this case is distinguishable because the trust company was not merely trustee for the pledgor but for a pledgor which had placed itself entirely in the power of the pledgee by the waiver of all the common-law safeguards in that the pledgee had power to sell without notice or advertisement at public or private sale, and at the public sale was authorized to become the purchaser of the pledgor's obligation. In their argument that these bonds were never out of the possession of the trust company pledgee, that no new consideration passed, and that no public sale held on the advertisement given could be valid, appellants make these contentions:
First. That, where the pledged collateral consists of an obligation of the pledgor in a greater amount than is due and the collateral is purchased by the pledgee, he cannot enforce it against the pledgor in an amount greater than the sum originally loaned.
Second. That the intent of the pledgee in making a sale on less than 24 hours' notice must be held to have been to acquire title to the collateral by bare literal compliance with the power of sale or wantonly to sacrifice the equity of the pledgor.
Third. That a sale without notice to the public is not a public sale, and that a just construction of the pledge agreement in the present case is that advertisement was waived by the pledgor only in case of private sale.
Fourth. That the duty of the pledgee was to obtain the highest cash value out of the collateral, and that, if it failed to act fairly in the conduct of the sale with such purpose in view, the sale must be held invalid without regard to the terms of the pledge agreement.
Fifth. That under the facts of the present case inadequacy of price is so great as to constitute conclusive proof of lack of good faith on the part of the pledgee in the conduct of the sale.
The attempt to make a distinction between the rule which governs contracts of pledge, where the pledgor prefers to pledge its own mortgage bonds as collateral, and that which governs such contracts, where the pledgor pledges the bonds of another corporation, is not well founded. The contract measures the rights of the parties; and where the expressed intention is that in case of foreclosure the bonds deposited may be sold as existing securities, and the pledgee is given the right to become the purchaser, why should there be any less good title conveyed to such purchaser than if he were selling the bonds of another corporation? The reason for permitting the pledgee to become a purchaser is to permit him to buy the bonds, if he should wish to do so, at a price higher than any one else will pay for them. Granting that under such a contract the relationship of a pledgee to the bonds may offer temptation to sacrifice the rights of the pledgor, still, if upon close scrutiny it appears that a sale has been fairly made and the right to become a purchaser has been specifically given to the pledgee by the agreement between the parties, the exercise of such a right must be upheld and its attendant advantages, whatever they may be, must be accorded to the purchaser. To hold otherwise would be to say that the courts can make a contract which will materially change the relationships of the parties by depriving one of them, in case of default by the other, of the right to acquire full legal title to the thing pledged. The essential characteristic by which a pledge is distinguished from a common-law lien is that the article pledged may be sold by the pledgee upon the nonperformance of the pledgor's obligation. A sale divests the title of the pledgor and gives to the purchaser a good title to the property pledged; the pledgee selling both his own interest and all the right which the pledgor could have empowered him to sell at the time the contract of pledge was made.
The facts here fail to show the features of a mortgage. The transaction was a mere lien with respect to bonds of a corporation. There was no conveyance of legal title upon an express condition subsequent but delivery of personal property by a debtor, in security for a debt, accompanied by a written agreement whereby the debtor agreed that, if he did not pay the debt by a certain time, the creditor might dispose of the property to pay the debt. Jones on Collateral Securities (3d Ed.) Sec. 8. A corporation which has issued its bonds frequently pledges them as collateral security for a debt. Nor is it unusual that in suits for foreclosure the bonds pledged are offered at public sale and are purchased by the pledgee, who is entitled to the full face value of the bonds. Cases where this rule has been recognized by the courts are Farmers' Loan & Trust Co. v. Toledo & S.H.R. Co., 54 F. 759, 4 C.C.A. 561; Gilchrist Transportation Co. v. Phoenix Ins. Co., 170 F. 279, 95 C.C.A. 475;...
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