Court Opinion

ID: 5280998
Source: CourtListenerOpinion
Date Created: 2022-01-06 21:56:59.99438+00
Date Added: 2024-06-11T08:28:23.137112
License: Public Domain

McAvoy, J.
(dissenting). I cannot subscribe to the doctrine announced in the prevailing opinion and I, therefore, dissent for the reasons following:
*538The question to be decided here is: May a creditor who receives from its debtor notes made by third persons and transferred to the creditor as collateral security for the debt, recover the full »amount thereof in an action against the debtor on its enforcement of the notes when the portion of the debt remaining unpaid at the time of trial is less than the amount for which the notes were drawn?
The parties’ controversy arose in this manner: The plaintiff brought two actions against the defendant on two promissory notes. Both actions arise out of the same transaction, and by stipulation of counsel both cases were tried together. The plaintiff, as “ owner and holder ” of the notes, sought to hold the defendant, its immediate indorser, for the face amount thereof. The notes in question were one made by the Standard Film Service Company and payable to the order of Warner Bros, (a copartnership), who indorsed and delivered the note to Warner Bros. Pictures, Inc., the defendant herein, due and payable on January 7, 1924, in the sum of $5,000; the other made by the Independent Film Corporation and also payable to the order of Warner Bros, (a copartnership), who indorsed and delivered the note to Warner Bros. Pictures, Inc., the defendant herein. This note was due and payable on January 16, 1924, in the sum of $5,000. The defendant Warner Bros. Pictures, Inc., indorsed and delivered these two notes to the plaintiff, together with three other notes each in the principal sum of $5,000, as collateral to secure an installment loan made by the plaintiff to the defendant in the sum of $18,750. The loan was repayable on the following dates and in the following amounts: January 7, 1924, $3,750; January 16, 1924, $3,750; January 22, 1924, $3,750; January 26, 1924, $3,750; February 5, 1924, $3,750. Each of the collateral security notes became due on the respective dates when the installments on the loan were repayable. The installments due January 7 and January 16, 1924, were not paid, nor were the two notes that matured on those dates. The remaining three notes in the total sum of $15,000 were all paid in full to the plaintiff, and the $15,000 so paid was applied by the plaintiff against the total loan of $18,750, thus leaving on February 5, 1924, a balance of $3,750 due and unpaid.
The notes due January 7 and January 16, 1924, which were not paid at maturity, went to protest, and on January 21, 1924, the plaintiff instituted these actions by attachment against the defendant to recover the face amounts thereof.
Thé plaintiff on this appeal maintains that it was a pledgee of the notes; and that as such pledgee it was entitled to recover the full amount thereof, namely, $10,000; and that from this amount *539it may deduct, in addition to the unpaid balance of the loan, the expenses incurred in bringing these actions. The relief which the plaintiff asks is that the judgment appealed from should be reversed and a verdict directed in favor of the plaintiff for the amounts of the notes, with costs.
Defendant’s obligation by way of debt, aside from its collateral pledge, is gleaned from this letter:
“ Warner Bros. Pictures, Inc.
“ N™ Yoek- “ October 25, 1923.
“ Mercantile Factors Corp.
“ 212 Fifth Avenue,
“ New York, N. Y.:
“ Gentlemen.— In consideration of your advancing us money on account of customers’ notes given us in the regular course of business, we herewith agree that any equity in said notes or any other security that you may hold on account of any particular loan or advance may be applied by you towards the payment or may be applied to any loss that may be sustained by you on account of the non-payment of any other note or notes covering any other advance or loan made by you to us on any note or notes.
“ Yours very truly,
“ WARNER BROS. PICTURES, INC.
“ By: S. T. Warner,
“ W-EB. Vice-Pres.”
Defendant having failed to pay either the loan or the notes, plaintiff commenced these suits by attachment upon the two protested collateral notes. When the three remaining collateral notes subsequently fell due, they were paid.
The defendant was permitted by the trial judge to show that the notes sued upon were given as collateral to secure an indebtedness; that three other notes given as collateral had been paid, and there remained unpaid on the indebtedness the sum of $3,750, against which plaintiff held the collateral sued upon. The defendant offered to pay $3,750, but resisted payment of the expense plaintiff was put to in collecting the collateral notes, all necessitated because of the defendant’s successive defaults. The plaintiff then showed that when the present actions were commenced, there remained unpaid the entire loan of $18,750; that collateral sought to be collected was worth not more than $10,000.
Plaintiff’s right to sue upon the collateral and recover the full sum thereof was absolute. A pledgee holding collateral has two remedies: He may sue to collect the money due on collateral, or *540proceed on the original indebtedness without resorting to the collateral. Here the indebtedness of defendant was the loan, and the terms of it are outlined in the letters of defendant, to wit, an advance of seventy-five per cent of the face of the notes of the third parties. It sued not on this obligation.
At the time these suits were brought the entire debt had not matured. The debt matured as and when the respective collateral notes fell due. Further, at the time these suits were brought, no part of the debt had been paid. Since the collateral totalled only $10,000 and the debt $18,750, plaintiff obviously acted properly in suing for the full amount of the collateral.
That a suit upon collateral may legally result in recovery of more than the debt due is text-book and decision law. The learned author Jones in his work on Collateral Securities and Pledges (3d ed. 1912, p. 804) says: “ The holder of collateral paper may recover the full amount due upon it, although this exceed the debt for which it was pledged, unless it is held subject to equitable defenses which the maker may have against his payee.”
In 31 Cyc. (at p. 864) the rule is given to similar effect. “ In a suit on the collateral, he [the pledgee] is not restricted to the recovery of his debt, but may collect the entire amount of the collateral, although any surplus after the satisfaction of his debt will be held by him for the pledgor.” The decisions concur with this view, for in Field v. Sibley (74 App. Div. 81; affd., 174 N. Y. 514) it was held that the pledgee may collect the entire amount, reimburse himself for the amount of the debt remaining unpaid and all necessary expenses incurred by him and hold the balance as trustee for the pledgor.
Defendant’s express agreement shows that this was the understanding which it had of the remedy. The defendant wrote in its letter concerning the loans: “We understand that when these notes are paid, you will return to us our equity in same.” The defendant’s liability arose as an indorser upon the collateral notes. The defendant was sued as such. Plaintiff, as a matter of law, was entitled to judgment for the full amount of the collateral. That the notes were actually given as .collateral appears from the defendant’s own allegations contained in its answers, where it was alleged: “ That as additional and collateral security for the repayment of the said loan * * * the defendant did duly indorse and deliver * *
We find, too, in Wheeler v. Newbould (16 N. Y. 392) that the purpose of a pledge is not alone the collection of a debt but also the reimbursement of the creditor for loss and expense. There the ruling made was: “ The primary and, indeed, the only purpose *541of the pledge is to put it in the power of the pledgee to reimburse himself for the money advanced when it becomes due and remains unpaid. The contract carries with it an implication that the security shall be made effectual to discharge the obligation. It simply clothed the creditor with authority to sell the pledge and reimburse himself for his debt, interest and expenses, and the residue of the proceeds of the sale then belonged to the debtor.”
Although circuity of action may be necessary for the recovery of plaintiff’s equity after paying the interest, loan and expenses of the pledgee, if defendant does not voluntarily pay the sum due plaintiff, yet another circuitous action by plaintiff is avoided by permitting full recovery to the pledgee because he is not then remitted to an action to recover for his losses and expenses due to the borrower’s dilatory payments of his obligations which the lender may recoup out of excess in collateral in his hands over the debt due him, and then render the balance to the pledgor.
The judgment should be reversed, with costs, and judgment directed for plaintiff for the full amount of the notes, with costs.
Dowling, J., concurs.
Judgment affirmed, with costs.