Court Opinion

ID: 4005615
Source: CourtListenerOpinion
Date Created: 2016-07-06 11:06:38.674838+00
Date Added: 2024-06-11T13:56:57.528926
License: Public Domain

A. The authority given the holder of the Highland note upon its non-payment was to sell the collateral at public or private sale, with the right to the holder "at any such sale" to purchase "the property sold." Since this authority is in contravention of the pledgor's common law rights, the contract of pledge, if unambiguous, "will be strictly construed * * * and in order that the sale and purchase be valid and effectual to pass title to him, the pledgee must bring himself strictly within their terms." Annotation, 76 A.L.R. 717. The words in the Highland note are plain and conferred on the holder but two rights only — the right to sell and the right to purchase at the sale. There is no question even but that Davis represented the Exponent Company in purchasing the note. He testified that he did, and that he purchased with Exponent's money. The majority opinion says "it is undoubtedly true" that he did so. That being true beyond peradventure, Exponent, not Davis, its agent, succeeded the Finance Corporation, as holder of the note and pledgee of the collateral; its pretended sale by Davis to Exponent was farcical because he was not the pledgee; and in legal effect, what happened was merely the appropriation by Exponent of the collateral in satisfaction of the note. This appropriation was not a sale and under *Page 519 
the express terms of the Highland note only a sale was permissible. "The term 'private sale' comprehends something more than a mere taking over of the property by the pledgee at such price as he may elect to consider an offer. * * * The agreement then that the pledgee may become purchaser at a private sale, must be taken as meaning at a sale conducted in the manner usually and ordinarily followed in relation to private sales of property. A sale of property is a contract, and like every other contract requires an agreement between two or more. The mere taking over of the property without any agreement with another competent to contract is not a sale in our opinion." Lowe v. Ozmun, 3 Cal. App. 387, 86 P. 729, 732. Accord: Union  Mercantile Trust Co. v. Harnwell, 158 Ark. 295,250 S.W. 321, 323; Jennings v. Wyzanski, 188 Mass. 285,74 N.E. 347; Cole v. Manufacturers Trust Co., 164 Misc. 741,299 N.Y.S. 416. The sale "must be a bona fide sale, and not a colorable one merely." Union Bank  Trust Co. v. Jones, 30 Ariz. 557,249 P. 747, 749. These cases are not cited merely for purpose of argument. I have been unable to find any well-considered cases materially variant, and, least of all, the seven cases cited in the majority opinion on the right of a pledgee to purchase under a pledge agreement. A brief digest of the facts of each case demonstrates my statement. (1) Hayward v. EliotNat. Bank, 96 U.S. 611, 24 L. Ed. 855. The collateral was sold by the bank to third parties after notice to and without objection from the pledgor. (2) Hiscock v. Varick Bank,206 U.S. 28, 27 S. Ct. 681, 51 L. Ed. 945. The collateral was sold without notice under a contract permitting such sale and was purchased by the pledgee, the bank. But the sale was made by a duly licensed auctioneer at public auction in the salesrooms of the New York Real Estate Office. (3) Peacock v. Phillips,247 Ill. 467, 93 N.E. 415, 32 L.R.A. (N.S.) 42. The pledgee sold the pledged property to a third person, who was held to have obtained no greater rights than the pledgee. (4) Farmers' Nat.Bank v. Venner, 192 Mass. 531, 78 N.E. 540, 7 Ann. Cas. 690. The collateral was purchased by the pledgee under a contract authorizing the purchase, but the sale was conducted by *Page 520 
"reputable auctioneers at one of the regular auction sales * * * at the New York Real Estate Salesroom." There was evidence warranting actual notice to pledgor, and also notice by public newspaper advertisement. (5) Baker v. Drake, 66 N.Y. 518, 23 Am. Rep. 80. This was a sale without notice, according to the alleged usage of the New York Stock Exchange, of stock purchased by a broker for a customer upon a margin, when the stock declined and the customer failed to furnish additional margin. (6) Penn Mut. Life Ins. Co. v. Bancroft, 207 Ala. 617,93 So. 566, 568, 28 A.L.R. 1102. An insurance policy having a cash surrender value, insufficient to pay amount borrowed by insured from the insurer, was cancelled by the latter, after "numerous notices were shown to have been given insured in regard to default in the payment." (7) Seder v. Gould,274 Mass. 223, 174 N.E. 311, 76 A.L.R. 700. An agreed statement shows that "the pledgee duly sold the collateral note and mortgage in accordance with the terms of the principal note." What were those terms is not stated. The court refused to consider a contention that the sale was invalid because the agreed statement precluded the contention.
The facts in the seven foregoing cases are so different from the facts in the suit at bar, that the principles governing those cases are essentially irrelevant here.
B. Many decisions hold that the pledgee, in exercising his powers, owes "the utmost" or "the strictest" good faith to the pledgor. Dodge v. Scripps, 179 Wash. 308, 37 P.2d 896, 899,et seq.; National Mill Supply Co. v. Morton, (Ind.Sup.)6 N.E.2d 543, 109 A.L.R. 1101. I do not object to the milder statement of the rule by the majority that the pledgee "must act in good faith" since even ordinary good faith requires that the pledgee make an honest attempt "to sell to the advantage of the pledgor." 12 Fletcher, Cyc. Corp. sec. 5663. Accord:German-American State Bank v. Spokane Columbia River etc. Co.,49 Wash. 359, 95 P. 261, 262; Moses v. Grainger,106 Tenn. 7, 22 Pickle 7, 58 S.W. 1067, 53 L.R.A. 857; Schaaf
v. Fries, 90 Mo. App. 111; Jones, Pledges *Page 521 
3d, sec. 732. Exponent utterly disregarded this requirement. The leading case on this subject, perhaps, is Montague v.Dawes, 14 Allen (Mass.) 369, 373, wherein the court said: "One who undertakes to execute a power of sale is bound to the observance of * * * a suitable regard for the interests of his principal. He cannot shelter himself under a bare literal compliance with the conditions imposed by the terms of the power. He must use a reasonable degree of effort and diligence to secure and protect the interests of the party who intrusts him with the power." A suitable regard for the interests of the Highland estate — a reasonable degree of effort to protect its interests — would have impelled Exponent to see if third parties, likely to be interested, would pay more than the face of the note for the collateral. "The appellant in making sale of the note was a trustee for its debtor and pledgor, and it was appellant's duty to adopt all reasonable modes of procedure in order to render the sale most beneficial to the debtor. It could not discharge this duty by simply resolving in its own mind that the property pledged was worth no more than the debt of the pledgor." Union  Mercantile Trust Co. v. Harnwell,supra. Accord: Louisville Trust Co. v. Drewry, 266 Ky. 279,98 S.W.2d 900, 902. Davis testified that the value of the collateral was not even discussed by him and the other directors of Exponent. Thus his own testimony affirmatively shows that neither he nor Exponent paid the slightest regard to the interests of the Highland estate. On the contrary, their sole purpose was to secure an advantage over the estate.
C. John Sabotka was the field agent of Finance Corporation. Cecil Highland testified, without contradiction, that in February or March of 1934, Sabotka, after obtaining information of the condition of the Highland estate and of the value of the collateral on the note in question, "assured" the witness "that he would not embarrass the Highland estate, that all they (Finance Corporation) desired was (for Highland) to pay the interest and let the principal ride until conditions got better." This assurance naturally caused Cecil Highland to understand *Page 522 
that the collateral would not be suddenly sold to pay the note, and was in effect a waiver of the right to do so. That waiver was never recalled. I do not overlook a subsequent letter to Cecil Highland from Finance Corporation, dated August 29, 1934, stating that in February, he had been requested to pay the note to Sabotka, and that the letter was to advise "that it will be satisfactory for you to make payment as indicated above, or to the receiver of the above bank (West Virginia Bank at Clarksburg)." This letter does not purport to demand payment immediate or otherwise, and there is nothing in the conduct of Finance Corporation indicating that the letter should have been taken to portend precipitate action. On the contrary, two days later, Finance Corporation filed proof of its claim (the note) against the Highland estate, before the commissioner of accounts, who had in charge the settlement of the estate. This act indicated that Finance Corporation would await the result of that settlement, at least for awhile, and lulled Cecil Highland into a deeper sense of security regarding the collateral with the note. A construction that the letter of August 29th was a demand for immediate payment, and as such terminated the understanding between Cecil Highland and Sabotka, would be so strained, I could not countenance it. That the right to sell collateral without notice may be waived by a pledgee "either by express terms or a course of dealing", is said to be "a well-established principle in every system of enlightened jurisprudence." Miller  Co. v. Lyons, 113 Va. 275,289, 290, 74 S.E. 194, 200. No new or independent consideration is required to support such a waiver. United States Trust Co. v. Blundon, 42 App. (D.C.) 500; Toplitz v. Bauer,161 N.Y. 325, 55 N.E. 1059, 1061; Fletcher, supra, sec. 5662. In case of waiver a subsequent sale without notice is unauthorized. Musser v. McCormick  Co., 57 Utah 62, 67-8,192 P. 1052; Fletcher, supra; 59 C. J. Pledges, sec. 255. It is therefore apparent to me that Finance Corporation could not have sold the collateral lawfully without notice to the Highland estate. "The pledgee doubtless has the right to exact strict performance of the contract according to its terms, and, upon default in the payment of the debt at the time stipulated, *Page 523 
he may, under a contract like this, dispose of the pledge. But if he waives the right to exact strict performance, and gives time and indulgence to the debtor, he cannot recall this waiver at his own option, without notice to the pledgor, to the end that the latter may have an opportunity of protecting the pledge. The good faith which the law exacts from a person dealing with trust property will not permit the pledgee, after having once waived the forfeiture or the right to dispose of the pledge upon default of payment at the prescribed time, to suddenly stop short and insist upon the forfeiture for the nonpayment of the debt when the other is unprepared to redeem."Toplitz v. Bauer, supra. When Exponent purchased the Highland note it was overdue. Therefore, Exponent took the note subject to Sabotka's waiver of the right to sell the collateral without notice. "One who acquires negotiable paper after maturity takes it, in the absence of statutory modification, subject to all equities and defenses arising out of the paper itself and attaching to it, or out of the transaction with reference to which the paper was made, or of any agreement between the original parties with relation to the instrument." Clemmer v.Bowlby, 109 W. Va. 105, 153 S.E. 311, 312. The majority opinion recognizes the sequence, saying not once, but twice, that Davis "stood in the shoes of the Reconstruction Finance Corporation." But he and Exponent kicked off the shoes, and the opinion excuses that breach of trusteeship, seemingly because of the personal antagonism existing between them and Cecil Highland. No authority is cited and I have found none which justifies a pledgee's violation of his trust because he is at outs with the pledgor.
D. In any event, I am of opinion that the rule requiring gross inadequacy of price is irrelevant here. That rule applies where there is no evidence, or but slight evidence of bad faith except inadequacy of price. Where other indicia of inequitable conduct are pronounced, as here, slight inadequacy suffices.
  I would affirm the circuit court. *Page 524