15 Jones & S. 409 47 N.Y. Super. Ct. 409

JOHN V. FARWELL and others, Respondents, v. THE IMPORTERS’ AND TRADERS’ NATIONAL BANK, Appellant.

I. Marshalling of assets.


(а) Collection of.

1. Who entitled to collect. The pledgee is entitled to collect ' as and when they fall due.

(б) Application of peoceeds.

1. Pledgee's right to make.

Has no right to apply the proceeds to the payment of his-loan until after default in its payment.

(c) Makes of collatebal note wrongfully pledged.

1. Bights of, as against pledgee who has not acquired, before notice of the facts, any rights or interest other than those springing out of the contract of pledge.

1. Possession of the note. If, before its payment, the pledgee has received from other collaterals sufficient to satisfy the loan, the maker is entitled to the possession.

2. Proceeds of the note. If the note, falling due before sufficient collections to meet the loan have been made on the other collaterals, is thereupon paid to thepledgee, and subsequently collections are made on such other collaterals, so that either none, or only a part of the proceeds of a note pledged without authority is required to satisfy the loan, the maker of such note is entitled to recover from the pledgee so much of the proceed# of his note as was not, after the application of the proceeds of the other notes, required to satisfy the loan.

1. Trustee quasi. The pledgee, as to such proceeds, is quasi trustee for the maker of the note.

Before Sedgwick, Ch. J., and Freedman, J.

Decided June 13, 1881.

Appeal by defendant from judgment entered upon decision of a judge sitting at special term.

*410The defendant, a banking corporation, lent, in September, 1873, to one Farnham, a clerk of Berry & Heiser, $50,000, payable whenever the defendant should request payment, the loan being what is usually called a loan on call. As security for payment Farnham pledged with the bank seventeen promissory notes, amounting on their face to the sum of $59,726.88. Berry & Heiser guaranteed payment of the loan. One of these notes had been made by the plaintiffs and had been by them delivered to Berry <& Heiser as brokers, to be sold in the market at a discount of not more than •8 per cent. The plaintiffs received no part of the loan and did not know that their note had been pledged until after the loan was made. Before the maturity of the note the plaintiffs notified the defendant of the facts and claimed that they were entitled to any surplus remaining from the notes pledged after the payment of the loan of $50,000.

The plaintiffs’ note matured on December 8, 1873 ; at that time nine only of the notes pledged had matured. They had been collected by the defendant. The sum collected was $29,633.40. The plaintiffs paid their note at its maturity. On January 24, 1874, the defendant had collected from the notes pledged, exclusive of plaintiffs’ note, a sufficient amount to fully pay the loan of $50,000. The plaintiffs claimed in the action that the defendant was bound to repay to plaintiffs the amount paid by the latter, on their note at its maturity.

R. W. Townsend, attorney, and A. R. Dyett, of counsel, for appellant, on the questions considered in the opinion, urged:

I. The transaction between plaintiffs and Berry '& Heiser was with the latter as owners of the commercial papers set forth in the complaint and the agreement was, in fact, the loan of $50,000 arn^ interest, to be paid by the proceeds of those notes *411as and in the order in which they fell due, if paid as they fell due ; and that plaintiffs’ note should be applied to make that payment, because it was so dated and fell due at such a time in reference to the other notes, that its proceeds would be needed and used for such payment before the other notes which fell due afterwards ; and it was, in fact and law, then agreed that the proceeds of the notes thereafter due should be applied on the other indebtedness of Berry & Heiser to defendant. This, being an agreement in relation to commercial paper' apparently belonging to Berry & Heiser, was lawfully made, and bound the plaintiffs’' note and its proceeds, and separated the note and its proceeds from the notes subsequently falling due, and left them to be operated on separately by the Berry & Heiser agreement of 18th of April, 1873, and gave defendant the right to apply their proceeds, as it offered to prove that it did—and to the exclusion of which offer an exception was taken—to and upon the indebtedness of Berry & Heiser, other than the $50,000 loan. The law itself applied the money received by the defendant in payment of the plaintiffs’ note towards the payment of the $50,000 loan. All the notes, amounting to $59,726.88, were pledged intact and simultaneously as collateral for the payment of the $50,000 loan. The defendant could not sell them (Wheeler v. Newbold, 16 N. Y. 392); but could collect them only, and as they fell due respectively. And as they were all paid at maturity, and when the plaintiffs’ noté fell due, less than $30,000 of the notes had fallen due, the proceeds of plaintiffs’ note could be applied only toward the payment of the $50,000. There was no pretense of any agreement between Berry & Heiser and the defendant to apply it in any other manner; and not only in the absence of such an agreement would the defendant have had the election as to its application, but, we repeat, by the law itself it was applicable *412only to the payment of that loan of $50,000. The plaintiffs’ notice of November 23, 1879, while it gave us notice of their rights, could not create any new right in them, nor deprive us of any right which we then had, and as fixed on the 11th September previous, and by the agreement of April 18,1873, nor could it change the contract which the law made then between Berry & Heiser and the defendant. We may, therefore, safely concede that after that notice no act of the defendant could deprive the plaintiffs of any right, but at the same time, by a parity of reasoning, the notice could not deprive the defendant of any existing rights, and one of those rights was the legal right to have the proceeds of the plaintiffs’ note applied, as the law itself directed, to the payment of the $50,000 loan, which was not yet paid, as we have shown. Let us test this: Suppose the plaintiffs’ note had fallen due the last, and before it fell due the defendant had received from the Other notes enough to pay the $50,000 and interest, and had made no actual application of the money received. The defendant could not have applied any part of that money to the prior indebtedness of Berry & Heiser so as to require the proceeds of the plaintiffs’ note to pay' the $50,000 loan. Those proceeds must be applied to that prior indebtedness under the agreement of April 18, 1873. But the reason why this is so, and the only reason, is, that the law itself applied the proceeds of the note, as collateral, to the payment of the $50,000 loan until that was paid. And for that very reason the proceeds of the plaintiffs’ note, when received, were so applied, as the defendant had not yet received $30,000 on that loan. The plaintiffs have no right or equity to control the creditor’s right (Munger on Application of Payments, 75, 151; 5 Denio, 470, 476 ; 3 Id. 284 ; 15 Wend. 20; Harding v. Tifft, 8 N. Y. Weekly Dig. No. 12, June, 1879). In this case of Harding v. Tifft, there was no application by the law itself of the pay*413ment, as there-is in this case. The application was made by the simple act and will of the' creditor. A fortiori, the plaintiffs cannot alter or control the application of these proceeds as a payment which is made by the law itself..

II. The plaintiffs concede and the court- found that the defendant had a right to demand and receive payment of their note when they did so. When the defendant received the proceeds of the plaintiffs’ note, eo instante, that amount of the $50,000 was paid and extinguished, and irrevocably so. The liability of Berry & Heiser, therefore, could never possibly be revived; certainly not without the consent and concurrence of Berry & Heiser (Marvin v. Vedder, 5 Cow. 691; Champney v. Cooke, 34 Barb. 539 ; Truscott v. King, 6 N. Y. 147-449 ; Banlo v. Garmo, 1 Sandf. Ch. 383).

III. The payment by the plaintiffs of their note was a voluntary one. There was no compulsion. In order to make it a compulsory payment, there must have been at least a judgment or its equivalent, though an execution was not necessary. A protest is of no consequence (Fleetwood v. Mayor, &c., 2 Sandf. 475 ; Forrest v. Mayor, &c., 13 Abb. Pr. 350; N. Y. & H. R. R. Co. v. Marsh, 12 N. Y. 308).

IV. But the plaintiffs claim that the defendant received the proceeds of their note in trust, provided'they subsequently received sufficient from the other notes to pay the balance of the $50,000 loan. Let us examine this- claim. They concede the right of defendant to demand and collect their note, when it fell due. This being so (apart from our position that the proceeds were applied by law to, and became, per se, and eo instante, a payment of so much of the loan of $50,-000), it follows that the defendant had a right then to the money, and as an incident to use it—to spend it. This being so, how can a trust of the proceeds coexist with the right to use the money % It is this very *414right to use the money of the depositor that makes a depositor in a bank a simple creditor at large (17 Wend. 94 ; 1 Paige, 249), or an agent or consignee, with a similar right, a simple debtor, and not in a fiduciary capacity (McBurney v. Martin, 6 Robt. 508, 509, and cases cited ; Stoll v. King, 8 How. Pr. 300, 301: Bussing v. Thompson, 15 Id. 97). Surely the plaintiffs do not claim to have, and they cannot have, any lien upon or claim to the proceeds of the other notes. Unless, therefore, they can impress a trust upon the very proceeds of their note, they must fail.

V. If the plaintiffs ever had any right, legal or equitable, in conflict with the rights of the defendant, acquired by him as against Berry & Heiser by the agreement of April 18, 1873, and the pledge of the $59,000 and odd notes on September 11, 1878, on the loan of the $50,000, those rights and equity of the plaintiffs existed when their note fell due, and before they voluntarily paid it. If the defendant could collect and hold the proceeds thereof in trust only as contended, they had no absolute right to collect the note, certainly not to use the money. And this being so, the plaintiffs had the right to invoke the aid of a court of equity then, and before paying the money to the de- * fendant, to declare and establish this alleged trust and their equitable right, and to permit them either to pay the money into court or to a receiver. A court of equity has power over every sort of trust, express, resulting, or implied. Or the plaintiffs might have asked a court of equity for permission to pay to the defendant the balance of the loan of $50,000, and thus, redeem their note from the pledge and be subrogated to the rights of the defendant. -Neglecting to do either, and having voluntarily paid the money to the defendant, they have no redress. They could not make the defendant their trustee, nolens miens.

VI. The defendant, in any aspect of the case, is a *415 bona fide holder of the plaintiffs’ note for value. Assuming that the defendant had taken this note entirely on account of the previous indebtedness of Berry & Heiser, the plaintiffs’ note was received September 11, and was not due until the early part of December, and the defendant must necessarily wait until its maturity for so much of that prior indebtedness, the payment pro tanto of which was extended accordingly by operation of law; and the defendant therefore, is a bona fide holder for value (Lewis v. Rogers, 34 Super. Ct. 64; James v. Patten, 6 N. Y. 9).

Martin & Smith, attorneys, A. P. Whitehead and M. W. Divine, of counsel, for respondents, on the questions considered in the opinion, urged:

I. The defendants are not entitled to retain plaintiffs’ note or its proceeds. (1) Berry and Heiser delivered to defendants' two different funds as security for the payment of the loan of September 11, 1873. 1st. Sixteen notes-(their own property), aggregating $53,205.58. 2d. One note (the property of plaintiffs), amounting to $6,521.30. They did not assume to sell those notes to defendánt-s, nor did defendants acquire any right of ownership in the notes ; they simply, as plaintiffs con-, cede, held a lien on them to secure the payment of the. loan. “ The general principle is, that if one party has a lien on or interest in two funds for a debt, and another party has a lien on or interest in only one of the funds for another debt, the latter has a right in equity to compel the former to resort to the other fund in the first instance for satisfaction ” (Story Eq. Juris. § 633; Exp. Alston, In re Holland, Eng. L. R. 4 Ch. App. 168; Broadbent v. Barlow, 3 De Gex, F. & J. 570 [64 Eng. Ch. Am. ed. 570]; Ingallsv. Morgan, 10 N. Y. 178). On November 25, 1873, thirteen days before-the maturity of plaintiffs’ note, defendants were notified of plaintiffs’ claims and rights in respect to it; de*416fendants then knew that the securities held by them for the loan, consisted of the two funds above mentioned, and they knew that plaintiffs’ note had been wrongfully pledged with them by Berry & Heiser. Having this knowledge, they must be presumed to know that it was their duty to resort, in the first instance, to the fund or securities which belonged to Berry & Heiser, and to resort to plaintiffs’ note and its proceeds, only in the event that the Berry & Heiser fund proved insufficient to reimburse them. The Berry & Heiser fund having produced more than sufficient to pay defendants’ loan in full, we submit that plaintiffs’ note and its proceeds have been released and discharged from defendants’ lien, and that plaintiffs are entitled to have the same returned to them. (2) The deposit by Berry & Heiser, with defendants, of plaintiffs’ note for $6,521.30, in legal effect, constituted plaintiffs sureties to that extent for the repayment of the loan, and the loan having been fully repaid from the other securities, plaintiffs are now entitled to the return of their note or its proceeds (Gould v. Central Trust Co., 6 Abb. N. C. 381, and the other cases above cited). (3) Even if Berry & Heiser bad sold the notes to defendants the latter could not, under the circumstances of this case, confer any title except as to the portion owned by them, namely, $53,205.58. Regarding the case from this point of view, it may be said that defendants paid $50,000 for notes amounting to $59,726.88, but they realized from them $59,726.88 ; they, therefore cannot be regarded as having paid anything for plaintiff’s note, and cannot be entitled to apply that note or its proceeds towards the payment of that antecedent indebtedness of Berry & Heiser. The defendants, on the other hand, claim that when they collected the note on the 8th of December, 1873, they had a right then to apply its proceeds to the payment of the loan, and certain authorities have been *417cited by defendants’ counsel in support of this proposition. We have examined these authorities with care, and respectfully submit that they have no application whatever to the facts of this case.

II. (1) Plaintiffs’ note matured December 8, 1873 ; at that time collateral notes to the amount of only $29,633.40 had matured, audit was, of course, uncertain whether the total amount of the loan could be realized from the collateral notes belonging to Berry & Heiser. Under the circumstances, defendants were entitled to enforce the collection of plaintiffs’ note and retain its proceeds for their indemnity until that matter was determined ; it was beyond the power of plaintiffs to refuse to pay their note, and they cannot be said to have paid it of their own volition, but because the law compelled its payment (Haynes v. Rudd, 17 Hun, 477; Gilmour v. Thompson, 49 How. Pr. 198 ; Smith v. Cuff, 6 Maule & S. 160.) (2) When the note was paid, plaintiffs did not and could not know whether the other collateral notes would be paid ; that knowledge was necessary to enable them to determine whether or not they would be liable to pay the note in question, and defendants having remained silent after the service on them of the notice of November 25, 1873, plaintiffs xvere entitled to assume that defendants, in presenting and collecting the note from the bank, would hold the proceeds as security in place of the note itself, the final disposition and application of those proceeds to depend upon the payment or nonpayment of the loan out of the proceeds of the Berry & Heiser fund or securities (Watson v. Cabot Bank, supra). (3) It will be observed that in this case, as in that .of the Cabot Bank, the payment of the note was made not by plaintiffs themselves, but by their bank out of their funds, and that defendants, when they applied for and obtained that payment, had notice of plaintiffs’ claims and rights to the note.

*418III. Defendants did not do anything to alter their position towards Berry & Heiser. There is no evidence to show that defendants parted with any of their rights against Berry & Heiser. They did not give up any securi ty, nor make any extension of credit, nor release Berry & Heiser from any obligation. Mo portion of Berry & Heiser’s indebtedness to defendants was extinguished. Under these circumstances the cases are unanimous, that defendants cannot be held to be holders for value (Wardell v. Howell, 9 Wend. 170; Rosa v. Brotherton, 10 Id. 86 ; Smith v. Van Loan, 16 Id. 659; Goldsmid v. Lewis Co. Bank, 12 Barb. 407).

By the Court.—Sedgwick, Ch. J.

The loan made upon the pledged promissory notes, was not to be paid in parts or installments, from time to time. A legal and fixed characteristic of the loan was that it was to be paid or demanded, altogether, at one time.

The defendant, as the pledgee, had power to collect the notes as they respectively fell due (Wheeler v. Newbould, 16 N. Y. 392; Nelson v. Eaton, 26 Id. 410, 417). But this power of itself did not imply an accompanying power, to apply the proceeds of the collection to the satisfaction of the loan. To apply the proceeds, it was at least necessary that default should have been made in payment of the loan. The loan, however, was not payable at the time the defendant collected plaintiffs’ note, which formed part of the pledge. Indeed, before the defendant as pledgee would have power under the contract of pledging to apply the proceeds, it was necessary that notice should have been given to the pledgor to redeem (Lewis v. Varnum, 12 Abb. Pr. 305 ; Wilson v. Little, 2 N. Y. 443).

In the words of Chief Justice Thompson in Garlick v. James (12 Johns. 148): “The authority of the defendant, with respect to the note, could extend no further than to receiving the money due upon it, with*419out first calling upon ‘ the pledgor ’ in some way to redeem. The money when received would be a substitute for the note and to be held upon the same terms and subject to the same rights and duties as the note.”

In January, 1874, the money collected upon the notes pledged, exclusive of the proceeds of plaintiffs?' note, were sufficient to pay the loan. At that time the' defendant had not called the loan or given notice to redeem. The plaintiffs before they paid their note notified the defendant of the facts and of their right; of course, this notice could not have diminished any previous right the defendant possessed ; on the other hand, however, it prevents the defendant from claiming that it gained any new right of application from the plaintiffs. The pledgors did not interfere, in any way, with the disposition to be made of the proceeds of plaintiffs’ note. The defendant received neither from the plaintiffs nor pledgors any implied authorization to-apply the proceeds as it pleased. The proceeds of all the notes therefore remained in defendant’s hands to bez applied as a pledge to the payment of the loan.

The plaintiffs’ note had been used as a pledge, without authority from them. If the pledgee was not a bona fide holder, the plaintiffs would have been entitled to recover possession of the note. Equitably, the proceeds of the note in the hands of the defendant stand in the place of the note (Blydenbnrgh v. Thayer, 3 Keyes, 293). Equitably, it was entitled to retain these proceeds only so far as was necessary to repay the- loan, the advance of which made it a bona fide holder. As it appeared that the defendant had no right to make an application of the proceeds of this note, before a time, when sufficient had been collected from the other notes to repay the loan, the plaintiffs were entitled to the proceeds of their note.

' It is claimed, however, that as the plaintiffs paid the note in regular course of business, it was such a *420voluntary payment that it cannot be recalled. To preserve the plaintiffs’ rights, it is not necessary to think of the payment as being affected or recalled, but only that the right of the defendant to the money paid, is shaped by the right the defendant had in the note. That is, the defendant did not take the proceeds of the note as absolute owner of the note, but as pledgee, having certain rights to the proceeds, to the extent that it was a bona fide holder. The loan had been made upon all the notes. These notes in solido were primarily security for repayment. There was no advance upon this note by itself. Until it should appear to what extent the other notes could be collected, it could not be determined to what extent it was necessary to resort to the proceeds, of this note to protect the defendant as bona fide holder.

I am of opinion that the judgment should be affirmed, with costs. '

Freedman, J. concurred.

Farwell v. Importers' & Traders' National Bank
15 Jones & S. 409 47 N.Y. Super. Ct. 409

Case Details

Farwell v. Importers' & Traders' National Bank
Decision Date
Jun 13, 1881

15 Jones & S. 409

47 N.Y. Super. Ct. 409

New York



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