Case ID: ohio-st_46/html/0009-01.html
Source: Caselaw Access Project
Author: {"author": "Uickman, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Handy v. Sibley.
    
      Accommodation note and mortgage held as collateral security — Amount recoverable thereon — Sale and purchase by pledgee — Bights of pledgee upon a foreclosure and sale of mortgaged premises.-
    
    1. The holder of an accommodation note, indorsed to him as collateral security, can recover against the accommodation maker no more than the amount intended to be thereby secured.
    2. When such note is secured by a mortgage executed by the maker of the note, the pledgee, upon a foreclosure and sale of the.mortgaged premises, after receiving payment of the debt due him from the pledgor, will be held as a trustee of tbe surplus, for the benefit of the mortgagor and his assigns.
    S. A pledgee can not, by a sale and purchase by himself of such accommodation note and mortgage, under a special power of sale and purchase from the pledgor, recover upon a foreclosure of the equity of redemption, a sum in excess of the debt for which the note and mortgage were pledged as collateral security.
    4. The children of H. made to him their promissory note for $25,000, secured by mortgage on real estate worth $100,000, for his accommodation, and to enable him to pledge the same as collateral and for no other consideration. H. pledged the note and mortgage as collateral security for the payment of a claim of S. against him for $15,000, and gave to S. a written power to sell the pledge at public or private sale, and to purchase the same. The children, with no knowledge or notice 'of the power of sale given to S., joined with their father in a written assignment to W. of ten thousand dollars in the note and mortgage, being the surplus over and above the claim of S. and the amount of H.’s indebtedness to W. In consideration of the assignment, W. extended the payment of his claim against H. for one year. 8. agreed in writing on the face of the assignment, to hold the note and mortgage, ahd deliver the same to W., upon receiving the amount of his claim of $15,000. Upon non-payment of his claim, S. sold the pledged note and mortgage at public sale, and became the purchaser thereof, for the sum of $15,000. There was no evidence, that W. at or before the time of the assignment, had any notice of the power of sale; nor had the children any notice or knowledge of the sale until long after it occurred. S., after purchasing the note and mortgage, in a proceeding to foreclose the equity of redemption, claimed $25,000, the amount of the mortgage note, with interest thereon.
    
      Held: That he was entitled to recover $15,000, with interest, and no more.
    (Decided May 22, 1888.)
    Error to tbe Circuit Court of Hamilton County.
    The original action was commenced in the court of common pleas of Hamilton county, by the defendant in error, James W. Sibley, against Helen A. Handy, Mariette B. Handy, Charles E. Handy, Jennie A. Handy (now Jennie A. Rhodes), Anna W. Handy and Eugene F. Williams, plaintiffs in error, and Truman B. Handy, to foreclose a mortgage, as hereinafter set forth.
    On March 27, 1883, Helen A. Handy, Mariette B. Handy, Charles E. Handy, Jennie A. Handy and Anna W. Handy, children of Truman B. Handy, executed and delivered to their father, their promissory note, a copy of which is as follows:
    
      “ $25,000.00. Cincinnati, March 27, 1883.
    Ninety days after date we promise to pay to the order of Truman B. Handy, twenty-five thousand (25,000) dollars, payable at the Citizens’ National Bank, at Cincinnati, with interest at six per cent, per annum; value received.
    Helen A. Handy,
    Mariette B. Handy,
    Chas. E. Handy,
    Jennie A. Handy,
    Anna W. Handy.”
    “ Indorsed: Truman B. Handy.”
    This note was secured by a mortgage deed executed and acknowledged March 27, 1883, by the above named makers oí the note, conveying to Truman B. Handy, certain described real estate owned by the mortgagors, and situated in the village of Clifton, in Hamilton county. The note and mortgage were executed to Truman B. Handy by his children, for his accommodation, and simply as surety for him, and to enable him to pledge the same as collateral, or, by having the same discounted, to obtain money for his convenience and accommodation, and for no other consideration. At the time of executing the mortgage, the real estate therein described was unincumbered, and worth one hundred thousand dollars.
    On April 2, 1883, Truman B. Handy executed and delivered to James "W. Sibley, his promissory note and agreement, a copy of which is as follows: .
    “ $15,000.00. Cincinnati, O., April 2, 1883.
    
      “ Ninety days after date I promise to pay James W. Sibley, or order, fifteen thousand dollars, for value received; having deposited or pledged as collateral security for the payment of this note, a note for twenty-five thousand dollars, secured by mortgage given me by Helen A. Handy, Mariette B. Handy, Chas. E. Handy, Jennie A. Handy and Anna Handy. And I hereby give to the holder thereof full power and authority to sell or collect at my expense all or any part or portion thereof, at any place, either in the city of Cincinnati or «elsewhere, at public or private sale, at his option, on the nonperformance of the above promise, and at any time thereafter, and without advertising the same or otherwise giving to me any notice. In case of public sale the holder may purchase without being liable to account for more than the net proceeds of such sale.
    “Truman B. Handy.”
    “ Indorsed: James W. Sibley..”
    Truman B. Handy indorsed the note for $25,000, and duly assigned the mortgage securing the same, to James W. Sibley, and deposited them with him, for the purpose and with the power and authority set forth in the above note and agreement of April 2, 1883.
    On June 9, 1883, Truman B. Handy and his children executed and delivered to .Eugene F. Williams an assignment, of which James W. Sibley had notice, and to which he assented in certain terms; a copy of which assignment and assent is as follows:
    “ Know all men that whereas Helen A., Mariette B., Charles E., Jennie A. and Anna W. Handy, did, on the 27th day of March, 1883, executp and deliver to Truman B. Handy their certain promissory note for twenty-five thousand dollars ($25,000.00), and on the same day executed a mortgage to secure the same, payable ninety (90) days after the date thereof, with six (6) per cent, interest, upon certain real estate situate in Clifton, Hamilton county, Ohio, and being the same premises described in a mortgage executed by said Helen A. Handy and others to said Truman B. Handy, recorded in mortgage book 461, page 170, Plamilton county, Ohio, mortgage records;
    “ And whereas said note and the mortgage securing the same were, for a valuable consideration, assigned and transferred by said Truman B. Handy to one J. W. Sibley, to secure the sum of $15,000.00 and interest;
    “ And whereas the said Truman B. Handy is indebted to one Eugene F. Williams in something over ton thousand dollars ($10,000.00), and being desirous of securing the same ;
    “ Now, therefore, we do hereby agree and consent that the said Eugene F. Williams shall receive an assignment and transfer of ten thousand dollars of, in and to said note and mortgage of $25,000.00, together with the interest thereon, the same being the surplus over and above the $15,000.00 due said Sibley, and the interest due him under said note and mortgage, and that said surplus of $10,000.00 and the interest accruing thereon, secured by said note and mortgage, shall be applied towards the payment of said indebtedness by said Truman B. Handy to said Williams, the said Williams, however, agreeing to extend the payment of his claim secured by this assignment, for one year from the date hereof, and also agreeing to apply to the diminution of said indebtedness all dividends that he may receive from the late firm of Handy, Richardson & Company, of Chicago, interest to be allowed to the said Williams at the rate of six per cent, per annum, until the payment of the indebtedness hereby secured. Said Truman B. Handy hereby so assigns said note and mortgage, and joins in this agreement.”
    Truman B. Handy,
    Helen A. Handy, Mariette B. Handy,
    Charles E. Handy,
    Jennie A. Handy,
    Anna W. Handy,
    Eugene E. Williams,
    by Jordan, Jordan & Williams, His Attorneys.
    
      “■ I do hereby acknowledge the service upon me of notice of the above and foregoing assignment made by Truman B. Elandy and others to Eugene F. Williams, dated June 9th, '1883, and agree hereby to hold said note and mortgage and deliver the same to said Williams or his attorneys, Jordan, Jordan & Williams, or his legal representatives, upon the payment to me of fifteen thousand dollars and interest thereon at six per cent, from March 27, 1883, whether said $15,000 and interest be paid by said Truman B. Handy or any other person.
    
      “ I sign the above with the agreement and understanding that nothing therein contained shall prevent me from enforcing my security at any time, or shall hold me responsible, in case other persons assert and maintain legal rights against said note or the proceeds thereof, or any part thereof.
    “ James W Sibley.”
    The note for $15,000, being past due and unpaid, James W. Sibley caused the note and mortgage for $25,000, pledged as collateral security for the payment thereof, to be offered at public auction sale, on July 21, 1883, at the Chamber of Commerce hall in Cincinnati, Ohio, and Sibley being the highest and best bidder, purchased the note and mortgage of $25,000, for the sum of $15,000. The sale was made without the consent of the children of Truman B. Handy, none of whom had any notice or knowledge of the existence or terms of the power of attorney, under which Sibley sold the pledged collaterals, until long after the salenor did they have any notice of the time or place of such sale; nor did they learn of such sale, until long after it was made. Notice of the sale of the pledge at the Chamber of Commerce, was given to the attorneys of Eugene F. Williams, but not to him personally; and before the sale, the attorneys of Williams informed Sibley by letter, that they had not notified their client of the notice served upon them of the intended sale, and that therefore, he had no knowledge of Sibley’s purpose to offer the pledge for sale.
    The condition of the mortgage deed having been broken, by reason of the non-payment at maturity of the note for $25,000, james W. Sibley filed his petition in the court of common pleas to foreclose the equity of redemption; and prayed that the premises described in the mortgage be sold, and that of the proceeds of such sale, there be paid to him the amount due on the mortgage note, to-wit: twenty-five thousand dollars, with interest from March 27, 1883. Eugene F. Williams, who was made defendant in the foreclosure proceedings, claims in his answer, that Sibley is entitled to receive out of the proceeds of the sale of the premises, as against him, the sum of $15,000, with interest, and no more. On appeal, the circuit court, upon an agreed statement of facts, which hereinbefore have been substantially set forth, adjudged and decreed the equities of the case to be with Sibley; that the note for $25,000, set forth in the petition, and the mortgage securing the same, belonged to Sibley; that he was entitled to a decree against the defendants for the full amount thereof, with interest; and that on failure to pay Sibley $27,802, and costs of suit, the mortgaged pi’emises should be sold, and the last named sum be paid from the proceeds of such sale. *
    To reverse the judgment of the circuit court, this petition in error is now prosecuted.
    
      Jordan & Jordans, for plaintiffs in error.
    
      Ramsey, Maxwell & Ramsey, for defendants in error.
   Uickman, J.

Independent of the power of sale vested in James "W. Sibley, by the instrument of writing dated April 2, 1883, he would not have been authorized to sell at public or private sale the note and mortgage of twenty-five thousand dollars, which Truman B. Handy had pledged as collateral security for the payment of his note of fifteen thousand dollars. There is a distinction between a pledge of ordinary chattels, and a pledge of commercial paper. A pledge of the latter as. collateral security for the payment of a debt, does not, in the absence of a special power for that purpose, authorize the pledgee to sell the securities so pledged, upon default of payment, either at public or private sale. He is bound to hold and collect the same as they become due, and apply the net proceeds to the payment of the debt so secured. The reason assigned for this exception to the general rule in relation to the sale of property pledged is, that such securities, not being* usually marketable at their fair value, would generally be sold at a sacrifice, and injustice would thus be done the debtor; and it cannot be presumed it was the intention of the parties thus, to deal with the securities. Wheeler v. Newbould, 16 N. Y. 392; Fletcher v. Dickinson, 7 Allen 23; Nelson v. Wellington, 5 Bosw. 178; Brown v. Ward, 3 Duer. (N. Y.) 660; Morris Canal & Banking Co. v. Lewis, 12 N. J. Eq. 323; Joliet Iron & Steel Co. v. Scioto Fire Brick Co., 82 Ill. 548; Zimpleman v. Veeder, 98 Ill. 613. Ordinarily, where there is a deposit of personal property as security, there is an implied power of sale upon default, upon giving reasonable notice to the debtor to redeem. But the pledgee of negotiable paper, who desires a more summary and speedy means of obtaining money from his security, than by collecting the same when it falls due, or by a bill in chancery and a judicial sale under a regular decree of fore■closure, will obtain a special power of sale from the pledgor. In enforcing his rights, however, by a salé of the pledge, he will be held to the strictest good faith in the execution of the power for the protection of the rights of the pledgor, and will be charged with a trust for the benefit of the debtor, and the benefit of those to whom the debtor may have assigned his interest.

It seems to be beyond controversy, that the note for $25,000, secured by mortgage, and given by the children of Truman B. Handy to their father, was good for that amount, although purchased by Sibley at the sale for $15,000 only — that being the amount of the note for which the note of $25,000 had been pledged as collateral security. Upon foreclosure of the mortgage, and sale of the premises, it appears that a sum would be realized more than sufficient to pay the note of $25,000 — sufficient to pay the principal and interest of the note of $15,000, and leave a surplus. The question arises, whether Sibley, because of his sale and purchase of the pledge, shall be permitted to retain this surplus embraced within the note of $25,000 as his own property, or be held to account for it as trustee to Eugene F. Williams.

The mortgage note of $25,000 was executed to Truman B. Handy by his children, solely for his accommodation, to enable him to pledge the same as collateral, or, by discount to obtain money for his convenience, and for no other consideration. They executed the note and mortgage simply as surety for their father. They had no knowledge of the power of sale given by him to Sibley until long after the sale of the pledge; nor did they have any notice of the time or place of such sale, or learn of the sale until long after it was made. We do not think that under the circumstances, Sibley can subject their property to the payment of $25,000, when he loaned to their father only $15,000; or that he cap retain the balance, $10,-000, without any consideration therefor. Handy deposited or pledged the note and mortgage as collateral security for the payment of $15,000, and no more. If, at the maturity and non-payment of his claim, Sibley, without resorting to a sale of the pledge, had sought to enforce payment by foreclosure of the mortgage, he would have been entitled out of the proceeds of the sale of the premises, only to the amount of his debt. He could not, by resorting to a sale of the pledge, enlarge his equities, or successfully invoke the aid of a court of equity, in an effort to exact from his debtor more than he owed him.

The principle is elementary, and as old as the Roman law, that if the creditor exercises his power of sale over the pledge, he must give the surplus, after paying himself, to the debtor. D. 13, 7,42; Hunter’s R. L. 439. And as between debtor and creditor, whatever may be the effect of a sale as to annulling all the debtor’s residuary interest in a pledge of ordinary chattels, when a question arises as to the rights of third parties, who are makers of accommodation paper pledged as collateral security, such parties should not be required to pay the credit-tor more than the amount of his debt. It has been decided by the supreme court of Massachusetts, in Fisher v. Fisher, 98 Mass. 303, that if a promissory note, which is without consideration as between the original parties thereto, is delivered without consideration to another person who pledges it before its maturity, as collateral security for a debt of his own of less amount than the face of the note, the pledgees, if they take it without notice, are to be deemed holders for value, and may maintain an action thereon for the amount due them upon the debt which it was pledged to secure. In the opinion of the court it was said : The evidence established that the plaintiffs received the note from the holder before its maturity, without any knowledge of the circumstances under which the defendants had delivered it to the payee, or the purpose for which the latter delivered it to the holder, and that it was held by the plaintiffs as collateral security for a valid debt due from the holder to them. Under the decisions of the court, these facts proved that the plaintiffs were bona fide holders for value, and without notice, and were therefore entitled to recover to the extent of their debt for which the note was pledged as collateral security.”

In Duncan, Sherman & Co. v. Gilbert, 5 Dutch. (N. J. L. R.), 527, it is stated as the rule, that the holders of accommodation paper, assigned as collateral security, cannot recover of the accommodation maker any more than the consideration actually advanced.

In Atlas Bank v. Doyle, 9 R. I. 76, it was held that in case of accommodation paper pledged, the pledgee can ' recover of the maker only the amount of the debt due him from the pledgor.

And in Maitland v. The Citizens Bank, 40 Md. 540, the doctrine was laid down, that, in an action against the maker of a promissory note made for the accommodation of the indorser, brought by the indorsee to whom it was passed as collateral security for the payment of notes discounted by the indorsee for the benefit of the indorser, the measure of the plaintiff's right of recovery is the amount due on the debts embraced by the security; and that it is incumbent on the plaintiff to show what debts were intended to be secured by the note, and the amounts remaining due in respect thereof. “Indeed,” says Alvey, J., “ all that the plaintiff is entitled to recover is the amount due on the debts intended to be secured,it being conceded that the note was taken as collateral security merely. In such case, while the plaintiff is entitled to be treated as a holder for value, it is only so to the extent necessary to protect the debts intended to be secured.”

The note executed by the children of Handy, and pledged as collateral security, being only accommodation paper, a.nd being held in pledge by Sibley, with no other lien upon it, they might, after the payment of the note of $15,000, have demanded the surrender or cancellation of the collateral. But, by the assignment of June 9, 1883, it was agreed by and between Truman B. Handy, his children, and Eugene F. Williams, that there should be assigned and transferred to Williams ten thousand dollars of and in the note and mortgage of $25,000 — the surplus over and above the $15,000 due Sibley— which surplus should be applied towards the payment of Williams’ claim against Handy; Williams, however, agreeing to extend the payment of his claim for one year from the date of the assignment. The record does not disclose that Williams had any knowledge of the power which Handy had vested in Sibley, to sell at public or private sale the collateral note and mortgage, and to become the purchaser thereof. The terms of the assignment of June 9th, and of Sibley’s written agreement attached thereto, would not bring such knowledge home to Williams any more than to the children of Handy, and it is among the agreed facts that none of the children, until long after the sale of July 21st, 1883, had notice or knowledge of the existence of such power of sale. So far as Williams knew, Sibley was a pledgee of negotiable paper secured by mortgage, with no special authority to sell the same as he would a pledge cf ordinary chattels, but only empowered to pursue the usual course of foreclosure proceedings. The surplus $10,000 was set apart to him, with the concurrence of all parties to the assignment, in view of a bona fide indebtedness to him by Handy, and for the valuable consideration that he would extend the payment of his claim against Handy.

There is nothing in the record inconsistent with the presumption that the assignment to Williams of June 9th, 1883, and the agreement by Sibley in relation thereto, were one and the same transaction. Williams having given a valuable consideration, Sibley was bound by his agreement to hold the note and mortgage, and deliver the same to Williams, upon receiving payment of $15,000 and interest. The proviso of Sibley, that nothing contained in the writing signed by him should prevent him from enforcing his security at any time, would not be notice to Williams of a special power of sale, but might convey the meaning that the one year’s extension of payment to Handy should not interfere with Sibley’s right to enforce his security at any time by a regular foreclosure of the mortgage.

As between Williams and Handy, and the children of Handy, the equities of the children in the surplus of the note and mortgage, after paying Sibley’s claim of $15,000, would, under tbe assignment of June 9th', follow and inure to the benefit of Williams. Nor do we conceive that the rights of Williams should be concluded in equity, by the sale of the pledge under a power of which he was not cognizant at the time he agreed with Handy to extend the time for the payment of his claim against him, and which extension he might not have granted, if Sibley had definitely notified him, as he might have done, of' his power to sell and purchase the pledged collaterals. The existence of the power of sale was a fact, which, under the circumstances, Sibley, as a trustee, should have disclosed to Williams, and his failure to communicate the fact to him, was contrary to the principles of equity. In our opinion, the defendant in error, James W. Sibley, has no right to ask anything more than the full payment of his claim, -with interest; and Eugene F. Williams is entitled to receive the surplus of the mortgage of twenty-five thousand dollars, over and above the sum of fifteen thousand dollars and interest, owing by Truman B. Handy to the defendant in error.'

Judgment reversed, and judgment for Eugene F. Williams.